Tag: Business Use Test

Capital Allowance: Whether a Ship used as a Restaurant constitutes Plant
High Court of Justice

(Chancery Division)

Court of Appeal

Benson (H.M. Inspector of Taxes)

v

Yard Arm ClubLtd

15 January 1979

England & Wales

In 1962 the Company bought a secondhand ship and converted her into a floating restaurant.

The converted hulk had no means of propulsion or steering.

She was moored with an attendant barge at a permanent site on the Victoria Embankment.

The Inspector refused capital allowances for the cost of the ship and subsequent expenditure upon her for the years 1963-64 to 1965-66 and for subsequent accounting periods up to and including the year to 31 December 1973.

On appeal the General Commissioners upheld the Company’s contention that the hulk was plant, on the grounds that it was the principal means of attracting people to the restaurant.

In the High Court, the Company did not seek to defend the grounds of the Commissioners’ decision, but contended that for the purpose of deciding if something is plant, assets fall into two classes:
- the first class being land and buildings and structures on land,
- the second comprising all other assets, including the floating restaurant.
The test for the former, it was argued, is stricter: the asset has to play a part in the commercial process.

For the second class the asset merely needs to be something kept for permanent employment in the trade; the authorities establishing a rigorous functional test were all concerned with the former class and thus irrelevant.

Alternatively, the Company’s trade was not merely that of a restaurant, but a floating restaurant.

In that specialised trade the hulk had a functional role.

The Crown contended that the hulk and its barge were simply the place or setting of the trade and not a means for carrying it on.

The Chancery Division, allowing the Crown’s appeal, held
1. that the Company’s main argument had no foundation in the authorities even if it were not explicitly inconsistent with them;
2. that its alternative argument was really for an amenity test, not a functional test; the hulk had amenity value in the Company’s trade, but it was not plant, because it was the setting of the trade and not the apparatus used for carrying on the trade.
Dixon v. Fitch’s Garage Ltd. 50 TC 509; [1976] 1 WLR 215 followed.

In the Court of Appeal, it was also contended for the Company that ships and hulks were by their very nature “plant”, on the authority of John Hall, Junior & Co. v. Rickman [1906] 1 KB 311, and capital expenditure on them therefore qualified for capital allowances.

The Court of Appeal, dismissing the Company’s appeal, held that the hulk and the barge, though chattels, were the premises where the business was carried on and not apparatus employed in the Company’s commercial activities. John Hall, Junior & Co. v. Rickman (above) distinguished and explained.

Case

Stated by the Commissioners for the General Purposes of the Income Tax for the Division of Spelthorne in the County of Middlesex pursuant to s 56 of the Taxes Management Act 1970, for the opinion of the High Court of Justice.

1. At a meeting of the said Commissioners at Sunbury Council Chambers, Green Street, Sunbury-on-Thames, Middlesex, on 15 December 1976, the Yard Arm Club Ltd. (hereinafter called “the Company”) appealed against income tax assessments made on the Company under Case 1 of Schedule D in respect of profits from its trade as restaurateurs, as follows:

1963-64: £200

1964-65: £300

1965-66: £300.

The Company further appealed against corporation tax assessments made on the Company in respect of profits from its trade as restaurateurs, as follows:

Accounting period
- 1.10.66-30.9.67: £1,000
- 1.10.67-31.12.67: £200
- 1.10.67-30.9.68: £1,000
- 1.1.68-31.12.68: £2,000
- 1.1.69-31.12.69: £2,000
- 1.1.70-31.12.70: £12,000
- 1.1.71-31.12.71: £20,000
- 1.1.72-31.12.72: £20,000
- 1.1.73-31.12.73: £20,000.
2. The question for our determination was as follows: whether the Company was entitled to capital allowances in respect of capital expenditure incurred in acquiring the vessel “Hotspur” later known as “Hispaniola” (and referred to here as Hispaniola 1) and the cost of its conversion into a floating restaurant, together with a barge which provided services to it.

The expenditure in dispute related to the hull and structure of the vessels, the Revenue having agreed that capital allowances were due in respect of restaurant furniture, sewage pumps etc.

3. Oral evidence was given by Mr. W.R. Watson-Smyth, formerly chairman of the Company.

4. The following documents were proved or admitted before us:
1. A schedule of the profits assessable and capital allowances for each period if the case were determined in favour of the Revenue.
2. A schedule of the profits assessable and capital allowances for each period if the case were determined in favour of the Company.
3. (A schedule showing summaries of the capital expenditure incurred, the capital allowances granted and the capital allowances disputed for each period.
4. Schedules showing details of the capital expenditure incurred.
5. A copy of an advertising circular sent to the Board of Inland Revenue.
6. Two photographs of Hispaniola 1.
7. The certificate of registration of Hispaniola 1.
5. The following facts were proved or admitted:
1. Hispaniola 1 had been originally built in 1927 for use as a ferry between Southampton and the Isle of Wight. Subsequently it had been sold to a firm in Norfolk who used it as a pleasure craft. It was acquired by the Company for £2,449 in 1962.
2. The reason for acquisition of the vessel was in order to convert it into a restaurant club.
3. The ship was initially registered as the “Hotspur” at Southampton. Since acquisition by the Company it had been re-registered at Southampton as the “Hispaniola”.
4. During the conversion of the vessel the engines and boiler were removed and it had thereafter no power or steering ability.
5. The vessel, after conversion, was towed to a permanent site of the Victoria Embankment, where it was used initially as a floating restaurant club and later as a floating restaurant open to the public at large from 13 August 1963 until 1975 when it was replaced by a larger vessel.
6. The vessel was moved under tow to dry dock for repainting and maintenance every few years (maximum five).
7. When the shares of the Company were acquired (in 1967) by Mr. Watson-Smyth and other members of his family, the ship comprised three decks;
  1. a hold where the washing-up etc., was done, which was served by a lift from the other decks,
  2. a main deck containing bars, toilets and restaurant facilities and
  3. an upper deck comprising table facilities and the kitchen.
  1. Associated with that was the barge which was necessary for the gangway to come down and slide on.
  2. It also contained sewage disposal equipment and waiters’ changing rooms, etc. In 1972 a new kitchen was built on the barge.
8. The barge was fixed to mooring posts and was able to slide up and down those posts as required by tidal movement.
  1. The maximum tidal difference at the site was about 30 ft.
  2. The Hispaniola 1 was attached to the barge by ropes and chains and was subject to the vertical tide movement of up to 30 ft. and also to movement up and down river to the extent of some 5 ft. caused by the ebb and flow of the tide.
  3. The waves caused it to rock gently from side to side.
9. The customers of the restaurant nearly all joined the vessel by way of the gangway from the Victoria Embankment but some came by boat, mooring to the barge. They came, to quote the former chairman, “to get good food somewhere different with views of the river, etc. and a shipboard feeling”.
10. The vessel was intended to be kept in a permanently fixed position although it could be moved if required. It was never intended to carry passengers or cargo on voyages.
11. When it was replaced by a larger vessel in 1975 attempts were made to sell Hispaniola 1 but these attempts had failed and a new mooring was being sought at Hammersmith Pier where negotiations with the local authority had reached an advanced stage.
12. In the period 1962-73 capital expenditure was incurred as follows:
  1. Cost of hull alterations (including cost of vessel) – £41,254
  2. Cost of lifts, machinery and furniture – £8,517
  3. Cost of additional fixtures, etc.- £26,091
  4. Total: £75,862.
13. Capital allowances have been granted in respect of the expenditure on the items 2 and 3 above. The dispute arises over item 1.
6. We were referred to the following authorities:
- Gibson v. Small (1852-54) 4 HL Cas 353
- European and Australian Royal Mail Co. Ltd. v. The Peninsular and Orient Steam Navigation Co. (1866) 14 LT 704
- The Mac (1882) 7 P 126
- Yarmouth v. France ELR(1887) 19 QBD 647
- The Gas Float Whitton No. 2 ELRELR (1896) P 42; (1895) 65 LJ P 17; (1895) P 301
- Andrews v. Andrews and Mears ELR [1908) 2 K B 567
- Polpen Shipping Co., Ltd. v. Commercial Union Assurance Co., Ltd.ELR [1943]
- J. Lyons & Co. v. Attorney-General UNK [1944] 1 All ER 477
- Hinton v. Maden & Ireland, Ltd. TAXWLR38 TC 391; [1975] 1 WLR 875
- Jarrold v. John Good & Sons TAXWLR40 TC 681; [1963] 1 WLR 214
Judgement

The test of whether an item is apparatus used in carrying on a business is sometimes called the Functional Test. In this case, Buckley LJ stated:
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'The functional test provides the criterion to be applied. Is the subject matter the apparatus or part of the apparatus employed in carrying on the activities of the business?'
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In this case, the company claimed plant and machinery allowances on an old ship that was adapted for use as a floating restaurant.

The ship was the structure within which the restaurant trade was carried on, rather than apparatus with which it was carried on.

In the Court of Appeal, Templeman LJ said that he could see no distinction between a restaurant on the Thames and a fish and chip shop in Bethnal Green.

Both act as premises in which the trade is carried on.

Note that the functional test is not whether an asset has a function.

All business assets have a function.

The test is whether the asset functions as apparatus used in carrying on the activities of the business.

For example, an asset that functions as the business premises is not plant, as it is not apparatus used in carrying on the activities of the business.

What this Means

It was decided in the well-known English case of Yarmouth v. France[7] that a horse owned by the defendant and utilised by the enterprise to carry carts is considered to be a “plant.” According to Lindley L.J., who asserted that:
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“There is no definition of plant in the Act: but, in its ordinary sense, it includes whatever apparatus is used by a business man for carrying on his business, - not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business”
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Therefore, the determination of whether or not anything is a plant is based on whether or not it is apparatus that is preserved for permanent employment in the process of running the business.

This procedure is referred to as the “Apparatus Test,” and it has been widely adopted by other jurisdictions as well as the Malaysian jurisdiction.

However, other tests, such as the “Premises Test,” the “Business Use Test,” and the “Functional Test,” were established over the course of time and through the use of various noteworthy cases.

In practice, the distinction between these tests may sometimes be unclear,

The ‘business use test’ is basically the same as the functional test,

The “business use test” examines whether an asset has a business use that is neither as stock-in-trade nor as merely the premises where business is conducted.

Functional Test looks at the function of the item in dispute and asks whether it has a functional purpose that enables the business’ performance.

Whereas the “premises test” requires that the following question be asked:
- whether or not the premise in question was the means by which business was conducted or,
- whether it was merely the premises where business was carried on.
In light of this, a taxpayer or their tax agent, who is preparing to make a claim for capital allowances, should take into consideration the particulars of their own business and the industry in which they operate in order to determine for themselves whether or not the apparatus in question qualifies as a plant for them.
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13
November 6, 2022
Back to Basic: The Capital Allowance in Malaysia, Is Horse a Plant?
It is no secret that claiming Capital Allowances on plant and machinery expenditure can be a complicated business.

While claiming allowances on business equipment such as motor vehicles, computers, tables, and chairs is straightforward, fully maximising a Capital Allowances claim on renovation and property purchases is fraught with complexities.

Even the most basic question doesn’t have a simple answer, namely, what is “Plant and Machinery”?

To this day, the question of whether or not a specific asset qualifies as a plant is one that the court must decide as a matter of legal principle (a question of law) and a vast amount of case law and legislation have to be interpreted when considering the question.

Yarmouth v France: CA 11 Aug 1887

The starting point in the search for a definition of the plant is relatively easy to find.

One case, concerned not with taxation but with compensation under the Employers’ Liability Act 1880, has been quoted and referred to in nearly every judgment that has considered the meaning of plant.

The case in question, Yarmouth v France, was heard by the Court of Appeal in 1887.

The defendant employed the plaintiff to drive carts. He objected that the horse had a vicious nature but was obliged to drive it. The horse kicked him.

For the 1880 Act, the plaintiff was an employee, the horse was a plant in the employer’s business, and its character was a defect in that plant.

In this case, Lindley LJ said:
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'There is no definition of plant in the Act, but in its ordinary sense, it (that is, plant) includes whatever apparatus is or instruments used by a businessman for carrying on his business, not his stock-in-trade which he buys or makes for sale; but all goods and chattels, fixed or movable, live or dead, which he keeps for permanent employment in the business.'
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The facts on which the decision was based have ceased to be relevant, but the following short quotation from the judgment of Lindley J has become the cornerstone.

This definition has received judicial approval at the highest level, as by the House of Lords in, for example, the cases of Maden & Ireland and IR Commrs v Barclay, Curle & Co Ltd.

It was also used as the justification for overturning, after 50 years, the Daphne v Shaw decision which had held that a law library was not plant.

That the definition is sound is beyond doubt, but it tells us little beyond what is seemingly rather obvious.

The concept that a plant may be live or dead has not in practice exercised the courts, though the case itself concerned a horse, and in recent times an inspector has been known to accept horses in a riding stable as a plant for tax purposes.

The practical importance of the definition can perhaps be said to be threefold:
- that plant is Apparatus; and
- that it includes ‘all goods and chattels’.
The same case is also relevant for the concept of ‘all goods and chattels’ in the related matter of whether numerous short-lived small items can qualify as a plant. Lord Reid commented:
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‘Subject to one point [that of durability], I have no doubt that these knives and lasts are plant in the ordinary sense of the word. It is true that they are numerous, small and cheap. But one trader may have to use a few large articles while another may have to use a large number of small articles.’
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Otherwise, the significance of ‘goods or chattels’ has not unduly concerned the courts.

In Jarrold v John Good & Sons Ltd, it was considered that the reference to goods and chattels ‘impliedly excludes the premises in which the business is carried on’.

This interpretation was also accepted in the Yard Arm Club case and subsequently in Wimpy International Ltd v Warland.

Of the different aspects of the Yarmouth v France definition, it is undoubtedly the reference to ‘apparatus used by a businessman for carrying on his business’ that has given rise to the most significant level of argument in the courts.

The contrast has been drawn between the ‘apparatus with which’ and the ‘setting within which’ a business is conducted.

However, this dichotomy is an uneasy one, for the two are not mutually exclusive on occasion. Furthermore, the definition of apparatus has itself given rise to a new problem, the so-called ‘functional test’, which, in turn, raises a different set of considerations.

Yarmouth v France also made it clear that something not used for carrying on the business is not plant. It also made it clear that ‘plant’ excludes stock in trade.

In Malaysia

Previously, since the term “plant” was not defined under the Income Tax Act of 1967, taxpayers were guided by the legal principles established in case law.

Consequently, traditionally, tax practitioners and tax officials will seek the courts for guidance on the definition of a plant. In particular, they will also look to the well-known case of Yarmouth v. France.

In Malaysia, the definition of Lindley LJ has been applied for a long time.

This is evident from prominent cases of capital allowance claims in Malaysia, such as:
- Ketua Pengarah Hasil Dalam Negeri v Tropiland Sdn Bhd; and
- Infra Quest Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri.
Ketua Pengarah Hasil Dalam Negeri v Tropiland Sdn Bhd

In this case, the taxpayer submitted a claim for capital allowance to receive reimbursement for the expenses incurred while building a multi-level carpark.

The approach used in the case of Yarmouth was essentially embraced by the Court of Appeal when it issued its decision that the multi-level carpark qualified as a qualifying plant.

To assess whether or not a particular subject matter is a qualifying plant, the Court considered a wide variety of standards, such as the “premise” test, the “Business Use Test”, and the “Functional Test”.

Infra Quest Sdn Bhd v Ketua Pengarah Hasil Dalam Negeri

In this case, the High Court held that telecommunication towers were plant and commented that:
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“This court is of the considered opinion that in distinguishing between the functional use and the setting, it must be noted that in some cases, buildings and structures have been held to be plant in their entirety as the courts considered the structures as performing an integral function with the machinery and plant contained within it.”
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The Court of Appeal subsequently affirmed the High Court’s decision.

Paragraph 70A Of Schedule 3

Section 28(a) of the Finance Act 2020 introduced a new paragraph 70A into Schedule 3 of the ITA, which reads as follows:
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“In this Schedule, “plant” means an apparatus used by a person for carrying on his business but does not include a building, an intangible asset, or any asset used and that functions as a place within which a business is carried on.”
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Taxpayers are now required to examine the legal position of what constitutes a plant for the purposes of capital allowances by analysing the approach taken by the courts in the past and the new paragraph 70A of the Income Tax Act 1967.

While it is clear that some of paragraph 70A was written based on the wordings from Yarmouth, paragraph 70A did significantly narrow the scope of the plant by the Inland Revenue Board of Malaysia.

Buildings, Intangible Assets, and places where business is conducted are no longer considered “plant” under the new wording of paragraph 70A.

What this Means

The legal environment has moved towards a more restricted plant definition at this point.

Despite this, the development and implementation of paragraph 70A did not correctly define the definition of the plant; instead, it imposed a more narrow interpretation of the term.
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Our website's articles, templates, and material are solely for reference. Although we make every effort to keep the information up to date and accurate, we make no representations or warranties of any kind, either express or implied, regarding the website or the information, articles, templates, or related graphics that are contained on the website in terms of its completeness, accuracy, reliability, suitability, or availability. Therefore, any reliance on such information is strictly at your own risk.
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16
November 6, 2022