[2009] UKFTT 374 (TC)

TC00312

Appeal number SC/3380/2005

Corporation tax – capital allowances – machinery or plant – conversion, fitting out and refurbishment of public houses – whether items of cost qualify for allowances under section 24 CAA 1990 or section 66 CAA 1990 (or both) – consideration of what amounts to alterations to an existing building incidental to the installation of machinery or plant – decision in principle on sample expenditure – Appellant successful in part 

FIRST-TIER TRIBUNAL
TAX CHAMBER

	J D WETHERSPOON PLC	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (CorporationTax)	Respondents

				TRIBUNAL: THEODORE WALLACE
						JOHN WALTERS QC

Sitting in public (as the Special Commissioners) in London on 14, 19 and 20 June 2007 and (as the First-Tier tribunal – Tax Chamber) on 29 and 30 June 2009 and 1 and 2 July 2009

Julian Ghosh QC and James Henderson, instructed by Deloitte LLP, for the Appellant Company
Rupert Baldry, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Introductory 
1.	After the first hearing of this appeal in June 2007, this Tribunal, sitting as the Special Commissioners, on 21 December 2007 released a decision in principle on the main issues raised (“Our First Decision”) and adjourned the appeal for the parties to consider whether in the light of Our First Decision, they could dispose of the outstanding matters by agreement.
2.	This did not prove possible and in June and July 2009, this time sitting as the First-tier Tribunal (Tax Chamber), we heard further argument to enable us to issue a decision on issues on which the parties were unable to agree the application of Our First Decision (this decision).  The issues related to the two public houses which were selected by the parties as samples: the Prince of Wales, at Cardiff, and the First Post, at Cosham.  This decision is not a final decision, since issues may arise on its application to the other 286 premises of which the two public houses were samples.  Indeed further issues may arise as to the figures.  We also mention that the Appellant has already appealed to the High Court against Our First Decision.
3.	At the 2009 hearing the parties had agreed lists of “clear” items and “unclear” items.  “Clear” items were those as to which the parties were in agreement as to the application of Our First Decision – that is, whether on the basis of Our First Decision the items did, or did not, attract allowances.  The parties asked us for a formal decision on the qualification (or not) for allowances of the “clear” items.  They need that decision to enable the matter to be taken further.   “Unclear” items were those where the parties remained in disagreement about the application of Our First Decision, the Appellant contending that the items attracted allowances and HMRC contending that they did not.  Our main task following the 2009 hearing is to consider the “unclear” items to decide which of them do, and which of them do not, attract allowances.  A final point raised at the 2009 hearing was a question of principle as to how allowances applied to items of expenditure classed as “preliminaries”.  Separate lists of “unclear” items were produced for the Prince of Wales, and the First Post.  However the parties agreed that we should issue a decision by reference to the list of “unclear” items produced for the Prince of Wales and not make separate reference to the First Post.  In fact we heard only one submission specifically directed to the First Post pub and we leave the parties to apply this decision to the items listed with reference to it.  The one submission was made by Mr. Baldry, to the effect that HMRC did not accept (whatever the position with regard to the Prince of Wales) that the lighting in the toilets of the First Post contributed to creating an attractive ambience.  We do not accept that submission – in our view that lighting did contribute to the creation of an attractive ambience – but we note that none of the “unclear” items with reference to the First Post related to lighting.  We therefore say no more in this decision about the First Post.
4.	We attach Our First Decision as an appendix to this decision (thus incorporating it into this decision) and do not repeat the background to the appeal which appears in Our First Decision.
The “unclear” items
5.	 Section 66 of the Capital Allowances Act 1990 (since repealed), with which much of the debate at the 2009 hearing was concerned provided as follows:
“Where a person carrying on a trade incurs capital expenditure on alterations to an existing building incidental to the installation of machinery or plant for the purposes of the trade, the provisions of this Part shall have effect as if that expenditure were expenditure on the provision of that machinery or plant and as if the works representing that expenditure formed part of that machinery or plant.” (emphasis added)
6.	At paragraph 78 of Our First Decision we noted that Lord Reid, in IRC v Barclay, Curle & Co. Ltd (1969) 45 TC 221, at page 240, had stated that “installation of machinery or plant for the purposes of the trade” should be understood as meaning installation so that the machinery or plant can function properly by reference to the purpose for which it was installed.  
7.	Taking that fully into account, we concluded that tiles on kitchen walls, for which the Appellant claimed allowances on the basis that they were alterations to an existing building incidental to the installation of machinery or plant for the purposes of the trade, did not qualify as alterations within section 66 because they did not have a sufficient nexus with the installation of equipment, such as cookers, to be incidental thereto.  We commented that the tiles were fixed to facilitate the cleaning of the walls.  We concluded, in paragraph 78 of Our First Decision that 
“apart possibly from splash backs to sinks and the immediate surrounds of lavatory basins, we do not consider that wipe-clean tiling qualifies under section 66”.  
Since Our First Decision was released, and for the purposes of this resumed hearing, HMRC have accepted in the light of what we said that splashbacks to sinks and the immediate surrounds of lavatory basins qualify for allowances under section 66.  Indeed, they have gone further, as indicated in paragraph 13 below. 
8.	Under the general heading of “Splashbacks”, the parties listed as “unclear” items the following:
(a)	Under the general subheading “Plastering and tiling to form splashbacks to items other than sinks and lavatory basins” the items CA02(B), CA03(C), SA24(B), SA25(C), SA26(C) and  SA28(B) covered an agreed proportion of the costs of plastering walls, applying ceramic tiles or mosaic tiles to walls or floors, representing the costs of plastering, tiling or painting walls or floors around equipment, WCs and other sanitary equipment
9.	The claims in relation to these items give rise to three points, as Mr. Ghosh agreed in argument (Day 1, page 39, page 74).  First, ought our comment in paragraph 78 of Our First Decision relating to splashbacks to sinks and the immediate surrounds of lavatory basins be interpreted as applying only to identifiable splashbacks, rather than to parts of larger wipe-clean surfaces which parts perform a splashback function (“splashback-functioning parts of walls or floors”)?  Secondly, should our comment (if it can be applied to splashback-functioning parts of walls or floors) also apply to splashbacks (or splashback-functioning parts of walls or floors) in relation to equipment other than sinks and lavatory basins (for example, cookers), WCs and other sanitary equipment?  Thirdly, if the cost of a splashback (or a splashback-functioning part of a wall or floor) does qualify on this basis as an alteration to a building incidental to the installation of machinery or plant for the purposes of the trade within section 66, is the alteration in question to be limited to the tiling applied to the surface of the wall to provide a wipe-clean surface, or is it also to include the plastering underneath the tiling, which is applied to the wall to receive the tiles?
10.	Mr. Ghosh’s submission on the first of these issues is that a part of a larger wipe-clean surface, which part performs a splashback function is and is to be regarded as a splashback. 
11.	On the second issue, he relied on the evidence of Mr. Large given at the 2007 hearing that a wipe-clean surface was required in order to operate the equipment in conformity with health and safety primary and secondary legislation, and 
“the way we achieved this was to plaster the surfaces in preparation to receive the wipe clean tiles.  This constituted an alteration to the existing building.  The expenditure on the building alteration was incidental to the installation of plant and machinery (the catering equipment) within the existing building”.  
Mr. Ghosh submitted that, given our interpretation of section 66 as applying to splashbacks to sinks and the immediate surrounds of lavatory basins, the nature of the equipment causing splashes is not the distinguishing feature in terms of eligibility for allowances, and allowances should be available for the tiling around other equipment causing similar splashing to their surrounds.  
12.	On the third issue, Mr. Ghosh submitted that the plastering to receive a splashback forms part of the cost of the splashback itself.
13.	For the purposes of this resumed hearing, HMRC are prepared to accept, on the basis of what we said in paragraph 78 of Our First Decision that the cost of splashbacks to sinks and the immediate surrounds of lavatory basins qualify for allowances as the cost of alterations within section 66.  They are also prepared “pragmatically” to accept that where sinks or lavatory basins were installed against a tiled wall, then an apportioned part of the cost of the tiling of the wall, representing the cost of the splashback-functioning part of the wall, is eligible for allowances under section 66.  This does not, however, extend to an acceptance that the cost of any part of the tiling of a wall against which equipment other than sinks or lavatory basins is set would be so eligible, even if the equipment produces splashes as a result of normal use.
14.	Mr. Baldry contended that tiling to deal with splashes caused by other equipment would not similarly qualify because such tiling is integral to the walls or floors with wipe-clean surfaces, which ought not to qualify as alterations within section 66, because they are walls or floors, and ought to be disallowed by reference to, or by analogy with, our statement in paragraph 78 of Our First Decision that “it would be stretching section 66 beyond its evident purpose to allow expenditure on the construction of kitchen walls to qualify”.  Further, Mr. Baldry submitted that the cost of plastering a wall is simply part of the cost of the wall finishing which would have been required to ‘finish’ the walls anyway, regardless of whether or not they were then tiled. Plastering costs cannot be costs of alteration to a building incidental to the installation of equipment.  
15.	Our decision on these questions is that the relevant alteration to a building qualifying for allowances under section 66 is restricted to the application to the surface of the building of a splashback, by which we mean tiling sufficient specifically to deal with splashing which may be expected to be caused by the usual functioning of any qualifying items of machinery or plant.  Thus we do not accept that a part of the cost of a fully tiled wall or floor can qualify as the cost of an alteration to the building incidental to the installation of machinery or plant. Moreover, we do not regard the cost of plastering (which we accept was needed to receive the tiling), even where a splashback (as we use the word) was applied, as a cost of alteration to a building incidental to the installation of machinery or plant on this basis.  That is part of the cost of finishing the walls generally.
16.	We are therefore with the Appellant to the extent that the cost of a splashback is allowable even if the splashback is to cater for the use of splash-producing equipment other than sinks or lavatory basins.  But we are with HMRC to the extent that splashback-functioning parts of walls or floors are not splashbacks (as we use the word) but simply parts of walls or floors and their costs do not attract allowances.
17.	We consider that HMRC’s decision to allow the costs of splashback-functioning parts of walls adjacent to sinks or lavatory basins as concessionary.  We do not criticise HMRC for taking the decision on pragmatic grounds, but it does not accord with our interpretation of the scope of the application of section 66. This has the effect that some of the “clear” items, where the parties have agreed that allowances are available, will have to be determined by us as items where allowances are not available. 
18.	Mr. Ghosh’s argument proceeded in incremental stages.  We have suggested, and HMRC have accepted, that the costs of a small area of tiling around a handbasin attracts allowances under section 66, as an alteration to the building to enable the handbasin to function as such.  Mr. Ghosh submits, with some force, that on that basis it would be illogical to deny that the cost of that part which relates to a notional splashback area of a fully tiled wall which was installed behind other splash-producing equipment should attract allowances on the same basis.  HMRC and the Appellant have agreed, or could agree, the relevant apportionment of the cost of a fully tiled wall between the notional splashback area and the rest of the wall.  Then Mr. Ghosh goes on to argue that since WCs and urinals are inherently splash-producing, the cost of a notional splashback area of the tiled floor on which they are set should also attract allowances or, if that is an implausible proposition, then the cost of the whole tiled floor should be eligible for allowances, on the basis that the floor must be wipe-clean to enable the WCs and urinals to function properly for the purposes of the Appellant’s trade. (We note that Mr. Ghosh in the end limited the area of floor for which he contended at the hearing that allowances should be available to the notional splashback area – see paragraph 35 below.)
19.	While we were at first sympathetic to the proposition that the cost of a notional splashback area of a fully tiled wall should not be treated differently from the cost of a specifically installed splashback, HMRC’s argument that it was unreal to make the apportionment involved seemed to us to have particular force when the toilet floors came to be considered.  In that case, we are considering the eligibility of the cost of a floor, albeit a wipe-clean floor, and we regard it as unreal to treat that cost as the cost of an alteration incidental to the installation of WCs and urinals rather than the cost of the floor.  On this basis we would exclude any allowances for item SA25(C) – 33% of the cost of the ceramic floor tiling in the toilets.
20.	Having made that decision on item SA25(C) it also seems unreal to us to apportion the costs of fully tiled walls between allowable costs of a notional splashback area and non-allowable costs of the rest of the tiling.  We therefore exclude any allowances for items CA03(C) – ceramic tiles to walls – and SA26(C) – mosaic tiles incidental to the installation of toilets.
21.	Although in the light of the decisions we have made about notional splashback areas, the importance of the claim in relation to plastering is much reduced, we comment that we consider that nothing in Mr. Large’s evidence prevents us from reaching our conclusions on the effect of the ambit of section 66. Mr. Ghosh submitted that Mr. Large’s evidence that the plaster was needed to receive the tiles was uncontradicted and must lead to the conclusion that if the tiles are eligible for allowances under section 66, so must the plastering be.  He also submitted that HMRC had not established in evidence, by cross-examination of Mr. Large or otherwise, that the plaster would have been applied as a wall finishing, even if the walls had not been tiled. 
22.	The relevant evidence of Mr. Large was “the way we achieved this [the wipe-clean surfaces] was to plaster the surfaces in preparation to receive the wipe clean tiles”.  We reject Mr. Ghosh’s submission that Mr. Large’s evidence must clearly be taken as meaning that “functionally” the plastering was in preparation to receive the tiles. Instead, we regard this evidence as ambiguous on the point of whether the plaster played some active role in the provision of the wipe-clean surfaces or alternatively merely formed a finish to the walls to which the tiles could be applied.  We resolve this ambiguity by concluding that the plastering provided a wall finish, rather than that it was an inherent part of the process of making the wall surfaces wipe clean. 
23.	We regard the way Mr. Large expressed himself in his evidence in relation to item SA24(B) (plastering incidental to the installation of toilets) as supporting this conclusion.  Mr. Large said of that plastering expenditure that it 
“related to plastering to walls and ceilings in the ladies and gents toilets in the basement and first floor, sometimes to support decorative tiling and/or painting ... in other areas the toilet walls had to be plastered prior to painting.  The plastering and painting of the walls to the toilets constituted the alteration to the existing building.  This was incidental to the installation of plant and machinery (toilets and sinks).”  
The evidence as a whole suggests to us that the plastering was carried out as a wall finish to provide a surface which could be painted or to which, alternatively, tiles could be applied. 
24.	It follows that we determine that the costs of items CA02(B), CA03(C), SA24(B), SA25(C), SA26(C) and SA28(B) are none of them eligible for allowances.
25.	Next, under the general heading of “Splashbacks”, the “unclear” items considered were the following:
(b)	Under the general subheading “Cement & flooring to form splashbacks to sinks & lavatory basins” the items CA04(B), CA11(B), and SA23(B), covered an agreed proportion of the costs of cement flooring to receive tiles, the provision of latex-cement to the floor to receive altro flooring and the PVC sheeting around equipment, WCs and other sanitary equipment
26.	Mr. Ghosh submitted that the costs of these items qualify for allowances on the same basis, that is that the flooring in question is required to be non-slip and wipe-clean by the exigencies of the Appellant’s trade and that an agreed proportion of the floors performs a splashback function. Altro flooring is non-slip vinyl flooring, and latex cement was used to prepare the floor surface to receive it.  Mr. Ghosh confirmed that the latex cement performed the same function as the plaster considered earlier; it produced a level surface to receive the vinyl flooring.
27.	Mr. Ghosh submitted that the eligibility of the cost of cement flooring followed the decision on whether the costs of floor tiles to be laid on top of the cement flooring was eligible.  
28.	The crucial issue for these items (as for those considered above under (a)) is whether the relevant costs were expenditure on alterations to an existing building incidental to the installation of machinery or plant for the purposes of the trade, or expenditure on alterations which are not incidental to the installation of machinery or plant because the alterations, being the provision of floors, cannot be regarded as incidental to the installation of machinery or plant which is to be set on them.
29.	Mr. Ghosh’s point is that an alteration incidental to the installation of machinery or plant is an alteration to a building to enable the machinery or plant to be used in the trade.  The floors in question needed to be non-slip and wipe-clean so that the machinery or plant set on them could be used properly.
30.	We reject this submission.  In our judgment the alteration was not incidental to the installation of any machinery or plant.  Non-slip and wipe-clean floors were desired and necessary for the proper performance of the Appellant’s trade in the premises, but their provision was not carried out specifically to enable any machinery or plant to be installed. 
31.	Mr. Large’s evidence was that 
“as a result of installing the cooking equipment and the sinks it was a requisite under [health and safety legislation] to install a non-slip wipe-clean floor surface for spillages from the equipment”.  
Although we acknowledge that we are making a fine distinction, we interpret this evidence as meaning that the floor surfaces were needed for the operation of the equipment, not for the installation of the equipment in a state in which they could be used for the purposes of the trade.  
32.	The floors and their provision did not have a sufficient nexus with the installation of any equipment to enable the cost of them to be eligible for allowances under section 66.
33.	This conclusion applies to the costs of the provision of the surface of the non-slip and wipe-clean floors and a fortiori to the costs of the provision of sub-surface preparation.  We therefore determine that none of items CA04(B), CA11(B), and SA23(B) are eligible for allowances under section 66.
34.	Next, under the general heading of “Splashbacks”, the “unclear” items considered were the following:
(c)	Under the general subheading “Cement & flooring to form splashbacks to items other than sinks & lavatory basins” the items CA04(C) and CA11(C), covered an agreed proportion of the costs of the provision of latex-cement to the floor to receive altro flooring and the PVC sheeting around equipment other than sinks and lavatory basis, predominantly kitchen equipment.
35.	Again Mr. Ghosh submits that the costs of the latex cement applied to the subfloor to receive altro flooring  and PVC sheeting installed on the floor of the kitchens to give a non-slip and wipe-clean surface should qualify for allowances under section 66 on the basis that the alterations to the building involved are incidental to the installation of machinery or plant for the purposes of the Appellant’s trade.  The submission was originally put on the basis that an agreed percentage (51%) was allowable, being the proportion of the whole cost which was attributable to that part of the flooring which could be said to have a splashback function.  Mr. Ghosh at one point accepted a suggestion from the bench that it was unreal to separate out a section of a wipe-clean floor on the basis that only that section had a splashback function, and developed his submission to claim 100% of the cost of these items.  However on consideration of the consequential ramifications of altering his submission at that stage he reverted to his case that only 51% of the costs qualified on the basis that that percentage represented that part of the floor area which immediately surrounded the equipment and pre-eminently performed a splashback function.
36.	 HMRC’s case on these, as on the other “unclear” splashback items, is that the costs of flooring cannot be eligible for allowances under section 66 to any extent, because they relate to the installation of floors, not alterations incidental to the installation of machinery or plant.  We agree, and for the same reasons as those given above we determine that neither the cost of item CA04(C) nor the cost of item CA11(C) is eligible for allowances.
37.	In our view the dividing line between alterations which are incidental to the installation of machinery or plant and those which are not should be drawn in this area between splashbacks (as we have used the term) specifically provided for splash-producing equipment and other wipe-clean and/or non-slip surfaces which form parts of walls or floors and, as such, cannot be said to have been alterations to an existing building incidental to the installation of machinery or plant for the purposes of the trade.  We record that apart from the evidence of Mr. Large and Mr. Heeley, we have had the benefit of site visits and, in particular, of copious photographs, to inform our conclusions on the factual issues involved in our determinations.
38.	Under the general heading of “Cold Store Drainage”, the parties listed as “unclear” items the following:
Items CS05(B), CS13(B) and CS16(B). These items covered expenditure incurred relative to the provision of the cement flooring to the cold store.
39.	Item CS05(B) is the “notional cost of creating a level floor”.  This item is explained by the following.  A cold store was created within the Prince of Wales in order to chill and maintain the temperature of draft beer.  Because of anticipated spillages and associated washing down, the floor had to be inclined to a new drainage channel by means of which liquids would be pumped out by pumping equipment within the cold store.  Mr. Ghosh claims the cost of the cement flooring to the cold store under section 66, as expenditure on an alteration to the existing building which was incidental to the installation of the drain and pumping equipment.  HMRC take the view that some of the expenditure is eligible for allowances, 5.6% of it, being the proportion of it which they say relates to the provision of the incline.  Mr. Baldry submits that 94.4% of the cost should be disallowed because that represents the proportion of the actual costs incurred which would anyway have been incurred if a level floor had been installed.  He contends that that amount is in reality referable to the provision of the floor as part of creating a new cold store, and is not incidental to the installation of any equipment.  He mentions in support of his submissions that the new floor in the cold store area was needed to replace an inappropriate existing timber floor and also that there is a lack of proportion between the provision of the inclined floor and the drain which makes in inappropriate to regard the former as incidental to the provision of the latter..
40.	Item CS13(B) is the cost of breaking out the existing slab in the cellar to allow the installation of the new cold store floor.  Mr. Ghosh submits that the whole of this cost should be treated in the same way as the costs of installing the inclined cold store floor.  Mr. Baldry submits that only 5.6% of it is attributable to the provision of the incline, 94.4% being attributable to the provision of a floor as such and therefore ineligible for allowances under section 66.
41.	Item CS16(B) is the cost of removal of the concrete screed in the pre-existing basement of the Prince of Wales, apportioned to that proportion of it (11½%) agreed to represent the removal of the concrete screed in the new cold store area.  Mr. Ghosh submits that this expenditure is eligible for allowances under section 66 as incidental to the installation of the pumping equipment in the same way as the cost of creating the inclined cold store floor.  HMRC consider that these costs were part of the costs of a wider project to remove all the concrete screed and therefore are not eligible for allowances.
42.	  Mr. Baldry’s argument in relation to item CS05(B) is that the parties have agreed after the event that 94.4% of the cost actually incurred in the provision of a cement floor with an incline in the cold store is referable to what would have been spent if a level floor had been installed.  He acknowledged that there was no evidence that any works were carried out to achieve the incline as opposed to the inclined floor as a whole. 
43.	In those circumstances we cannot see that any of the works actually carried out to produce the inclined floor in the new cold store were not incidental to the installation of the drain, which required an inclined floor in order for it to function at all.  In a similar way to the way we have concluded that none of the expenditure on the tiled walls and floors qualifies under section 66 on the basis that no part of those walls and floors can be said to have been alterations to the installation of equipment, even though some part of those walls and floors may have had a splashback function, so here we reach the (opposite) conclusion that no part of the expenditure of the actual provision of an inclined floor can be isolated out and shown not to be an alteration incidental to the installation of the drain or pumping equipment.  There never was any intention to provide a level floor which was then altered to an inclined floor – it was to be an inclined floor from the start.  All the expenditure involved is therefore expenditure on alterations incidental to the installation of machinery or plant.  We do not regard this conclusion as disproportionate in any way.  The fact (if it be such) that the cost altering the existing building to provide the inclined floor was relatively higher than the cost of the machinery or plant to whose installation the alteration was incidental is on the facts immaterial. We reject Mr. Baldry’s submission that any of the expenditure incurred in breaking out the existing slab or removing the concrete screed is ineligible simply on the basis that new flooring was being provided for the entire basement.  The proportion of that total expenditure which relates to the cold store area is eligible for allowances on the same basis as the costs of providing the inclined floor.
44.	For these reasons our decision is that all the expenditure claimed under ‘unclear’ items CS05(B), CS13(B) and CS16(B) is eligible for allowances under section 66.
45.	Under the general heading of “Lighting”, the parties listed as “unclear” items the following:
First, items ES02(B), ES03, ES04(B) and SA34. These items covered the cost of cutting holes in ceilings for luminaire (strip lighting) points in the kitchen, and other luminaire points in the toilets, the provision of a lighting pelmet (a panel to obscure a light fitting) to the top of a WC cubicle partition and expenditure incurred in forming a drop ceiling in the ladies’ toilets in the Prince of Wales.  Secondly, items ES31 and ES35, being light fittings in the toilets and the rewiring of toilet lighting.
46.	A number of different points of principle arise in connection with these ‘unclear’ items.  To introduce the first point we record that when the Appellant’s complex capital allowances claim was considered by HMRC the information on lighting was marshalled in such a way that only one item, ES31, which was lighting in the toilets, was separately identified and queried by HMRC.  The capital allowances status of that item – whether or not it qualifies as machinery or plant under section 24 of the Capital Allowances Act 1990 – is in issue, but uniquely so as far as the lighting is concerned.  HMRC took no point on the Appellant’s claim that the remainder of the lighting qualified as machinery or plant under section 24 and so the capital allowances status of the rest of the lighting is not in issue.
47.	The dispute in relation to items ES02(B), ES04(B) and SA34 turns on whether the cutting of holes in ceilings in the kitchen (ES02(B)) and the toilets (ES04(B)) and the provision of a drop ceiling to accommodate lighting in the ladies’ toilet at the Prince of Wales (SA34), were alterations to an existing building incidental to the installation of machinery or plant for the purposes of the trade within section 66.  This point, in turn, depends on whether the luminaires (strip lights in the kitchen and spot lights in the toilets) are to be taken to be machinery or plant for capital allowances purposes.
48.	Item ES03 was a ‘pelmet’, which had been removed before our site visit to the Prince of Wales, but which was fairly clearly a length of board affixed to the top of a partition or wall in a toilet to shield from view a strip light originally fixed to the top of the partition or wall, so that in the result light would shine upwards from the strip light to the ceiling, we infer, for the purposes of creating a decorative ambience in the toilet.
49.	Item ES35 is ‘rewire toilet lighting’.  The cost involved is claimed by the Appellant as eligible for allowances alternatively under section 24, as machinery or plant and section 66 as an alteration to an existing building incidental to the installation of light fittings which are themselves machinery or plant.  The evidence on this item was particularly thin.  We were referred to Mr. Large’s statement where he said: 
“toilet facilities needed to be created within the existing structure.  This therefore led to the provision of lighting.  However when the lighting was first trialled it was found that the level of lighting was insufficient and consequently the lighting needed to be altered to maximise the ambient effect.  This represented an alteration to the existing building.  The alteration was incidental to the installation of plant and machinery (toilets and sinks).”
50.	We are unclear (and the parties were unable to help us) as to whether the expenditure claimed under this item was in respect of light fittings, or wiring as such, or alterations to the fabric of the building (cutting holes in ceilings and so forth).  It seems that the cost must have represented one or the other, or both.  Insofar as it represented light fittings or wiring as such, we consider the claim under section 24; insofar as it represented alterations to the fabric of the building we consider the claim under section 66, on the basis that the alterations were incidental to the installation of the light fittings.  We reject the suggestion that they were incidental to the installation of toilets and sinks (which was not renewed in submissions by Mr. Ghosh).
51.	We deal first with the question of the eligibility of the light fittings to be treated as machinery or plant under section 24.  This arises directly in relation to item ES31, WC light fittings.  Again, the evidence on what these light fittings were is extremely thin.  We were shown no photograph of them and we have no recollection of their being pointed out to us on the site visit.  Yet we must decide whether or not they qualify as machinery or plant.
52.	Mr. Ghosh submitted that the light fittings had a separate identity and the function of creating an attractive ambience.  We accept both points.  In relation to ambience, there was copious evidence that the ambience of the toilets, especially the ladies’ toilets was an important aspect of the attractiveness of the Appellant’s pubs to its customers.
53.	 HMRC’s case on the light fittings is that they can only be regarded as machinery or plant if they are ‘trade-specific’, and not if they are ‘general lighting’.  This submission was advanced on the authority of J. Lyons & Co. Ltd. v Attorney-General  [1944] Ch 281, in which a distinction was drawn in the context of a dispute under the War Damage Act 1943, between plant as part of the apparatus with which a trade is carried on and assets forming part of the setting in which a trade is carried on. HMRC regard ‘general lighting’ as part of the setting and will only accept ‘trade-specific’ lighting as plant.  Mr. Baldry acknowledged that the concept of what was ‘trade-specific’ was “slightly elusive”.
54.	There are two aspects to the problem of distinguishing between ‘trade-specific’ and ‘general’ lighting.  The first is that one must look at the light fittings themselves, to see if there is anything about them that sets them apart from being ordinary light fittings (such as might be found in any residential or other premises to provide illumination) and makes them particularly suitable to the trade in question.  In the context of a filming trade, one could give the bright lights in a film studio as an example.  The second aspect is that one must decide whether the light fittings, whether ‘ordinary’ or not, perform some appreciable function in the carrying on of the trade, over and above simply providing illumination. 
55.	Mr. Baldry, for HMRC, accepted this.  He said that both the physical type of the light and the usage of the light are relevant factors, and that where lighting is specially constructed or designed to serve some trade-specific function and is used for that function, it is likely to qualify as plant.  He also said that ordinary light fittings may qualify as plant is they provide more than general illumination, so that they also may be said to fulfil some trade-specific function, such as providing ambience. HMRC had accepted that the ‘front of house’ lighting, in the bars and so forth, qualified as plant.  Mr. Baldry submitted that plainly the kitchen lighting did not so qualify (although by mistake HMRC had “let it through”) and the toilet lighting lay “somewhere in the middle”.
56.	We accept Mr. Baldry’s statement of the relevant law and find that whether or not the WC light fittings in ES31 were specifically constructed or designed to serve a trade-specific function (which we doubt but make no finding on), they did serve a function in the carrying on of the Appellant’s trade, viz: the provision of an attractive ambience in the toilets.  This is particularly clear in relation to the ladies’ toilets.  We do not know whether the fittings in ES31 relate to the ladies’ or the gentlemen’s toilets and we find in the Appellant’s favour that the lighting produced ambience there also. 
57.	We therefore decide that item ES31 is eligible for allowances under section 24.
58.	It follows from this decision that we also decide that item ES35 ‘rewire toilet lighting’ is eligible for allowances under section 24 to the extent that the cost concerned represents the provision of machinery or plant (wiring and fittings) rather than alterations to the building.  Insofar as it represents alterations to the building we decide that it is eligible for allowances under section 66 as the cost of alterations incidental to the installation of lighting which qualifies as machinery or plant.
59.	Likewise we find that item ES03, the ‘pelmet’, was an alteration to the existing building (either because it was attached to the wall, or to the timber partitions in the toilets which we have found in paragraph 79 of Our First Decision to be an alteration within section 66).  The alteration constituted by the affixing of the ‘pelmet’ was incidental to the installation of a lighting fixture in the toilet, which we find to have been plant on account of its function in providing atmosphere, and therefore is eligible for allowances under section 66.
60.	We turn now to the dispute in relation to items ES02(B), ES04(B) and SA34 (the cost of cutting holes in ceilings in the kitchen (ES02(B)) and the toilets (ES04(B)) and the provision of a drop ceiling to accommodate lighting in the ladies’ toilet at the Prince of Wales (SA34)).  
61.	The position is that HMRC in their amendment to the Appellant’s self-assessment have not taken the point that the light fittings, in the installation of which these holes were cut (or the drop ceiling provided), were not plant. In relation to items ES04(B) and SA34 this point is without practical significance because we have held that the lighting in the toilets does qualify as plant (ES31) and, therefore, we decide that items ES04(B) and SA34 are eligible as alterations to the building incidental to the installation of plant within section 66. (We reject Mr. Ghosh’s alternative submission that the drop ceiling has a separate identity which would render it eligible for allowances under section 24 as plant – in our view it is or has become part of the ceiling.)
62.	 However for item ES02(B) – the cost of cutting holes in ceilings in the kitchen to install lighting – the rival contentions are as follows.  First, Mr. Ghosh contended that HMRC has accepted that the kitchen lighting qualified as plant and that therefore they cannot argue in relation to item ES02(B) that the kitchen lighting was not plant and that therefore the cost of cutting holes in ceilings was not incidental to the installation of plant.  Mr. Baldry submitted that HMRC have not accepted that the kitchen lighting qualified as plant, they simply let the point through by mistake at the time of the amendment to the self-assessment.  He accepted that HMRC cannot now take the point in relation to the kitchen lighting itself but asserted that they can take the point in relation to the different issue of whether item ES02(B) is eligible for allowances under section 66.
63.	Secondly, Mr. Ghosh argued that for HMRC to take the point on the status of the kitchen lighting (whether or not it is plant for capital allowances purposes) at this stage is prejudicial to the Appellant, because the Appellant did not know that the point was in issue at the time it prepared its case and might have presented the case differently (including leading further evidence) if it had. 
64.	We consider that HMRC are not precluded from contending that item ES02(B) is not eligible for allowances under section 66 simply because they did not take the point that the kitchen lighting was not plant.   The two claims are sufficiently distinct to prevent HMRC’s failure to question the claim for the light fittings being fatal to their contention that the open claim for cutting the holes in the ceiling fails because the light fittings were not plant.
65.	However, we are more sympathetic to the Appellant’s point that it would be unfairly prejudicial to it if we were to decide on the state of the evidence as it is, that the light fittings in the kitchen were not plant.  This would entail a decision by us that they were not ‘trade-specific’, but were, instead, ‘general’.  Mr. Baldry submits that “lights in the kitchen shouldn’t, couldn’t possibly qualify as plant or be trade-specific”.  We do not accept that submission.  The concept of ‘trade-specific’ lighting was described by Mr. Baldry himself as “elusive” – which we agree – and, as a general observation, it seems to us that lighting in a busy pub kitchen, with the obvious requirement for it to assist in maintenance of high standards of cleanliness, might very well be ‘trade-specific’. If we were to find that it was ‘trade specific’ we do not understand Mr. Baldry to resist the conclusion that item ES02(B) was eligible for allowances under section 66.  
66.	However we cannot make any finding on whether or not the kitchen lighting was ‘trade-specific’.  In these circumstances, Mr. Baldry accepted that it was open to us, as a matter of case management, to give the Appellant “the benefit of the doubt”.  We could have adjourned the case for further evidence on this issue, but both parties resisted this approach, in Mr. Baldry’s case on “strong pragmatic grounds”.
67.	We therefore adopt that approach, holding as a matter of case management that we can reach no decision on the present state of the evidence as to whether or not the kitchen lighting was ‘trade specific’, and that it would be disproportionately inconvenient and not in the interests of justice to direct a further adjournment to deal with the point.  On this basis, since the kitchen lighting might well in our view be ‘trade specific’, we decide to give the Appellant the benefit of the doubt and that item ES02(B) is eligible for allowances under section 66.
68.	We turn now to the general heading of “Lifts and hoists”.  The parties stated as that item CA18(B) was an “unclear” item under that heading item. That item comprises the cost of tiling to the front of food hoists.
69.	The food hoists, which facilitate the movement of food from the kitchen at basement level in the Prince of Wales to the dining area at first floor level, were enclosed in studwork and HMRC have accepted the Appellant’s claim that the studwork attracts allowances under section 66 as an alteration of the building incidental to the installation of the hoist, which they accept is machinery or plant. 
70.	Mr. Ghosh submitted that the cost of item CA18(B) was eligible for allowances under section 24 or section 66. Mr. Baldry resisted the claim on each basis.
71.	At the basement level, but not elsewhere, the studwork is tiled.  The basement level is a kitchen and the tiling is required to ensure the surface is wipe-clean.  Mr. Ghosh argued that the tiling performed a splashback function. But since it is not a splashback as such, that is, tiling applied specifically to deal with splashing, and not housing for the hoists as such (because the stud work forms a sufficient housing as can be seen from the upper floors where the hoist covering is not tiled), we do not accept that the cost is eligible for allowances under section 66 on the basis that it is an alteration incidental to the installation of the hoists. 
72.	  Nor does the cost of tiling, item CA18(B) qualify under section 66 as an alteration incidental to the installation of the stud work housing.  It was applied to the housing, once the housing had been installed.
73.	Mr. Ghosh’s claim under section 24 seemed to be on the basis that the cost of the tiling was properly to be regarded as part of the cost of the hoists.  We reject that submission, which in our view is unsupported by any evidence. The only evidence which we were referred to was the statement by Mr. Large: 
“Food hoists were installed within the building.  Stud partitions were created around the hoists at basement, ground and first floor levels to enclose the hoists.  This constituted an alteration to the existing building.  The alteration was incidental to the installation of plant and machinery (the hoists) within the existing building.”  
This evidence makes no reference to the tiling.
74.	 Our decision is that the tiling whose costs is item CA18(B) was part of the wall finish in the kitchen and the claim for allowances fails. 
75.	Under the general heading of “Miscellaneous Works”, the parties listed as “unclear” items the following:
(a)	Under the general subheading “Toilet Cubicles” the items SA03(B), SA03(C) and  SA04(B) covered an agreed proportion of the costs of brickwork and blockwork carried out in constructing toilet dividers and, separately, brickwork and blockwork carried out in connection with the installation of toilet cubicles. 		
76.	Item SA03(B) relates to the cost of blockwork and brickwork partitions between toilet cubicles.  At paragraph 79 of Our First Decision we stated that we considered that timber partitions and doors to the individual toilets had sufficient nexus with the installation of the toilets (machinery or plant) to rank as alterations to the building incidental to the installation of the toilets.  On that basis we found the cost of the timber partitions and doors eligible for allowances under section 66.  HMRC was apparently uncertain whether in this decision we had deliberately excluded blockwork and brickwork partitions on the basis that they gave rise to different considerations as compared with timber partitions and doors.  On our indicating that we had not intended to make such a distinction, Mr. Baldry withdrew his objections to this item’s eligibility.  We therefore decide that the cost of item SA03(B) is eligible for allowances under section 66 as being the cost of an alteration to the building incidental to the installation of the toilets.
77.	 Item SA03(C) relates to the cost of a back wall to the toilet cubicles which divides the space within the toilet cubicles from the cisterns and pipework which are behind the cubicles.  It also relates to the cost of a side wall. The cisterns and pipework are themselves in a space which is just large enough for them and enclosed (on the other side) by another wall which is (of course) not visible from the toilet cubicles, because the back wall to the toilet cubicles (the back wall in issue) screens it from the toilet cubicles.  The side wall screens the access to the cisterns and pipework from the toilet cubicles.
78.	Mr. Ghosh submits that these walls (which he accepts are walls) are alterations to the building incidental on the installation of the toilets, in a similar, if not the same, way as the partitions between the toilet cubicles.  Mr. Ghosh says that they are different from the partitions because they form (or partly form) the room in which the toilets are situated, and that being so they cannot be said to be merely incidental to the installation of the toilets.
79.	We regard the “room” in which the toilets are situated – that is, the definition of the space in which the toilets are situated – as including the space which customers can use (bounded in part by the back and side wall in issue) but also the space actually occupied by the cisterns and the pipework.  The back and side walls are in reality a partition between the toilet cubicles and the space containing the cisterns and pipework and the access to it.  The design of the toilets themselves calls for a partition between the toilet bowls and the cisterns.  These walls are such partitions.  On that basis we accept Mr. Ghosh’s submission that they are alterations to the building which are incidental to the installation of the toilets and decide that item SA03(C) is eligible for allowances under section 66.  The parties were agreed (and it is also our view) that the treatment of item SA04(B) – expansion joints in the blockwork allowing the blockwork to expand and contract – follows the treatment of item SA03(C).  Therefore we decide that item SA04(B), being part of the cost of the blockwork walls, is also eligible for allowances under section 66.
80.	Under the general heading of “Miscellaneous Works”, the parties also listed as “unclear” items the following:
(b)	Under the general subheading “Reinforcement of Kitchen Floor” the items SA55 and SA66 covered removing an existing timber floor and installing screed and concrete strengthening to the new floor in the basement to take the load of kitchen equipment.
81.	Mr. Ghosh claims that the costs of items SA55 and SA66 are eligible for allowances under section 66 because they relate to the alteration of the building to produce a new floor in the kitchen area which is strong enough to support the kitchen equipment which the Appellant introduced.  He submits that the works covered by these items were alterations of the building which were incidental to the installation of the kitchen equipment. He relies on Mr. Large’s evidence, which was that “we had to remove the basement floor within the kitchen because it was not adequate to support the equipment we were using”.  There was a floor in that area before, but the evidence is that it was replaced by a much stronger floor and Mr. Ghosh submits that the need for the increase in the strength of the floor was specifically attributable to the installation of kitchen equipment, which is machinery or plant, and that for that reason the items pass the section 66 test.
82.	Mr. Baldry submits that the costs of items SA55 and SA66 are costs of the operation of providing a strong floor suitable for a kitchen in modern-day conditions, where there was only a weak floor before, and that it would be stretching the language of section 66 unacceptably for us to decide that the strengthened floor had been provided incidentally to the installation of the kitchen equipment.  The provision of the floor and the installation of the equipment were, he submits, relevantly two quite different operations.
83.	The evidence that the stronger floor was needed to support the kitchen equipment indicates to us that, without it, there was a danger that the equipment, if it had been installed, would simply have fallen through the floor and therefore would have been unusable for the purposes of the Appellant’s trade.  The alteration in question here is different from the provision of tiles to form a wipe-clean surface to the kitchen walls, which we considered earlier, in that the wipe-clean surface was needed as a consequence of the use of the kitchen equipment, whereas the strong floor was required before the equipment could be used at all.
84.	Although we accept that the works effectively created a floor for the kitchen, it was a special floor, whose characteristics were determined by the fact that the kitchen equipment needed to be installed in the kitchen.  We therefore decide that the cost of items SA55 and SA66 are eligible for allowances under section 66, as the cost of alterations to the building which were incidental to the installation of machinery or plant (the kitchen equipment).
85.	Under the general heading of “Miscellaneous Works”, the parties also listed as “unclear” items the following:
(c)	Under the general subheading “Other Works” the items SA35 and SA41 covered the cost of plywood used to strengthen the timber partitions in the toilets of Prince of Wales to enable sanitaryware fittings to be secured (SA35) and the cost of providing a waterproof coating to the floor of the male toilets in the Prince of Wales to prevent leaks permeating through to the ceiling below – which was the ceiling of premises occupied by a third party, and not the Appellant (SA41).
86.	Item SA35 covers plywood applied to timber or stud partitions including a back wall, such as was considered under item SA03(C) above.  Mr. Ghosh submitted that it was an alteration incidental to the installation of machinery or plant (whether the toilets or the sanitaryware fittings which it enabled to be secured), whereas Mr. Baldry’s contention was that the plywood was an addition to a wall, whose provision was not an alteration incidental to the installation of any machinery or plant.  We decide that the cost of item SA35 is eligible for allowances under section 66, for the reasons put forward by Mr. Ghosh.  Our decision is consistent with our decision above that the cost of item SA03(C) is eligible for allowances.
87.	Mr. Ghosh submitted that the application of the waterproof coating in item SA41 was an alteration incidental to the installation of the toilets and sinks in the male toilets of the Prince of Wales.  Mr. Baldry submitted that it was an alteration consequential on the installation of those items and should properly be regarded as an alteration which was not incidental to the installation of any machinery or plant.  On this item we are with Mr. Baldry.  It seems to us that the application of the waterproof coating was a preventative measure, to prevent future difficulties which might arise if there was leaking from the equipment in the toilet caused by their use.  We therefore decide that item SA41 in not eligible for allowances.
“Clear” items
88.	We were provided with a list of “clear” items as to which the parties had agreed how Our First Decision would apply to dispose of the claims made for them respectively, either as eligible for allowances or as ineligible.  We were asked formally to decide the claims, for the purposes of any possible appeal from our decision, but because of their agreed nature not much time was taken up at the hearing dealing with them.
89.	The “clear” items, with one exception (item SA27) fall into one of two categories.  Either their treatment for capital allowances purposes is agreed for the same reasons (category 1 “clear items”), or their treatment is agreed but for different reasons by the Appellant and HMRC respectively (category 2 “clear” items).
90.	 As stated above, at paragraph 17, our decision that HMRC’s allowance of the costs of splashback-functioning parts of walls adjacent to sinks or lavatory basins was concessionary and not in accordance with our interpretation of the scope of section 66, has the effect that some of the category 1 “clear” items which are agreed to be eligible for capital allowances are, in our determination, not so eligible.  These items are: CA03(B), CA26, SA09, SA25(A), and SA26(A).
91.	   Item SA27, the exceptional item, referred to above, is PVC floor sheeting, which is agreed by both parties to be incidental to the installation of disabled toilets in the existing building.  Mr. Baldry told us that this was special PVC floor sheeting which is specific to disabled toilets and its special function is to assist wheelchair traction. Unlike the items considered under the subheading “Cement & flooring to form splashbacks to sinks & lavatory basins” at paragraphs 25 et seq. above, the provision of this PVC floor sheeting was, we find, carried out specifically to enable machinery or plant to be installed in the disabled toilet(s) – cf. paragraph 30 above.  Therefore we decide that the costs of item SA27 are eligible for allowances under section 66.
92.	 Turning to the remaining category 1 “clear” items, we decide that items ES10, ES11, ES41, ES20(A), ES45(A), BZ252, CA17, CA18(A), CA20, HV05(A), LI06, LI08, SA48(A), CA28, SA01, SA10, SA11, SA15, SA18, SA33, SA56, SA57, SA58, SA59, SA60, SA61, SA63, SA64, SA65, SA68, SA69, ES52(A), HV14(A), HV57, HV58, SA08(A), SA12(B), SA20(B), SA22(B), CS01, HV23 and HV56 are all eligible for allowances by reason of the application of Our First Decision to these items respectively, as agreed by the parties.
93.	We decide that items CA03(A), CA08, ES20(B), ES45(B), HV05(B), FF02, FF16, FF40, FF55, FF66, FF74, FF78, FF90, SA48(B), SA49, CA05, CA06, CA07, CA09, CS16(A), CS17, CS02, CS03, CS12, CS14, ES52(B), HV14(B), BZ197, BZ198, SA07, SA08(B), SA14, SA17, SA20(A), SA24(A), SA25(B), SA26(B), SA28(A), SA29, SA36, SA40, SA42, SA03(A), SA04(A), SA12(A), SA13 and SA67 are all ineligible for allowances by reason of the application of Our First Decision to those items respectively, as agreed by the parties.
94.	Turning to the category 2 items, we decide that items CA02(A), CA04(A), and CA11(A) (wipe clean surfaces) are ineligible for allowances because these items are not incidental to the installation of any plant or machinery for the reasons given in this decision.  
95.	We decide that items CS05(A) and CS13(A) (cold store drainage) are eligible for allowances because they are part of the expenditure for the alterations which we have decided are eligible for allowances (see paragraphs 38 et seq. above).
96.	We decide that items ES02(A) and ES04(A) are eligible for allowances because cutting holes for outlet power points is an alteration to the building incidental to the installation of machinery or plant.
97.	We decide that items SA22(A) and SA23(A) are not eligible for allowances because they relate to timber doors and door frames and cement flooring relating to general areas of the toilets (not the toilet cubicles) and are for that reason not alterations incidental to the installation of machinery or plant. 
Preliminaries
98.	The final issue raised following Our First Decision concerned preliminaries.  More specifically, it was concerned with whether the items listed at paragraph 34 of Our First Decision, which the parties agreed to be trade-specific overheads, should be apportioned to the items of main contract expenditure to which they respectively related, rather than pro-rata to the measured works as a whole.
99.	 Mr. Baldry submitted that the problem arises from applying paragraph 116 of Our First Decision to items within paragraph 34 of Our First Decision. He submitted that global apportionment is not appropriate to paragraph 34 items where costs can reasonably be attributed to particular types or classes of work within the project.
100.	Mr. Ghosh contended that we had already decided the point.  He said that paragraph 116 of Our First Decision was to be read in the light of paragraph 109.  He submitted that a global apportionment is in principle a good methodology.  Although the paragraph 34 items are theoretically attributable to trade-specific areas of costing, the work at arriving at the respective attributions involves considerable professional time, and therefore money.  Mr. Healey (HMRC’s expert) had accepted in evidence that a global apportionment is acceptable commercially, although he said that HMRC have cost models and that has influenced the way they approached the question of apportionment of preliminaries.
101.	We first make clear that paragraph 116 of Our First Decision was a summary of our conclusions as to preliminaries and was not intended to be exhaustive.  In particular it should be read in the light of paragraphs 108 to 112.
102.	The appeal itself concerns capital allowances for expenditure on 288 pubs in the year to 31 July 1999.  The hearing concerned two premises selected as samples, and in respect of preliminaries concentrated on the Prince of Wales.
103.	The legislation makes no reference to preliminaries, which in any event is not a precise term.  ‘Overheads’ conveys the concept more closely, but is still not precise.  The questions as regards capital allowances is whether the preliminaries were incurred on the provision of machinery or plant within section 24, or on alterations to an existing building incidental to the installation of machinery or plant, within section 66.
104.	There is no problem with respect to preliminaries which are attributable to particular items of measured work without the need for any apportionment.  They are not in truth preliminaries, although they may have been described as such.  They are part of the cost of (expenditure incurred on) the particular items concerned.
105.	Similarly there is no problem with items such as those at paragraph 35 of our First Decision, which were project overheads or preliminaries, and not trade-specific overheads or preliminaries.  These fall to be apportioned globally.  At paragraph 116 of Our First Decision we concluded that items within paragraph 36 should be treated in the same way.
106.	The costs within paragraph 34 of Our First Decision were costs which were not incurred for individual items of measured work, but related to some categories and not to others.  Some appeared to relate to a considerable number of items; examples are propping and temporary propping.  Others related to a more limited and specific category of works, such as photographs of drainage work. 
107.	It is clear that it is much easier to identify costs related to a more limited and specific category of works as trade-specific, in the sense that they were neither specific to individual items of measured work nor attributable to the project as a whole, than it is to attribute or apportion them to specific items within the group to which they relate.  Some would no doubt be relatively easy to attribute or apportion in this way, but others would be much more difficult.  An exercise of rateable apportionment over a number of items is of itself an inexact exercise.
108.	As we stated at paragraphs 108 and 116 of Our First Decision, the extent of attribution or apportionment required depends on reasonableness and proportionality.  This involves the application of common sense.
109.	None of the items in paragraph 34 of our First decision was large in relation to the whole project.  Some were very small indeed.  Our conclusion at paragraph 109 of Our First Decision was directed to the material before us and to the capital allowances claim under appeal.  Our conclusion in paragraph 116, namely that where, as here, there is a multiplicity of items, many of them relatively small, a pro-rata apportionment is reasonable in principle, covers the items in paragraph 34.  We therefore answer Mr. Baldry’s query in the sense contended for by Mr. Ghosh.
110.	The text of paragraph 34 of Our First Decision does not in any way conflict with our conclusion.  The first sentence of paragraph 34 merely recorded what Mr. Philippo and Mr. Heeley had agreed, but Mr. Philippo’s agreement was subject to what we said in paragraph 37 of Our First Decision.
111.	Our conclusion therefore is that an overall global apportionment of preliminaries which do not relate to individual items is a legitimate approach to paragraph 34 items.  Since the Prince of Wales and the First Post were agreed by the parties to be samples, and there was no separate consideration of preliminaries in relation to the First Post, this approach should be applied to all 288 pubs covered by the appeal.
112.	This, of course, is not a conclusion that global apportionment of preliminaries is legitimate in all cases.  HMRC are clearly entitled to investigate the figures in any case to see whether a more specific breakdown is reasonable and proportionate.  However in our judgment a global apportionment which accords with commercial practice will normally be appropriate.
113.	We make this decision in principle in accordance with, and for the reasons stated in Our First Decision and this decision.  If any further issues arise at a future date for our decision, we direct that they be referred to us within a period of 1 year or (if later) a period of 1 year after the final determination of any appeal against this decision.

   THEODORE WALLACE

JOHN WALTERS QC

JUDGES OF THE FIRST-TIER TRIBUNAL
RELEASE DATE: 18 December 2009