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

HOUSE OF LORDS

SESSION 2007-08

[2008] UKHL 54

on appeal from: [2007]EWCA Civ 545

OPINIONS

OF THE LORDS OF APPEAL

FOR JUDGMENT IN THE CAUSE

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

Appellate Committee

Lord Hoffmann

Lord Scott of Foscote

Lord Walker of Gestingthorpe

Lord Mance

Lord Neuberger of Abbotsbury

Counsel

Appellants:

Timothy Brennan QC

Akash Nawbatt

(Instructed by HM Revenue & Customs Solicitors Office)

Respondents:

Giles Goodfellow QC

James Rivett

(Instructed by Gregory Rowcliffe Milners)

Hearing date:

22 MAY 2008

ON

WEDNESDAY 30 JULY 2008

HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

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

[2008] UKHL 54

LORD HOFFMANN

My Lords,

1.  For the reasons given by Patten J and Collins LJ, as well as those of my noble and learned friends Lord Walker of Gestingthorpe and Lord Neuberger of Abbotsbury, I would allow this appeal.

LORD SCOTT OF FOSCOTE

My Lords,

2.  This appeal raises a very short point of construction of section 18(2) of the Capital Allowances Act 1990. Since my opinion on the point differs from that of a majority of your Lordships it will suffice for me to explain the reasons for my dissent quite shortly. I am enabled to do so because I have had the advantage of reading in draft the opinions of my noble and learned friends Lord Walker of Gestingthorpe and Lord Neuberger of Abbotsbury, who, with my noble and learned friend Lord Hoffmann, constitute the majority, and can gratefully adopt their description of the facts and relevant statutory background.

3.  The issue is whether the warehouse in which the respondent, Maco, stores the stock that it purchases from its Austrian parent, Mayer, is an “industrial building or structure” as defined in section 18 of the 1990 Act. Section 18(1) says that an “industrial building or structure” means “a building or structure in use - “ for one or other of the purposes specified in the ten following paragraphs, lettered (a) to (j). Only paragraph (f) is of any use to Maco. Paragraph (f) has four sub-paragraphs, numbered (i) to (iv), of which only sub-paragraph (i) is of any use to Maco. Paragraph (f)(i) specifies

“… the purposes of a trade which consists in the storage -

(i) of goods or materials which are to be used in the manufacture of other goods or materials”

4.  It is common ground that the goods which Maco purchases from Mayer and stores in its warehouse are “goods … which are to be used in the manufacture of other goods or materials". So far, so good. But it is also common ground that Maco does not carry on a “trade which consists in the storage” of goods. Maco’s trade consists in the buying of goods and selling them on at a profit. Storage of the goods over the period between purchase and sale is an essential part of that trade but is not a trade on its own account.

5.  This is where section 18(2) comes into play. The subsection says that

“The provisions of subsection (1) above shall apply in relation to a part of a trade or undertaking as they apply in relation to a trade or undertaking except that where part only of a trade or undertaking complies with the conditions set out in subsection (1), a building or structure shall not by virtue of this subsection be an industrial building or structure unless it is in use for the purposes of that part of that trade or undertaking".

Since storage is “a part of” Maco’s trade, subsection (2) requires the provisions of subsection (1)(f)(i) to be applied to that part of Maco’s trade. The disagreement between the majority and the minority on this appeal is a disagreement as to how that is to be done. I, and I believe my noble and learned friend Lord Mance, take the view that subsection (2) requires that paragraph (f)(i) of subsection (1) must be applied to the relevant part of Maco’s trade, i.e. the storage part, as if that part were a trade. The words in subsection (2) : “shall apply in relation to a part of a trade … as they apply in relation to a trade …” seem to me to point clearly to that construction. It is, I think, accepted that if that is the right construction of subsection (2), this appeal must be dismissed.

6.  The majority view, however, is that subsection (2) requires that paragraph (f)(i) be applied to Maco’s storage activity without any qualification. If that is right then, since Maco does not have “ a trade which consists in the storage” of goods, paragraph (f) cannot apply. If that is right, then of course this appeal must be allowed.

7.  Which construction is to be preferred? I have already referred to the words in subsection (2) which seem to me to point to the construction I favour. The consequence of the majority view is that subsection (2) can only apply where the taxpayer is carrying on composite trades one of which is a “trade which consists in … storage". If it had been the intention of the legislature to limit the scope of subsection (2) to composite trades, it seems to me very odd that the reference in the subsection was to “a part of a trade", language which indicates to my mind an activity which is part of a trade but is not itself a trade.

8.  Authority for both constructions can be found. In Saxone Lilley & Skinner Ltd v IRC (1967) 44 TC 122 this House had to consider the meaning of “a part of a trade” in a statutory predecessor of section 18(2). Lord Reid said that the phrase should be given its meaning as a matter of ordinary language and that there was

“… nothing in the context here to justify giving any other interpretation to ‘a part of a trade’” (p.139)

and that

“If a trader stores or sells or otherwise deals with two kinds of goods, A and B, I think that it is the ordinary use of language to say that dealing with A is one part of his trade and dealing with B is another part” (p.139)

These remarks seem to me inconsistent with the notion that section 18(2) is confined to cases where a taxpayer is carrying on composite trades.

9.  An even stronger authority in favour of the construction I favour is Kilmarnock Equitable Co-operative Society Ltd v IRC (1966) 42 TC 675. The taxpayer sold coal in 1 cwt bags and in bulk and decided to sell the coal also in 28 lb packets. It constructed a special building to pre-pack the coal in these packets and claimed allowances on the footing that the building was being used “for the purposes of a trade which consists in …… the subjection of goods or materials to any process” (see s.18(1)(e)). The taxpayer contended successfully that, in pre-packing its coal in the 28 lb packets, its coal was being subjected to a “process” for section 18(1)(e) purposes. The Court of Session upheld the claim for capital allowances, rejecting the Revenue’s argument that the building was not used for the purpose of a trade part of which consisted of subjecting goods to a process. It was not part of the Revenue’s case that the subjecting of the coal to a process had to constitute a trade on its own account. If the opinion of the majority in the present case had been presented and accepted the case would have been otherwise decided. The taxpayer would have lost.

10.  It should not be a matter of surprise that the Revenue did not in the Kilmarnock Co-op case take the composite trade point. Consistently from the enactment of section 8 of the Income Taxes Act 1948, which was in materially the same terms as section 18, until the decision of Lightman J in Bestway (Holdings) Ltd v Luff (1998) 70 TC 512 in 1998 the Revenue appear to have accepted that a “part of a trade” in section 18(2) could consist of an activity that was not a trade in itself. The suggestion that great complications and uncertainties would follow if your Lordships were to uphold the Court of Appeal’s decision in the present case and confirm the Revenue’s pre-Bestway practice is, in my opinion, shown to be mistaken by the history. There has not been a spate of cases where uncertainty as to the nature of the activity that could constitute a “part of a trade” for section 18(2) purposes has caused problems. Successive chancellors of the Exchequer, from 1945 onwards, have not thought it necessary to introduce amending legislation to confine the scope of subsection (2) to composite trades.

11.  My noble and learned friend Lord Neuberger of Abbotsbury has, in his opinion on this appeal (para.60), suggested that it would be surprising if section 18(2) served only to expand but not to limit the ambit of section 18(1). I must respectfully say that in my opinion that would not be in the least surprising. The apparent intention of section 18(2) was to expand the ambit of section 18(1). Not only can use of a building for the purposes of one of the specified trades attract capital allowances, but use of a building for the purposes of a part of a specified trade can do so. The expansive intention is clear. Why should that be a surprise?

12.  My Lords for these reasons I would uphold the majority decision of the Court of Appeal and dismiss this appeal.

LORD WALKER OF GESTINGTHORPE

My Lords,

The Facts

13.  This is a corporation tax appeal concerned with capital allowances for industrial buildings. The respondent Maco Door and Window Hardware (UK) Ltd (“Maco”) has claimed a writing-down allowance under section 3 of the Capital Allowances Act 1990 (“CAA 1990”) for its accounting periods ending on 31 December 1999 and 31 December 2000, but the Revenue amended Maco’s self-assessments so as to disallow the claims. The issue turns on the definition of “industrial building or structure” in section 18 of CAA 1990, and in particular on the meaning of the expression “a part of a trade” in section 18(2).

14.  This question has been given different answers in the course of the appeal process. The Special Commissioner (Dr John Avery Jones CBE) allowed Maco’s appeal. In the Chancery Division Patten J allowed the Revenue’s appeal : [2007] STC 721. In the Court of Appeal the majority (Carnwath and Hallett LJJ) allowed Maco’s appeal and restored its claims, but Lawrence Collins LJ dissented: [2007] ST 1442. The Revenue now appeals to your Lordships’ House.

15.  The building in question is a large warehouse and distribution centre at the Eurolink Business Centre, Sittingbourne, Kent. It also contains offices, a lecture theatre, and other facilities, but as these represent less than one-quarter of the building (by capital cost, not area) they can be disregarded under section 18(7) of CAA.

16.  Maco trades as an importer and distributor of products manufactured by its Austrian parent company, Mayer & Co Beschlage GmbH (“Mayer”). The products are hardware (such as locks, handles and hinges) to be fitted to a wide range of pvc doors and windows produced by other manufacturers. Designs of the hardware change frequently to keep up with changes in the designs of doors and windows. Maco purchases its stock from Mayer and sells it (either to wholesale distributors or direct to manufacturers of doors and windows) as a principal, not as an agent.

17.  The Special Commissioner made some detailed findings about Maco’s business and the use to which it puts the building. He recorded that because designs change frequently, because products made by Mayer for the United Kingdom market differ from those which it makes for the rest of the market (and require re-tooling), and because Maco sells the products with a ten-year guarantee, Maco has to hold large and varied stocks (amounting to about 2,300 different lines in all). There is specialised computerised equipment for locating and moving stock, much of which is on pallets. It is unnecessary to go into further detail here. It is common ground that the building is a state-of-the-art warehouse and distribution centre. But Maco is storing and selling goods which are its own property. Its trade is not storage. It is that of a merchant, buying goods and selling them on at a profit.

The legislation

18.  Capital allowances have a long and complex history. They are a relief afforded by Parliament partly as compensation for the non-allowance of depreciation as a deduction in computing trading profits for tax purposes, and partly as a policy of providing differential tax incentives in order to encourage particular forms of economic activity. Parliament’s perception of the need for incentives changes from time to time and there is not therefore any very regular or coherent pattern in the way that capital allowances have been granted over the years. Allowances for industrial buildings were first introduced by the Income Tax Act 1945. The legislation was consolidated, as amended, by the Capital Allowances Act 1968, and reconsolidated, with further amendments, by CAA 1990, which (with a few further amendments) was in force in 1999 and 2000. Since then Parliament has enacted the Capital Allowances Act 2001 (“An Act to restate, with minor changes, certain enactments relating to capital allowances”) as part of the tax law re-write programme.

19.  Despite repeated amendment and consolidation the provisions enacted in 1945 remain essentially intact. They reflect a general legislative policy, formed in the very difficult economic conditions at the end of the second world war but still continuing half a century later, to encourage industrial activity by according to industrial buildings advantages not accorded to shops and offices. But the precise extent of the advantages depends on the correct construction of the legislation, and in particular the terms of section 18 of CAA 1990 (definition of “industrial building or structure”).

20.  The essential provisions are in subsections (1) to (4), which I will set out in full (I have already noted the generous de minimis provision in subsection (7), and I add that under subsection (9) “undertaking” means an undertaking carried on by way of trade). The text below includes minor amendments made by the Finance Acts 1991 and 1995.

“(1) Subject to the provisions of this section, in this Part ‘industrial building or structure’ means a building or structure in use -

(a) for the purposes of a trade carried on in a mill, factory or similar premises; or

(b) for the purposes of a transport, dock, inland navigation, water, sewerage, electricity or hydraulic power undertaking; or

(c) subject to subsection (11) below, for the purposes of a tunnel undertaking; or

(d) subject to subsection (12) below, for the purposes of a bridge undertaking; or

(da) for the purposes of a highway undertaking; or

(e) for the purposes of a trade which consists in the manufacture of goods or materials or the subjection of goods or materials to any process; or

(f) for the purposes of a trade which consists in the storage—

  

       (i) of goods or materials which are to be used in the manufacture of other goods or materials; or

       (ii) of goods or materials which are to be subjected, in course of a trade, to any process; or

       (iii) of goods or materials which, having been manufactured or produced or subjected, in the course of a trade, to any process, have not yet been delivered to any purchaser; or

       (iv) of goods or materials on their arrival in any part of the United Kingdom from a place outside the United Kingdom; or

  

(g) for the purposes of a trade which consists in the working of any mine, oil well or other source of mineral deposits, or of a foreign plantation; or

       (h) for the purposes of a trade consisting in all or any of the following activities, that is to say, ploughing or cultivating land (other than land in the occupation of the person carrying on the trade) or doing any other agricultural operation on such land, or threshing the crops of another person; or

       (j) for the purposes of a trade which consists in the catching or taking of fish or shellfish;

       and, in particular, the expression ‘industrial building or structure’ includes any building or structure provided by the person carrying on such a trade or undertaking for the welfare of workers employed in that trade or undertaking and in use for that purpose.

(2) The provisions of subsection (1) above shall apply in relation to a part of a trade or undertaking as they apply in relation to a trade or undertaking except that where part only of a trade or undertaking complies with the conditions set out in subsection (1), a building or structure shall not by virtue of this subsection be an industrial building or structure unless it is in use for the purposes of that part of the trade or undertaking.

  

(3) The reference in paragraph (e) of subsection (1) above to the subjection of goods or materials to any process shall include a reference to the maintaining or repairing of any goods or materials but, notwithstanding subsection (2) above, paragraph (e) shall not apply to the maintenance or repair by any person of any goods or materials employed by that person in any trade or undertaking unless that trade or undertaking itself falls within any of the paragraphs of subsection (1) (including paragraph (e)).

(4) Notwithstanding anything in subsections (1) to (3) above, but subject to subsections (5) and (7) below, ‘industrial building or structure’ does not include any building or structure in use as, or as part of, a dwelling-house, retail shop, showroom, hotel or office or for any purpose ancillary to the purposes of a dwelling-house, retail shop, showroom, hotel or office".

  

  Maco’s case, which was successful before the Special Commissioner and in the Court of Appeal, is that part of its trade is storage of goods falling within section 18(1)(f)(i). The Revenue’s case is that the goods fall within the description in section 18(1)(f)(i), but that no part of Maco’s trade is storage.

21.  It is apparent that throughout section 18(1) the emphasis is on use of a building for the purposes of a trade, or an undertaking carried on by way of trade. The trader using the building need not be its owner (although in this case Maco is, we were told, the owner) but the trade for which the building is used must fall within one or more of the ten categories listed in subsection (1). These categories cannot be mutually exclusive, since section 18(1)(a) appears to be largely a subset of section 18(1)(e). But apart from that there are few if any obvious overlaps. Subsection (4) overrides the previous provisions, excluding particular premises even if they would otherwise come within subsection (1). So if a company which is a shoe manufacturer sells 90% of its products by wholesale, but has its own retail shop in a separate building near the factory, the shop will not be within section 18, even though the company’s trade is within section 18(1)(e) (if on the other hand the shop was in a corner of the factory itself, section 18(7) would probably apply). The same approach would be taken if the entirety of the company’s products were sold through its own retail outlets. Its factories and warehouses would still be within section 18, as its trade was manufacture, but its retail shops, showrooms and offices would not be (unless and except so far as section 18(7) applied to any particular building).

“A part of a trade”

22.  These examples prompt some general points about the scheme and effect of section 18. Whether the requirements of the section are met may depend both on the way in which an enterprise divides its activities between different buildings, and on the way in which those activities are arranged within its corporate structure. It is common ground that in this case the conditions would have been satisfied if Maco had traded simply as a storage company, with its stock remaining the property of Mayer until sooner or later it was sold to customers. The Special Commissioner observed that it made little sense to restrict the relief to the case of a warehousing subsidiary. But it would also have been available, under section 18(1)(e), if the warehouse had belonged to Mayer, trading through a United Kingdom branch (rather than a subsidiary). In any case it is a commonplace of tax law that different corporate structures often produce different fiscal consequences, even if the economic results are the same from the consumer’s point of view.

23.  The other essential point to note is that section 18(1)(e) is concerned with “a trade which consists in the manufacture of goods [etc]". A trade must by definition be conducted with a view to profit. A do-it-yourself enthusiast is not a trader. Making goods out of raw materials is an activity which becomes a trade only if the goods are to be turned to account - normally by sale, occasionally by hire. Mr Goodfellow QC (for Maco) rightly pointed out that some manufacturers, for instance in the tailoring trade, work on goods which they do not own, and charge for their time and skill without any sale of goods. But that does not affect the general principle. A trading manufacturer who does own the finished goods is in the ordinary course of things going to sell them either by wholesale or by retail. If a manufacturing company has a chain of retail shops, it may decide to set up a retailing subsidiary, and in that case there would be two traders and two trades, with a wholesale transaction between them (as in this case, between Mayer and Maco). But if only a single company is involved, it would not be a correct legal analysis to describe it as carrying on two trades (rather than two vertically integrated activities). To do so would involve positing a fictitious sale in which the same company was both seller and buyer. Occasionally an appropriation similar to a fictitious sale is required for some particular tax purpose (see for instance Watson Brothers v Hornby (1942) 24 TC 506, approved by this House in Sharkey v Wernher [1956] AC 58) but there is no warrant for it here. The Court of Appeal were rightly unanimous in the view that capital allowances should not be over-complicated.

24.  There is therefore a clear and important distinction, in my opinion, between a trade and an activity undertaken in the course of a trade. The expression “a part of a trade” is a simple phrase which is no doubt capable of bearing different meanings according to the context. The second half of section 18(2), which refers to the case where “part only of a trade or undertaking complies with the conditions set out in subsection (1)” suggests that the “part” must be something that has the same sort of characteristics as the trade as a whole - what Patten J ([2007] STC 721, para 40) called an activity in the nature of a trade. That was also the approach adopted by Lightman J in Bestway (Holdings) Ltd v Luff (1998) 70 TC 512, 543, citing Rowlatt J in Graham v Green [1925] 2 KB 37, 40;

“a conception of a trade ... differs in its nature, in my judgment, from the individual acts which go to build it up, just as a bundle differs from odd sticks. You may say, I think, without an abuse of language, that there is something organic about the whole which does not exist in its separate parts.”

25.  In my opinion that approach is the right one. To come within section 18(2) “a part of a trade” must be, not simply one of the activities carried out in the course of a trade, but a viable section of a composite trade which would still be recognisable as a trade if separated from the composite whole: for instance, a garage business that sells cars from its showroom and services and repairs cars in its workshop, the example given in argument by Mr Brennan QC in Bestway. If the proprietor were to close the showroom, or alternatively were to close the workshop, he would still have part of his original trade.

 
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