The House of Lords held, by a majority, that a taxpayer was not entitled to industrial buildings allowances in respect of a warehouse with office and lecture room facilities since the storage of goods in the building was carried out to support the taxpayer's wholesale trading operation and not as a trading or commercial activity in itself. Accordingly it did not qualify for relief under CAA 1990, s. 18(1)(f)(i) and 18(2).

Facts

The taxpayer's business was 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'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. The nature of the business meant that the taxpayer held 2,300 different items of stock at its warehouse and distribution centre. 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 Court of Appeal overturned that decision by a majority ([2007] BTC 607). The Revenue appealed.

Issue

Whether the taxpayer was entitled to the allowances because the use of the building was for the purpose of the storage of what were admittedly qualifying goods within s. 18(1)(f)(i) and that was part of a trade within s. 18(2).

Decision

Lord Walker (Lord Hoffmann agreeing, Lord Neuberger concurring and Lords Scott and Mance dissenting) (allowing the appeal) said that it was apparent that throughout s. 18(1) the emphasis was on use of a building for the purposes of a trade, or an undertaking carried on by way of ‘a part of a trade’. Whether the requirements of the section were met might depend both on the way in which an 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 this case the conditions would have been satisfied if the taxpayer had traded simply as a storage company, with its stock remaining the property of M until sooner or later it was sold to customers. It would also have been available, under s. 18(1)(e), if the warehouse had belonged to M, trading through a UK 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.

There was a clear and important distinction between a trade and an activity undertaken in the course of a trade. The second half of s. 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’ must be something that had the same sort of characteristics as the trade as a whole, or was an activity in the nature of a trade. That was also the approach adopted by Lightman J in Bestway (Holdings) Ltd v Luff [1998] BTC 69; 70 TC 512 and was the right approach. To come within s. 18(2) ‘a 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. It was not enough to be able to isolate some activity carried on in the course of a vertically-integrated trade, even if that activity was significant, separate and identifiable.

The effect of the second part of s. 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 s. 18(1). As a matter of strict logic the second part of s. 18(3) was unnecessary, on the Revenue's construction, but it was not inconsistent with the Revenue's construction. 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 (HMIT) (1981) 54 TC 658 and it was understandable that Parliament had chosen to put that point beyond argument.

The other cases relied on by the taxpayer were not authority for its case that it was not necessary for part of the trade under s. 18(2) to be a qualifying trade under s. 18(1). The essential point about Saxone Lilley & Skinner (Holdings) Ltd v IR Commrs (1967) 44 TC 122 was that the warehouse where the shoes were stored was run by a subsidiary company 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 became s. 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 s. 18(1)(f). A case which caused more difficulty was Kilmarnock Equitable Co-operative Society Ltd v IR Commrs (1966) 42 TC 675. The gist of the decision in Kilmarnock was that the relevant trade for the purposes of s. 18(1) was assumed to be processing and packing, and that the effect of s. 18(2) was to make that part of Kilmarnock's overall trade a qualifying trade for the purposes of s. 18(1)(e).

House of Lords.
Judgment delivered 30 July 2008.