Some of the original investors in Eurocentral are set to lose around £5million arising from the recent case of MARK SHAW v THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS [2019] UKFTT 280 (TC).
First-tier Tribunal (“FTT”) rejected TAL CPT Land Development Partnership LLP’s (“TAL”) claim that the commercial buildings it acquired from Chunghwa Picture Tubes (UK) Ltd (“CPT”) were ever in ‘temporary disuse’ during its period of ownership.
The fact the partnership intended to let the buildings after CPT’s period of qualifying use but were unable to find a suitable tenant was not sufficient to demonstrate ‘temporary disuse’. The buildings ceased to be in a qualifying use during CPT’s ownership.
Consequently, TAL was not eligible to claim writing down allowances for the residue (c.£14 million) of industrial building allowances (IBAs) or subsequent improvement expenditure to encourage tenants. It was also ineligible for any balancing allowance on either cessation of use, demolition or sale.
The Chunghwa Factory
TAL acquired the Chunghwa Factory site (now known as Eurocentral) from CPT on 4 February 2004 for £17.25million. CPT manufactured cathode ray television tubes and developed the site between 1996 and 1998 with the support of Scottish Enterprise (who owned areas of freehold). Part of the site was in an Enterprise Zone and benefited from enhanced IBAs (enterprise zone allowances), grants and simplified planning rules.
With the introduction of flat screen technology, CPT fell into difficulty and its buildings on the site fell into ‘temporary disuse’ in or around January 2003.
CPT wished to protect its IBA claim position on sale and obtained a warranty from TAL that it would actually bring the buildings and structures on this site back into qualifying use within three years of its acquisition. TAL also agreed to indemnify CPT for up to £7 million for any future tax liabilities it might incur if it failed to do so.
The sale is also understood to have included various subsidiary companies with ‘golden contracts’ designed to preserve the availability of 100% enterprise zone allowances in future site development, none of which formed part of this enquiry.
Following its acquisition, TAL entered into various negotiations and even incurred costs in adapting parts of the property to make it more attractive to tenants. However, by 2005 the site remained unlet and TAL began selling portions to other investors. By June 2006, it began planning for demolition and redevelopment of the site which started in 2007.
Temporary Disuse
IBAs were introduced after the Second World War to encourage industrial activity by ‘according to industrial buildings tax advantages not accorded to shops and offices’. In order to qualify for the annual relief, the industrial building or structure had to be in a qualifying use at the end of each chargeable period. A building that fell into temporary disuse (CAA 2001 s285) could still be eligible provided it had been in a qualifying use immediately before.
TAL argued that the buildings were in a state of ‘temporary disuse’ right up to the point when they decided to redevelop the whole site following significant efforts to let the production facilities and offices. The legislation did not place a time limit on length of temporary disuse and all parties agreed that CPT had actually used the site for a qualifying IBA use previously.
HMRC argued that if a building falls ‘temporarily’ out of use, it remains so until it comes back into an actual physical state of ‘use’ with reference to objective facts. If it never comes back into actual use, then the period cannot be considered to be ‘temporary’.
FTT favoured HMRC’s approach and dismissed the appeal against the closure notice and assessments for the IBA claims in 2004-05 (£658,846) and 2006-07 (£10,315,324). The discovery assessment for IBA claim (£2,555,820) in 2005-06 is being held under a separate direction.
Tax Warranty
TAL did actually enter into a short lease (a week) with a company to store vintage cars on the site between 30 March 2006 and 6 April 2006. This was done to meet its obligations under the tax warranty and avoid incurring any liability under the £7million indemnification to CPT.
FTT was given a copy of this lease but was not provided with any evidence on whether any activity was actually carried out within the buildings involved. HMRC disagreed that there was any qualifying use and FTT had insufficient detail to make any comment either way. TAL did not make this a part of its case and the instructing solicitors wished to reserve the matter for Upper Tribunal should it go to appeal.
FTT agreed that the capital allowances legislation did not cope well with extended periods of ‘temporary disuse’ but was not persuaded to depart from HMRC’s published view (CA32800) and it remains to be seen whether TAL will appeal the decision given the tax at stake and ongoing enquiry into 2005-06. It also remains to be seen what impact the decision (if any) will have on the allowances claimed by CPT which was dissolved on 26 November 2015.
Eurocentral is one of the largest industrial estates in Scotland situated on the edge of Holytown and Mossend, North Lanarkshire, just off the A8/M8 motorway, about 12 miles (19 km) east of Glasgow city centre and 34 miles (55 km) west of Edinburgh. The nearest communities to the estate are Holytown, Mossend, Chapelhall, Calderbank and Carnbroe.
The closest major towns are Bellshill 4 miles (6.4 km), Motherwell 4 miles (6.4 km), Coatbridge 4 miles (6.4 km) and Airdrie 4.5 miles (7.2 km).
If you have any questions on the above, or would like more details, please do not hesitate to contact us.