Council houses — Installation of central heating — Equipment supplied by taxpayer company under leasing agreements — Ownership remaining with supplier — Writing-down allowances claimed by supplier — Revenue refusing allowances — Special Commissioners allowing appeal — High Court holding that once installed equipment no longer belonging to supplier — Tenant holding legal estate — Local authority landlord having no right to enter and sever central heating equipment to discharge obligation to supplier
The taxpayer company entered into 180 agreements with local authorities for the installation of central heating in council houses. The leases contained a clause specifying that the equipment installed would remain personal and movable property and should continue in the ownership of the company even though it was fixed to the ground. In some cases the houses were unoccupied at the time of the installation, but let to tenants shortly afterwards. The company claimed writing-down allowances under section 44 of the Finance Act 1971 in respect of capital expenditure on the provision of the central heating equipment in the houses for which rent was paid by the local authorities.
The tax inspector refused the allowances, but the Special Commissioners allowed appeals against that refusal on the basis that notwithstanding the equipment was fixed, it belonged to the company because it was entitled to repossess it on expiry or termination of the lease. With a few exceptions the equipment was capable of being removed and had a second-hand value.
Held The Revenue’s appeal was allowed.
1. The company and the local authorities could not contradict the plain and obvious legal consequence of the incorporation of the equipment as part of the local authorities’ land simply by agreeing that the equipment should remain personal and removable.
2. The tenant of a council house had a legal estate in the land. Therefore, whether the tenants were already in occupation when the central heating was installed or whether they went into occupation thereafter, they were in the position of bona fide purchasers for value. They enjoyed their tenancies free from any right of the company to enter and remove or require the local authority to enter and remove the central heating.
3. The fact that a council-house tenant had only a limited interest was immaterial. As tenant he had a legal estate which prevailed over any contractual right of the company to enter and repossess.
4. None of the tenancy agreements conferred a right either expressly or impliedly on the local authority, as landlord, to enter and sever the central heating in order to discharge their obligation to the company.
5. Accordingly, the provisions of the master equipment leases in so far as they conferred a right of entry on the company or for the severance and delivery up of the equipment by the local authority, and in so far as they provided that it should be treated as in the ownership of the company, were wholly inapt as regards the central heating in the council houses.
6. Finally, as regards the heating installed in vacant council houses which were let shortly thereafter, any capital allowance would be extinguished by a balancing charge when the property was let and the equipment ceased to belong to the company.
James Munby QC and Timothy Brennan (instructed by the solicitor to the Inland Revenue) appeared for Mr Melluish (HMIT); Graham Aaronson QC and Paul Morgan QC (instructed by Denton Hall Burgin & Warrens) appeared for the company.
