Leasing agreements — Lease of equipment — Plant and machinery installed in council premises — Installation of equipment which became fixture — Whether lessor entitled to capital allowances in relation to leasing agreements — High court holding that equipment did not belong to lessor under Finance Act 1971 — Lessor entitled to allowances under Schedule 17, para 3 of Finance Act 1985
Five members of the Mercantile Group plc (BMI) carried on the trade of acquiring and hiring out plant and machinery to local authorities. Between 1983 and 1985 BMI entered into 201 leasing agreements, of which 180 related to the installation of central heating in council houses occupied by tenants. The remaining 21 leases related to the installation of other plant on land occupied by the local authority. The leases contained a clause specifying that the equipment in question would remain personal or movable property and should continue in the ownership of BMI, notwithstanding that it was fixed to the ground. In the cases of central heating in council houses, tenants would move out for 24 hours while the installation was completed. Items other than central heating included a swimming pool, crematorium equipment, a sheltered housing alarm system in 500 council flats, two refurbished lifts and ancillary equipment in each of two car parks and boiler equipment in council premises.
BMI appealed against corporation tax assessments disallowing capital allowances under section 44 of the 1971 Act or (where the expenditure was incurred after July 11 1984) under Section 59 and Schedule 17 of the 1985 Act in relation to the leasing agreements. Under the 1971 Act the High Court held that: (1) all the items of plant and machinery became fixtures on installation; (2) despite that, all the items installed in premises which the local authorities continued to occupy (ie all the items except central heating equipment, etc installed in council flats) continued to belong to the companies; and (3) the central heating equipment and entry phone or alarm systems installed in council flats ceased to belong to the relevant companies when the flats were let because each weekly tenant took a legal estate in his flat, including the fixtures, without notice of any equitable or merely contractual rights of BMI. Therefore, as against the tenant in occupation, BMI had no right to enter and remove the central heating equipment, etc. The Crown appealed and the companies cross-appealed.
Held The appeals and cross-appeals were allowed.
1. The judge was right on issues (1) and (3) for the reasons he gave.
2. As regards issue (2), the concept of a fixture which remained personal or movable property was a contradiction in terms and an impossibility in law. The items of equipment in the present case, fastened as they were to the buildings, became fixtures in law: see Hobson v Gorringe (1897) 1 Ch 182.
3. The rights of BMI in respect of those fixtures were such that they could not, on a fair use of language, be said to “belong” still to BMI. Looking at the matter overall, despite the rights of entry such as they were and any amount of labelling of the equipment, it was unrealistic to say that the various items of equipment “belonged to” or “were owned by” the lessor companies.
4. Accordingly, BMI could not claim the allowances under the 1971 Act alone but only, if at all, under the 1985 Act. Schedule 17, para 3 was enacted to enable equipment lessors to claim the allowance if machinery or plant became a fixture, provided that the parties elected that the paragraph should apply. In the circumstances of this case BMI had made out their claims under para 3 where the relevant elections had been made.
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) appeared for BMI.
