The High Court, allowing the Revenue's appeal from the special commissioners ((2005) Sp C 508) held 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 otherwise qualifying 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 s. 18(2) of the Capital Allowances Act 1990.

Facts

The taxpayer operated from a building comprising 4,445 square metres of which 855 square metres was a high-bay warehouse allowing storage of products on 15 levels, and 1,497 square metres was a distribution building also containing storage for items too large to fit on standard size pallets. The building could hold 5,500 pallets. In addition there were offices and a lecture theatre, and an area with equipment for testing products.

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 in the building was of obsolete products. Such stock was available for sale. The high-bay part of the building contained the most hi-tech equipment available enabling orders to be picked, packed and despatched quickly. Sales and ordering were dealt with in the office part of the building. Customers did not visit the building in connection with ordering. Eight salesmen worked away from the building virtually all the time, visiting customers and potential customers, such as architects and local authorities to encourage them to specify the taxpayer's products. The salesmen did not take orders. 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 Revenue appealed maintaining that the taxpayer's use of the building did not satisfy the statutory conditions set out in s. 18(1)(f)(i) because its trade did not consist in the storage of the products imported from its Austrian parent but of the importation and sale of those products to customers in the UK and the storage of the products was carried out simply to facilitate that trade. Section 18(2) applied the provisions of s. 18(1) to a part of a trade but only in the same way as they applied to the trade or undertaking itself. Section 18(2) did not allow storage which was merely ancillary to some other trade to qualify under s. 18(2).

Issue

Whether the taxpayer's use of the building was ‘for the purposes of a trade which consists in the storage’ of what were admittedly qualifying goods within s. 18(1)(f).

Decision

Patten J (allowing the appeal) said that, for present purposes, the real issue was what was meant by ‘part of a trade’ in s. 18(2) and whether storage of the kind carried on by the taxpayer in the warehouse qualified. In cases involving a single trading entity, a claim under s. 18(1) for capital allowances based on the storage aspect of the business could not succeed because the building was not in use for the purposes of a trade which consisted in the storage of such goods. On any view it was in use for a much wider and therefore different trade which in this case was the importation and sale of particular goods. Even if storage was properly to be regarded as part of that trade, the conditions set out in the opening words of s. 18(1)(f)(i) were not satisfied. Hence the need to rely on s. 18(2).

The taxpayer had relied on the decision of the High Court in Crusabridge Investments Ltd v Casings International Ltd (1979) 54 TC 246 in support of its argument that the building was in use for the purposes of storage of goods or materials which were to be used in the manufacture of other goods or materials, which the commissioner accepted. However Crusabridge was wrongly decided in so far as the judge there held that the words ‘which consists in’ meant involved (Bestway (Holdings) Ltd v Luff [1998] BTC 69 considered).

Two principles emerged from the judgment of Lightman J in Bestway. The first was that the trade of a company consisted of all its activities which were directed towards producing a profit. Assuming that the activity in question satisfied that condition, then it constituted part of the trade if it was a significant, separate and identifiable part of the trade carried on.

The decisions in Saxone Lilley & Skinner (Holdings) Ltd v IR Commrs (1967) 44 TC 122 and Kilmarnock Equitable Co-operative Society Ltd v IR Commrs (1967) 42 TC 675 supported a much narrower and more fundamental view of the scope of s. 18(2) than that adopted by the special commissioner, who considered both cases. An operation had to be itself an activity in the nature of a trade to be part of a trade within s. 18(2). Section 18 itself demonstrated that a trade for those purposes was not limited to the selling goods and could include both manufacturing and processing operations. However, storage as a trade in s. 18(1) and as part of a trade in s. 18(2) did not involve the application of different tests. Section 18(2) operated only to expand the definition contained in s. 18(1), not to alter it. Neither Saxone nor Kilmarnock provided any support for a wider test. On a proper analysis they were in fact supportive of the approach taken by Lightman J in Bestway (Vibroplant Ltd v Holland (HMIT) (1981) 54 TC 658 not followed). Although the storage of the qualifying goods in this case was carried out in a separate building and on a quite different scale, it was nonetheless carried out to support the taxpayer's wholesale trading operation and not as a trading or commercial activity in itself. On any view of s. 18(2), that was not enough.

Chancery Division. Judgment delivered 19 July 2006.