West Law Report

Warehouse not industrial building for purpose of capital allowance relief

Posted in House of Lords (case), Times Law Report by mrkooenglish on September 3, 2008

From The TimesSeptember 2, 2008

Warehouse not industrial building for purpose of capital allowance relief

House of Lords

Published September 2, 2008

Maco Door and Window Hardware (UK) Ltd v Revenue and Customs Commissioners

Before Lord Hoffmann, Lord Scott of Foscote, Lord Walker of Gestingthorpe, Lord Mance and Lord Neuberger of Abbotsbury

Speeches July 30, 2008

Expenditure on a warehouse which was used for storage of goods which the taxpayer was in the business of importing and selling was not expenditure on an industrial building so as to qualify under section 18 of the Capital Allowances Act 1990.

The House of Lords so held (Lord Scott and Lord Mance dissenting) allowing an appeal by the Revenue and Customs Commissioners from the Court of Appeal (Lord Justice Carnwath, and Lady Justice Hallett, Lord Justice Lawrence Collins dissenting) ([2007] Bus LR 1686) which allowed an appeal by the taxpayer, Maco Door and Window Hardware (UK) Ltd from Mr Justice Patten (The Times August 11, 2006; [2007] STC 721) who allowed the commissioners’ appeal from a special commissioner, Dr John F. Avery Jones, who on October 25, 2005 allowing the taxpayer’s appeal from the commissioners’ decision that expenditure on the taxpayer’s warehouse building at Eurolink Business Centre, Sittingbourne, Kent, did not qualify as expenditure on an industrial building for the purposes of section 18 of the 1990 Act.

Mr Timothy Brennan QC and Mr Akash Nawbatt for the commissioners; Mr Giles Goodfellow, QC and Mr James Rivett for the taxpayer.

LORD WALKER said that the issue turned on the definition of “industrial building or structure” and, in particular, on the meaning of “part of a trade” in section 18(2).

The taxpayer traded as an importer and distributor of products manufactured by its Austrian parent company.

The products were hardware such as locks, handles and hinges, to be fitted to a wide range of doors and windows produced by other manufacturers. Designs of the hardware changed frequently to keep up with changes in the designs of doors and windows.

The taxpayer purchased its stock from its parent company and sold it, either to wholesale distributors or direct to manufacturers of doors and windows, as a principal, not as an agent.

Because, inter alia, designs changed frequently and because the taxpayer sold the products with a ten-year guarantee, it had to hold large and varied stocks of about 2,300 different lines. The building was a state of the art warehouse and distribution centre but the taxpayer was storing and selling goods which were its own property. Its trade was not storage. It was a merchant buying goods and selling them on for profit.

The taxpayer’s case was that part of its trade was the storage of goods falling within section 18(1)(f)(i) of the 1990 Act which stated that “industrial building or structure” meant a building or structure in use “… for the purposes of a trade which consists in the storage … of goods or materials which are to be used in the manufacture of other goods or materials”.

The Revenue’s case was that the goods fell within the description in section 18(1)(f)(i) but that no part of the taxpayer’s trade was storage.

It was apparent that throughout section 18(1) the emphasis was on the use of a building for the purpose of a trade, or an undertaking carried on by way of trade. The trader using the building need not be its owner but the trade for which the building was used had to fall within one or more of the ten categories listed.

Whether the requirements of section 18 were met might depend both on the way in which the enterprise divided its activities between different buildings, and on the way in which those activities were arranged within its corporate structure.

It was common ground that in the taxpayer’s case the conditions would have been satisfied if it had traded simply as a storage company with its stock remaining its own property until sooner or later it was sold to customers.

Relief would also have been available, under section 18(1)(e) if the warehouse had belonged to the taxpayer trading through a United Kingdom branch, rather than a subsidiary.

In any case it was a commonplace of tax law that different corporate structures often produced different fiscal consequences, even if the economic results were the same from the consumer’s point of view.

Another essential point to note was that section 18(1)(e) was concerned with “a trade which consists in the manufacture of goods…”. A trade must by definition be conducted with a view to profit. A do-it-yourself enthusiast was not a trader. Making goods out of raw materials was an activity which became a trade only if the goods were to be turned to account, normally by sale, occasionally by hire.

It was rightly pointed out on behalf of the taxpayer that some manufacturers, for instance in the tailoring trade, worked on goods which they did not own, and charged for their time and skill without any sale of goods.

His Lordship said that that did not affect the general principle. A trading manufacturer who did own the finished goods was in the ordinary course of things going to sell them either by wholesale or by retail.

If a manufacturing company had a chain of retail shops, it might decide to set up a retailing subsidiary, and in that case there would be two traders and two trades, rather than two vertically integrated activities.

But if only a single company was involved, it would not be a correct legal analysis to describe it as carrying on two trades. To do so would involve positing a fictitious sale in which the same company was both seller and buyer.

There was therefore a clear and important distinction between a trade and an activity undertaken in the course of a trade. The expression “part of a trade” was a simple phrase which was no doubt capable of bearing different meanings according to the context.

The second half of section 18(2), which referred to the case where “part only of a trade or undertaking complies with the conditions set out in subsection (1)” suggested that the “part” had to be something that had the same sort of characteristics as the trade as a whole.

To come within section 18(2), “part of a trade” had to 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 sold cars from its showroom and serviced and repaired cars in its workshop. If the proprietor were to close the showroom, or alternatively were to close the workshop, he would still have part of his original trade.

It was not enough 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 was significant, separate and identifiable.

LORD NEUBERGER, agreeing, said that the commissioners’ interpretation of section 18 of the 1990 Act was to be preferred.

First, it was more in accordance with the language and structure of section 18. Second, it seemed to make better sense so far as the purpose of section 18 was concerned. Third, it was the more practical interpretation.

Lord Hoffmann agreed with Lord Walker and Lord Neuberger. Lord Scott and Lord Mance delivered dissenting speeches.

Solicitors: Solicitor, Revenue and Customs; Gregory Rowcliffe Milners.

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