The Supreme Court ruled that SSE Generation was entitled to deduct £200m in capital allowances spent building underground channels for a hydroelectric power station at Glendoe in Scotland.

HMRC disputed certain allowances claimed by SSE for the tax years 31 March 2006 to 31 March 2012 on the basis that in their view certain relevant assets did not give rise to allowable expenditure under the Capital Allowances Act 2001 (CAA 2001).

SSE appealed to the First Tier Tribunal (FTT), which held that they were entitled to ‘some of the allowances claimed’ but upheld HMRC’s view on others. However, this was later overturned at the Upper Tribunal, which allowed the appellant’s challenge to parts of the FTT’s decisions.

The issue before the Supreme Court was whether terms constructed for the collection and transmission of water through and from the hydroelectric power station were a ‘tunnel’ or an ‘aqueduct’ within the meaning of those words as used in section 22 (1)(a) List B of Chapter 3 of CAA 2001.

Section 22 disqualifies relief for expenditure on a ‘tunnel, bridge, viaduct, aqueduct, embankment or cutting’. The issue of statutory interpretation at the Court focused on whether the expenditure, which totalled £200m, fell within the provision.

The Glendoe scheme is the only large-scale hydroelectric scheme of its type built in the UK in the last 50 years and officially opened in August 2012.

The total cost of building the scheme was £300m. SSE then claimed capital allowances on £260m of that expenditure, of which HMRC only accepted a total of £34m – leaving £227m in dispute.

According to SSE, the station generated electricity by using water at high pressure taken from a dammed area to drive a water turbine. The turbine then engaged the generator and the used water was discharged into Loch Ness.

Jonathan Peacock, for the SSE, argued that all of the items in dispute, which included water intakes, conduits and the main intake, were of plant and machinery allowances, as allowed under part two of CAA 2001.

As such, expenditure on all of them was allowable unless ‘specifically disallowed by section 22 CAA 2001’.

HMRC argued that the ordinary meaning of the word ‘tunnel’ is ‘any subterranean passage’ and also stressed that the word appeared not only in s22 List B but also in s23 List C.

Items contained in List B are excluded from capital allowances, however items contained in List C are classed as exceptions to those exclusions.

Thus, the tax authority contended that the presence of the term ‘tunnel’ in List C strongly indicated that the use of the term in List B was not limited in meaning. It also argued that the ordinary meaning of the word ‘aqueduct’ was a conduit to convey water.

According to List B an ‘aqueduct’ is listed after ‘bridge, viaduct’ and in the context of a theme of structures relating to the construction of transportation routes or ways.

In that context, the Court considered that the term referred to a bridge-like structure for carrying water, which included but is not limited to carrying a canal.

For these reasons, the Court rejected HMRC’s suggestions of both ‘tunnel’ and ‘aqueduct’ and upheld the decision by the Court of Appeal.

Lord Reed said: ‘I reject HMRC’s suggested interpretations of both ‘tunnel’ and ‘aqueduct’ and would uphold the decision reached by the Court of Appeal.

‘In those circumstances, it is not necessary to consider SSE’s alternative case that the disputed items fall within List C. I would dismiss the appeal.’

Commenting on the case, the Supreme Court said: ‘In this case, the CA identified two possible ordinary meanings of both the words ‘tunnel’ and ‘aqueduct’. Where there are two possible ordinary meanings, it may be appropriate to rely on a thematic connection which explains the group of items in a list such as List B. This is an important part of the statutory context.

‘The meaning given to ‘tunnel’ by the Court is based on an objectively reasonable contextual inference and is not speculative. The meaning is clear and ‘draws a line in the sand’ in accordance with the Act’s statutory purpose to remove uncertainty as to where the boundary between capital-allowances-qualifying and non-qualifying expenditure lies.

‘If, as HMRC contend, ‘aqueduct’ simply meant a water conduit, it would be very surpising for it to be listed after ‘bridge, viaduct’ and in the same grouping as ‘tunnel, embankment and cutting’, as it has nothing in common with those items. It would also render other water conduits specifically included in List B superfluous.’