Judgments - Maco Door and Window Hardware (UK) Limited (Respondents) v Her Majesty's Revenue and Customs (Appellants)

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26.  It is not enough, in my view, to be able to isolate (by horizontal division as it were) some activity carried on in the course of a vertically-integrated trade, even if that activity is (in the words of Lightman J in Bestway) “significant, separate and identifiable". I consider that Bestway was rightly decided, but I see force in Mr Goodfellow’s criticism of the test that I have just referred to. Storage was not a part of the wholesale cash and carry trade considered in that case, not so much because it was insignificant as because you cannot trade by storing your own goods.

27.  Mr Goodfellow argued that the construction which I prefer is inconsistent with section 18(3), the second part of which would be unnecessary, he said, unless section 18(2) had the wide meaning he contends for. Section 18(3) was originally introduced by the Finance Act 1982 so as to reverse the decision of the Court of Appeal in Vibroplant Ltd v Holland (1981) 54 TC 658, to the effect that for a plant hire company to service and repair its plant was not subjecting it to a process. The Court of Appeal did not comment on the dictum of Dillon J (at first instance) that servicing and repairing the plant was part of the company’s trade (as, in some sense, it obviously was).

28.  The effect of the second part of section 18(3) is that a building used by a trader to service and repair his own trade equipment cannot qualify for relief unless his trade qualifies under one or more of the ten categories in section 18(1). A company trading as a transport undertaking (section 18(1)(b)) can get relief for the building where its lorries are serviced and repaired; so can a shoe manufacturer (section 18(1)(e)) for its delivery vehicles. But a supermarket chain cannot get relief for a building used to service and repair its distribution vehicles, because its trade is outside every category in section 18(1). The second part of section 18(3) does not apply at all to the servicing and repair of other people’s (that is, customers’) vehicles.

29.  Mr Goodfellow is right, I think, to argue that as a matter of strict logic the second part of section 18(3) is unnecessary, on the Revenue’s construction, since you can no more trade by repairing your own vehicles than you can trade by storing your own goods. But I do not regard this as a strong argument against the Revenue’s construction. Especially in view of what Dillon J said in Vibroplant, it is understandable that Parliament chose to put this point beyond argument.

30.  Mr Goodfellow also argued that the Revenue’s construction would lead to all sorts of complications. The notion of a composite trade is no doubt rather imprecise, and there may be some borderline cases (to be decided as a question of fact and degree) as to whether a trade can be vertically divided in this way. But those difficulties seem relatively trivial compared with the prospect of any business that owns a van or lorry claiming to have a transport undertaking (section 18(1)(b)) which is a part of its trade. The balance of any argument on complication seems to me to come out decisively in favour of the Revenue.

The authorities

31.  Apart from those already mentioned, the most important authorities to be considered are the decision of this House in Saxone Lilley & Skinner (Holdings) Ltd v Commissioners of Inland Revenue (1967) 44 TC 122 and that of the Inner House of the Court of Session in Kilmarnock Equitable Co-operative Society Limited v Commissioners of Inland Revenue (1966) 42 TC 675.

32.  The essential point about the Saxone case is that the warehouse where the shoes were stored was run by a subsidiary company, Jacksons Limited, whose only trade was storage. The only issue in the case was whether storage of shoes manufactured within the Saxone group, and not yet sold (shoes, that is, falling within what is now section 18(1)(f)(ii)) could be treated as “a part of a trade", the other part being the storage of shoes which did not fall within any limb of section 18(1)(f). It was, therefore, a case of what I have called vertical division, although there was no physical segregation of the types of shoe within the warehouse, and it gives no support to the “separate” element of the “significant, separate and identifiable” test.

33.  The case which does cause some difficulty is Kilmarnock, and it calls for closer consideration. The Kilmarnock Co-op traded as a general merchant, selling a variety of goods by retail and some by wholesale. As part of a plan to expand wholesaling in coal, it installed (in a separate building at its premises) specialised machinery for screening coal and packing it in 28-lb paper bags. The issue was whether this building was an industrial building. Before the General Commissioners there seem to have been only two issues: whether the building was used to subject coal to a process, and whether it was used for a purpose “ancillary to the purposes of ... a retail shop". The General Commissioners decided both these points against the Co-op. They seem to have made no finding about whether the screening and bagging of coal was a part of its trade.

34.  On appeal to the Court of Session the Co-op succeeded on both the points argued below. The Court of Session also addressed the point which seems not to have been taken below, that is whether the screening and bagging of coal was a part of the Co-op’s trade for the purposes of what is now section 18(2).

35.  What the Court said on this point is not easy to disentangle from its reasoning on the “ancillary purpose” issue. But Lord Clyde said at pp 679-680:

“The Crown further argued that in any event the building in question was not in use for a trade or part of a trade which consisted in subjecting of the goods to a process within the meaning of [section 18(2)].

It was therefore disqualified from being an industrial building or structure, so the argument runs, within the meaning of the subsection. This contention by the Crown is also not specifically dealt with by the Commissioners, if it was presented to them. The argument was that if the Society’s only trade was screening and packing of coal in paper bags then the situation might have been different, but this Society operated a trade of general merchants, and only a small part of their total operations involved paper packaging of screened coal. But the relative proportions of the Society’s various activities appear to me to be quite irrelevant. The building in question houses a definitely identifiable part of their industrial operations and a quite separate activity, and that separate activity alone. This is in my view enough to satisfy the requirements of subsection (2).”

Lord Guthrie said at p 681:

“But in my opinion the separation of the dross from the coal is its subjection to a process, the process of selection from the mass of coal of lumps which are suitable for packing in bags. There is no doubt that at the building the Appellants carry on a trade, a business conducted with a view to profit, which consists of the subjection of the coal to this process.”

36.  Both Patten J and Lawrence Collins LJ cited these passages (the latter citing Lord Clyde rather more briefly). Patten J commented (para 37) :

“Mr Goodfellow submits that applying Lightman J’s test of what constitutes storage, the packaging of the coal was not an end in itself and was simply a step towards making the coal more attractive for sale to potential customers at the society’s retail stores. But that was not the way in which the Court of Session approached the matter. Both Lord Clyde and Lord Guthrie regarded the process as a separate commercial operation in its own right. Lord Clyde’s words can, I think, be read as a response to the Crown’s contention that the packaging operation was not the society’s “only” trade. Not that it was not an operation in the nature of trade at all.”

37.  Similarly Lawrence Collins LJ said (paras 74 and 77):

“Lord Clyde was meeting the point that that trade was only a small part of the operations of the Society. He was not dealing with a point that there was no separate trade ... The gist of the decision in Kilmarnock is that the relevant trade for the purposes of section 18(1) was assumed to be processing and packing, and that the effect of section 18(2) was to make that part of Kilmarnock’s overall trade a qualifying trade for the purposes of section 18(1)(e). I do not consider that it is authority for Maco’s case that it is not necessary for part of the trade under section 18(2) to be a qualifying trade under section 18(1).”

38.  I am in full agreement with these comments by Patten J and Lawrence Collins LJ. A part of the Co-op’s composite trade as general merchants consisted of the trade of manufacturer (of screened and bagged coal, to be sold either wholesale or retail). That brought it within what is now section 18(2). The fact that most of it might be sold in the Co-op’s retail shops did not take it out again under section 18(4). The case does not therefore assist Maco because its trade is neither manufacture nor storage.

39.  I am indeed in full and respectful agreement with the whole of the judgment of Lawrence Collins LJ. I would happily have adopted it as mine, but in view of the differences of opinion on this matter, both below and in this House, I have thought it right to set out my opinion in my own words. I would therefore allow this appeal and restore the decision of Patten J.

LORD MANCE

My Lords,

40.  I have had the benefit of reading in draft the speeches of my noble and learned friends Lord Scott of Foscote, Lord Walker of Gestingthorpe and Lord Neuberger of Abbotsbury. I gratefully adopt their account of the background and issues.

41.  I have found the issues quite evenly balanced. However, in my opinion, the better view is that taken by the majority in the Court of Appeal and by my noble and learned friend Lord Scott. I would supplement the reasons Lord Scott gives by only a few of my own, as follows.

42.  First, I consider the natural meaning of the language in s.18(2) to be that “a part of a trade or undertaking” is an element, not itself a trade or undertaking. It seems to me improbable that s.18(2) was included simply to make clear that a “composite trade” (i.e. a business involving two or more distinct trades) should be treated severally, so that an industrial building or structure in use for any one of such trades would be eligible for writing-down allowance. That would anyway be obvious from the language of s.18(1) and as a matter of common sense. S.18(1) requires nothing more than an identifiable building or structure in use for the purposes specified expressly as purposes of, in most cases, a trade. It could not have been thought that its benefit would be lost if the business also had other buildings or structures in which it carried on some other trade.

43.  In his dissenting judgment in the Court of Appeal Lawrence Collins LJ nonetheless read s.18(1)(f) and s.18(2) together in such a way that s.18(2) would only apply if Maco could establish, first, that it had a trade which “consists in the storage” of the goods and, secondly, that the relevant building was in use for the purposes of part of that trade. In short, Maco would in this case need to establish that it was carrying on a trade or undertaking, part of which was the trade of storage in the relevant building. But that is not what s.18(2) says. It is the part of the trade which has to be storage, not the trade itself. And to require both the part and the trade of which it is part to be trades when carried on by the taxpayer seems a most unlikely construction of the statutory wording.

44.  In my view, the statutory language is clear enough. Reading ss.18(1) and (2) together, the word “trade” in s.18(1)(f) becomes “part of a trade", and the word “part” (not the word “trade”) then qualifies the ensuing clause “which consists in the storage". A part of a trade thus complies with the conditions set out in subsection 1(f), if the part “consists in the storage” etc. The remaining words of s.18(2) (providing that “a building or structure shall not … be an industrial building or structure unless it is in use for the purposes of that part of that trade or undertaking”) complete the information as to how subsection (2) aligns and operates in conjunction with the opening words of subsection (1) (“'industrial building or structure’ means a building or structure in use …..(f) for the purposes of a trade ….”). Again, they show that “trade” in s.18(1) is in this context to be read as “part of a trade". The result is that a building or structure will only count under s.18(2) if it is in use for the purposes of whatever part of the trade or undertaking is identified under that subsection as consisting of storage within s.18(1)(f). Again, that confirms that all that matters is that there should be a part of a trade or undertaking, for the purposes of which part the relevant building or structure is in use.

45.  Like my noble and learned friend Lord Scott I see no difficulty in treating s.18(2) as a one-way provision, in the taxpayer’s favour. It expands and does not restrict the allowance. This can be claimed either on the basis of and in respect of the trade or undertaking as a whole or, if that does not fall within s.18(1), then on the basis of but in respect only of a building or structure which is in use for a part of a trade or undertaking which part must (in the present case) consist in storage of goods or materials within one of clauses (i) to (iv) of s.18(1)(f). If, on the other hand, the trade or undertaking as a whole qualifies, then no question arises of looking at any part of it under s.18(2).

46.   Like the Commissioners, I find strange the idea that it should have been intended that a building or structure should benefit by incentives in a corporate structure set up where the building owner trades separately as a storage supplier, whereas the same building or structure attracts no such incentive in a set up like the present, where Maco was also buying and selling the contents which the building was used to store. As Lord Scott notes, the Commissioners do not appear to have experienced any difficulty over the forty or so years when they were ready to accept the correctness of Maco’s interpretation. Bearing in mind that both s.18(1) and s.18(2) only operate where there is an identifiable building or structure in use for the relevant purposes, it does not seem to me surprising that Maco’s interpretation gave rise to no difficulty and no move by the Commissioners to amend the law.

47.  Instead, in 1982, the wording of s.18(3) was introduced into the Capital Allowances Act 1968 (the predecessor statute to the 1990 Act) by amendment made by the Finance Act 1982. S.18(3) provides that the subjection of goods or materials to a process should include maintaining or repairing them. When this provision was introduced in 1982, it was clearly contemplated that the position, apart from the further provision of s.18(3) commencing “notwithstanding subsection (2) above", would be that a person engaged in the maintenance or repair of goods or materials employed by that person in a trade or undertaking could claim an allowance even though the trade or undertaking itself did not fall within any head of s.18(2). This is only consistent with the view that I take of s.18(2) which is the view also taken by the Revenue at the time (as well as by Dillon J at first instance in Vibroplant Ltd. v. Holland (1981) 54 TC 658, 666). The further provision commencing “notwithstanding subsection (2) above” was deliberately confined to the context of maintenance and repair of goods and materials brought by s.18(3) within s.18(1)(e). Nothing equivalent exists or can have been thought in 1982 to exist in relation to the other paragraphs of s.18(1) including paragraph (f). The 1990 statute - the consolidating statute which we have to interpret: see R v. Secretary of State for the Environment, Transport and the Regions Ex p. Spath Holme Ltd. [2001] 2 AC 349 - was passed on the view of the law which Maco advances and which must be taken to reflect Parliament’s intention regarding the effect of s.18(2).

48.  I would therefore uphold the Court of Appeal’s decision and dismiss this appeal.

LORD NEUBERGER OF ABBOTSBURY

My Lords,

49.  I have had the benefit of reading in draft the opinion of my noble and learned friend Lord Walker of Gestingthorpe, and I agree with him that this appeal should be allowed. The issue at stake has been subject to an unusual degree of disagreement, in that: the experienced Special Commissioner’s decision was reversed by Patten J, whose decision was in turn reversed by the Court of Appeal by a majority of two to one, and there is a bare majority of three to two the other way in this House. Not least for that reason, I propose to express my reasons in my own words.

50.  The facts and relevant statutory background are fully set out in Lord Walker’s opinion. The issue ultimately turns on the meaning of “a part of a trade” in section 18(2) of the 1990 Act. Maco contends that it refers to any activity which forms a component of the taxpayer’s trade, such as an activity which is ancillary to, or inherent in, that trade. The Commissioners argue that it only applies to any activity which is itself a trade, although carried on as part of a taxpayer’s composite trade.

51.  The difference between the two positions can be illustrated by an example of a trader who manufactures motor vehicle components, some of which he sells through retail outlets to the public, and some of which he supplies to motor vehicle manufacturers. There could be said three separate “part[s]” of the business, namely (a) the manufacture of components, (b) the supply of components to the motor manufacturing industry, and (c) the retail sale of components. Both parties accept that, as a result of applying section 18(2), insofar as a building was used by the trader for purpose (a), e.g. a factory, it would fall within section 18(1)(e), but, if a building was used by the trader for purpose (c), e.g. a shop, section 18(1) would not apply, as retail use is not within section 18(1).

52.  If the components were stored in a separate building by the trader so that, in connection with purpose (b), they could be supplied to motor vehicle manufacturers as and when they were needed, on Maco’s case the building would satisfy section 18(1)(f)((i), as the components would be in “storage", an aspect (and hence under section 18(2) “a part”) of the trader’s business, and they would be intended to “be used in the manufacture of other goods", namely motor vehicles. However, as the storage of the components in preparation for providing them to motor vehicle manufacturers could not sensibly be characterised as a separate trade of the trader, on the Commissioners’ case the use of the building would not fall within the ambit of section 18(2), and hence could not benefit from section 18(1)(f) - at least unless it could be said to be used for the purposes of the component manufacturing business.

53.  While Maco’s interpretation is generally more generous to taxpayers, there will be cases where, on the Commissioners’ case, a building would fall within section 18(1), but on Maco’s approach it would not do so. If a building was used by the trader in my example for research into the design or efficiency of motor vehicle components, Maco would presumably accept that the building was used for research, which is not within any of the categories of section 18(1). However, the Commissioners would, I think, accept that it fell within section 18(1)(e), at least provided that the research was devoted to improving the quality of the components manufactured by the trader: in such a case, the building would be used “for the purposes of” the trader’s manufacturing trade.

54.  In my judgment, the Commissioners’ interpretation is to be preferred. First, I think it is more in accordance with the language and structure of section 18. Secondly, it seems to me to make better sense so far as the purpose of section 18 is concerned. Thirdly, I believe that it is the more practical interpretation.

55.  I accept that either interpretation is possible if one merely looks at the way in which section 18(2) is expressed. However, I agree with what Lawrence Collins LJ said in the Court of Appeal at para 48, namely that “the language of section 18(2) and its place within section 18 show that it is concerned with part of a trade which is a qualifying trade under section 18(1)". Applying section 18(2) to, for instance, section 18(1)(e) or (f), the section extends to a building “in use… for the purposes of part of a trade which consists in [X]". On the Commissioners’ argument, this is perfectly simple: one simply asks whether the trader in question carries on a business, part of which is trade X.

56.  This appears to me to fit in well with the structure and wording of the two subsections. Section 18(2) is simply clarifying or extending section 18(1) so far as composite trades are concerned. To put the point another way, both linguistically and in the light of the way in which the two sub-sections are structured, the “part of a trade” envisaged by section 18(2) has the same characteristics as the “trade” envisaged by section 18(1): as Patten J put it, [2007] STC 721 at para 40, it has to be “an activity in the nature of a trade".

57.  On Maco’s approach, one asks whether part of the trader’s trade consists of activity X. On this approach, through the medium of section 18(2), it seems to me that section 18(1) ceases to be a provision concerned with types of trade, which is what it appears clearly to be directed to, and becomes concerned with types of activity within a trade. Further, if Maco’s interpretation is correct, the structure of sections 18(1) and (2) is both unnecessarily cumbersome and a little surprising. All that would have been needed would have been to replace the word “which” in the opening part of paragraphs (e) and (f) of section 18(1) with “insofar as it” (and to make similar amendments in the other paragraphs), and to omit section 18(2) altogether. Further, on this approach, the ambit of section 18(2) becomes more wide-ranging than that of section 18(1), which is not what one would expect.

58.  As to the purpose of section 18, it is to encourage certain types of business, through the indirect means of benefitting property owners fiscally. The origins of section 18 go back to section 8 of the Income Taxes Act 1945, subsequently re-enacted as section 8 of the Capital Allowances Act 1968. In this connection, the 1945 Act was prompted by the need to regenerate the United Kingdom’s economy after the Second World War. The use of land for certain types of business was encouraged through the means of capital allowances, and that has persisted to the present day in the Capital Allowances Act 2001, whose sections 274 and 276 have replaced section 18 of the 1990 Act (in terms which now clearly reflect the Commissioners’ interpretation of section 18).

59.  If, as is suggested by the wording of section 18 of the 1990 Act, and is clear from the underlying legislative policy, the purpose is to encourage certain types of business, then that also appears to me to favour the Commissioners’ contention. In that connection, I would refer to a building put to a use subsidiary to a trade falling within section 18(1) but not itself falling within the subsection (such as research for improving motor vehicle components manufactured by a trader, the example given above). It seems to me likely that the policy of the 1990 Act was intended to be that such a building should be within the ambit of section 18. On the Commissioners’ case, it would be.

60.  On Maco’s case, however, such a building would not be within section 18(1), unless section 18(2) only applies one way. It would be a little surprising if such a building was not within section 18(1), as it would involve attributing a rather unrealistic view to the legislature and an artificially restricted scope to the legislation. On the other hand, it would be more than surprising if, on Maco’s case, section 18(2) only served to expand, but not to limit, the ambit of section 18(1). The logic of Maco’s case appears to me (and I understood it to be accepted by Maco) to involve dividing up individual businesses into component parts, and then assessing which of those parts satisfy section 18(1).

61.  Thirdly, it seems to me that Maco’s interpretation could lead to practical difficulties. It would often be a matter of opinion how far one went in dividing up aspects of a particular trade. Take an area in a factory, or a separate structure adjoining the factory, given over to storage of the finished goods ready for immediate collection, or to keeping trucks used to transport the goods around, or out of, the factory. On the Commissioners’ interpretation, the treatment of such areas or structures would present no problem. They would fall within section 18(1)(e), and section 18(2) would not apply. On Maco’s case, the areas or structures could be said to be outside the ambit of section 18(1)(e), because of section 18(2). Not only would that seem rather inconsistent with the purpose of the capital allowances scheme as already discussed, but it would also appear somewhat unrealistic, and it could also obviously lead to arguments and subjective judgements as to when and how to divide up businesses into component parts.

 
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