The Court of Appeal (allowing the taxpayer's appeal by a majority) held that a taxpayer was entitled to industrial buildings allowances in respect of a warehouse since the building was used for storage, storage was part of the taxpayer's trade and the products stored in the warehouse were goods or materials to be used in the manufacture of other goods or materials. Accordingly it qualified for relief under CAA 1990, s. 18(1)(f)(i) and 18(2).

Facts

The taxpayer's business was that of importing products manufactured by its Austrian parent company (‘M’), promoting and selling them in the UK. The products were hardware for the PVC window and door market. The taxpayer held 2,300 different items of stock. M mainly manufactured for the mainland European market for which the products were standard. The UK market, on the other hand, had different products because tilt and turn window fittings were different in the UK. Because UK products had to be manufactured separately by M, the standard ordering time was six weeks. M's factory was set up to produce products in large batches. Manufacturing products for the UK market alone required the machines to be re-tooled, a process that took three hours and therefore interrupted the larger production for the mainland European market, which was uneconomic to do for small orders. Accordingly M required the taxpayer to place orders for minimum quantities. The taxpayer could not obtain products for the UK market from any of M's other subsidiaries because they would not hold products manufactured for the UK market.

The taxpayer's customers were primarily wholesalers (‘distributors’) who sold the products in smaller quantities to window and door fabricators. A few large fabricators were direct customers. None of the customers held large stocks and expected orders to be delivered within seven to ten working days. Products were sold by the taxpayer with a ten-year guarantee corresponding to the guarantee that fabricators offered to their customers. That required the holding of products that were no longer manufactured in case the taxpayer needed to replace them, which was more cost-effective than repairing them. About 2.5 per cent of the stock held was of obsolete products. Such stock was available for sale.

The taxpayer operated a warehouse and distribution centre. Sales and ordering were dealt with in an office part of the building. Customers did not visit the building in connection with ordering. Eight salesmen worked from the building visiting customers and potential customers.

A special commissioner allowed the taxpayer's appeal against amendments to its corporation tax self assessment denying its claim for industrial buildings allowances on the building ((2005) Sp C 508). The special commissioner held that the expenditure qualified under s. 18(1)(f)(i), as applied by s. 18(2), because the building was used for storage; the storage was a part of the taxpayer's trade; and the products stored in the warehouse were goods or materials ‘to be used in the manufacture of other goods or materials’. That decision was reversed on appeal by Patten J ([2006] BTC 829). He held that, for an operation to be part of a trade’ within the meaning of the section ‘it must itself be an activity in the nature of a trade’. The storage activity in this case did not qualify, because it was carried out to support the company's wholesale trading operation and not as a trading or commercial activity in itself. The taxpayer appealed.

Issue

Whether the taxpayer's use of the building was for the purposes of part of a trade which consisted in the storage of what were admittedly qualifying goods within s. 18(1)(f)(i) and s. 18(2).

Decision

Carnwath LJ (Hallett LJ agreeing, Lawrence Collins LJ dissenting) said that since the special commissioner was the tribunal of fact, unless he could be shown to have erred in law, his decision had to stand. The principal difference between the two decisions below was in the interpretation of s. 18(2), as applied to category (0- The commissioner took the words ‘a part of a trade which consists in the storage’ of qualifying goods at face value. Having found that storage had a distinct commercial role in the taxpayer's business (in contrast to the position in Bestway (Holdings) Ltd v Luff [1998] BTC 69), he held that it was in ordinary language ‘a part’ of the taxpayer's trade, and therefore within the section. Patten J held it was not ‘a part’ of the trade in the required sense, because it merely supported the company's trade, and was not ‘a trading or commercial activity in itself’. Thus the error of law found by Patten J lay essentially in the commissioner's reading of the words ‘a part of ’.

In adopting the ordinary meaning of those words, the commissioner could claim the support, not only of the standard approach to interpretation of statutory language, but more specifically of Lord Reid in Saxone Lilley & Skinner (Holdings) Ltd v IR Commrs (1967) 44 TC 122. The only further elaboration one could derive from Lord Reid's speech was that there must be a ‘sufficient distinction’ between the relevant activity and other aspects of the trade ‘to enable one say that (the activity) is one part of the trade ’. By contrast the judgments in other cases disclosed a number of different glosses on the statutory words, to indicate the circumstances in which storage would qualify as a part of the business: ‘storage as a purpose and end in itself’ and storage as a ‘significant, separate and identifiable part of a trade’ (per Lightman J in Bestway); storage as an ‘essential part of a trade’ (per Lightman J in Bestway, distinguishing Crusabridge Investments Ltd v Casings International Ltd (1979) 54 TC 246 and Vibroplant Ltd v Holland (HMIT) (1981) 54 TC 658; and storage as an ‘activity in the nature of a trade’, or ‘a trading or commercial activity in itself ’ (per Patten J).

The principal objection to all those formulations was that they were glosses on the statutory words. As such they were inconsistent with the ordinary reading adopted by Lord Reid. In addition, each was open to more specific criticisms. With respect to the elaborate reasoning of Lightman J in Bestway and of Patten J, and the extensive arguments on the appeal, there was a danger of overcomplicating a relatively straightforward statutory test. It was so regarded by Lord Reid, and the special commissioner was right to follow his lead.

He had been entitled to distinguish Bestway on its facts, for the reasons he gave. His conclusion on s. 18(2) applied the statutory language in accordance with its ordinary meaning and disclosed no error of law. Accordingly, the appeal would be allowed and the decision of the special commissioner restored. (Per Lawrence Collins J dissenting) Although the statutory test should not be overcomplicated, on its proper construction, CAA 1990, s. 18(2) did not have the effect of widening s. 18(1) to encompass a building or structure in use for the purposes of a trade which did not qualify under s. 18(1). If the taxpayer's trade did not qualify under s. 18(1)(f), then the fact that an important part of its modus operandi involved storage of its own goods pending sale did not entitle it to a capital allowance on the basis that ‘part of [its] trade’ consisted in storage.

Court of Appeal (Civil Division).
Judgment delivered 19 June 2007.