Next Distribution Ltd and others v Revenue and Customs Commissioners

CORPORATION TAX – whether industrial buildings within s18 CAA – On facts – No –

appeal dismissed

UPPER TRIBUNAL

TAX AND CHANCERY CHAMBER

[2014] UKUT 0227 (TCC) FTC/94-96/2012

NEXT DISTRIBUTION LIMITED NEXT GROUP PLC

THE PAIGE GROUP LIMITED                       Appellants

-and-

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE & CUSTOMS                      Respondents

TRIBUNAL: Mr JUSTICE DAVID RICHARDS Sitting in public in London on 24-25 March 2014

Timothy Brennan QC, instructed by PricewaterhouseCoopers Legal LLP, for the

Appellants

Sam Grodzinski QC, instructed by the Solicitor to HM Revenue and Customs, for the

Respondents

Introduction

1.  This appeal is concerned with the meaning of “industrial buildings” as defined in section 18 of the Capital Allowances Act 1990 (CAA 1990).

2.   The appellants are three companies in the Next group, which carries on clothing and household goods retailing on a large scale both in shops and online. They appeal, with permission granted by the First-tier Tribunal (FTT), against its decision that the relevant premises were not “industrial buildings” for the purposes of section 18.

3.   The premises in question (the Buildings) are two buildings, called Elmsall Way and

Stadium Two, near Doncaster. They were built in 1997-1999. The members of the

FTT (Judge Adrian Shipwright and Ruth Watts Davies FCIPD MIH) visited the Buildings, which they describe in their Decision at [58] as “enormous”. Elmsall Way has a capacity to hold approximately 16.5 million individual items and Stadium Two, which primarily deals with items which are received hanging on rails rather than folded in boxes, can store up to 4.25 million hanging items.

4.   Next Group plc (NGP) is the freehold owner of the land on which the Buildings stand. It granted a lease of the land to The Paige Group Limited (Paige) which in turn granted a sub-lease to the first appellant, Next Distribution Limited (NDL), during the course of construction. These companies are the appellants.

5.   The warehousing and other activities at the Buildings, and at buildings elsewhere, are carried on by NDL. It provides warehousing and distribution services to companies in the Next group, mainly Next Retail Limited (NRL) which is the principal retailing company in the group. These services have since 2007 also been provided to third parties. It is common ground that NDL carried on the business of warehousing and distribution services, not as part of a larger trade but as a separate trade. NDL does not itself sell goods and, as the FTT found as a fact, its trade is the holding and distribution of goods in a group context. The FTT accepted the following as an accurate description of NDL’s business:

“dedicated  warehouse  processing,  quality  control,  rework  and  sorting services for goods acquired by NRL for resale in its business (principally fashion clothing and homewares) and arranging for the storage of and then the distribution of such goods to NRL stores, Directory customers and franchisee customers…”

6.   The total expenditure incurred by the appellants on the buildings was £19,264,856.

The amounts incurred by each of the appellants were as follows: NDL (£42,754), NGP   (£3,485,608)  and   Paige   (£15,736,494).  This   expenditure  covered   land preparation and the construction of walls and roofs for both warehouses, an office block (costing less than 25% of the total building expenditure), car park and vehicle access areas, as well as other building works which were not incidental to the installation of plant and machinery. These figures are common ground.

7.   HMRC refused the appellants’ claim to allowances under section 3 CAA 1990, for the accounting periods ending 31 January 1998 to 31 January 2001. The FTT dismissed the appellants’ appeal against that decision.

Legislation

8.   The claims for allowances were made before the Capital Allowances Act 2001 came in to force and are to be determined under the capital allowances legislation as it then stood. Capital allowances on industrial buildings have since been abolished, with effect from 2011.

9.   CAA 1990 was divided into a number of Parts, each providing allowances against income or corporation tax in respect of a wide range of capital expenditure. The provisions relevant to this appeal appear in Part I, headed “Industrial Buildings and Structures”.

10. Section 3(1) provided:

“(1) Subject to the provisions of this Act, where –

(a) any person is, at the end of a chargeable period or its basis period, entitled to an interest in a building or structure, and

(b) at  the  end  of  that  chargeable  period  or  its  basis  period,  the building or structure is an industrial building or structure, and

(c) that interest is the relevant interest in relation to the capital expenditure incurred on the construction of that building or structure,

an allowance (“a writing–down allowance”) shall be made to him for that chargeable period.”

The allowance in respect of such expenditure was 4% of the relevant expenditure spread over 25 years on a straight-line basis: section 3(2).

11. It is common ground that each of the appellants had at the relevant time an interest in the buildings which was a “relevant interest” as defined.

12. Section 18 CAA 1990 provided an exhaustive definition of “industrial building or structure” for the purposes of Part I. Section 18(1) provided:

“(1) Subject to the provisions of this section, in this Part “industrial building or structure” means a building or structure in use—

(a) for the purposes of a trade carried on in a mill, factory or other similar premises; or

(b) for the purposes of a transport, dock, inland navigation, water, sewerage, electricity or hydraulic power undertaking; or

(c) subject to subsection (11) below, for the purposes of a tunnel undertaking;

or

(d)  subject  to  subsection  (12)  below,  for  the  purposes  of  a  bridge undertaking; or

(da) for the purposes of a highway undertaking; or

(e) for the purposes of a trade which consists in the manufacture of goods or materials or the subjection of goods or materials to any process; or

(f) for the purposes of a trade which consists in the storage—

(i) of goods or materials which are to be used in the manufacture of other goods or materials; or

(ii) of goods or materials which are to be subjected, in course of a trade, to any process; or

(iii) of goods or materials which, having been manufactured or produced or subjected, in the course of a trade, to any process, have not yet been delivered to any purchaser; or

(iv) of goods or materials on their arrival in any part of the United

Kingdom from a place outside the United Kingdom; or

(g) for the purposes of a trade which consists in the working of any mine, oil well or other source of mineral deposits, or of a foreign plantation; or

(h) for the purposes of a trade consisting in all or any of the following activities, that is to say, ploughing or cultivating land (other than land in the occupation of the person carrying on the trade) or doing any other agricultural  operation  on  such  land,  or  threshing  the  crops  of  another person; or

(j) for the purposes of a trade which consists in the catching or taking of fish or shellfish;

and, in particular, the expression “industrial building or structure” includes any building or structure provided by the person carrying on such a trade or undertaking for the welfare of workers employed in that trade or undertaking and in use for that purpose.”

13. The legislative  policy behind capital  allowances, and specifically allowances for industrial buildings, was described by Lord Walker of Gestingthorpe in Maco Door and Window Hardware (UK) Ltd v HMRC [2008] UKHL 54, [2008] 1 WLR 1790, (2008) 79 TC 287, at [18]-[19]:

“18. Capital allowances have a long and complex history. They are a relief afforded by Parliament partly as compensation for the non-allowance of depreciation as a deduction in computing trading profits for tax purposes, and partly as a policy of providing differential tax incentives in order to encourage particular forms of economic activity. Parliament’s perception of the need for incentive changes from time to time and there is not therefore

any very regular or coherent pattern in the way that capital allowances have been granted over the years. Allowances for industrial buildings were first introduced by the Income Tax Act 1945. The legislation was consolidated, as amended, by the Capital Allowances Act 1968, and reconsolidated, with further amendments, by CAA 1990, which (with a few further amendments) was  in  force in  1999 and 2000. Since then Parliament has enacted the Capital  Allowances  Act  2001  (“An  Act  to  restate,  with  minor  changes, certain enactments relating to capital allowances”) as part of the tax law re- write programme.

19. Despite repeated amendment and consolidation the provisions enacted in

1945 remain essentially intact. They reflect a general legislative policy, formed in the very difficult economic conditions at the end of the Second World War but still continuing half a century later, to encourage industrial activity  by according to industrial buildings advantages not accorded to shops and offices. But the precise extent of the advantages depends on the correct construction of the legislation, and in particular the terms of s 18 of CAA 1990 (definition of “industrial building or structure”).”

14. It is the appellants’ case that each of the Buildings constituted an industrial building or structure because it fell within one or more of the limbs of paragraphs (e) and (f) of section 18(1) as follows:

“(1) Subject to the provisions of this section, in this Part ‘industrial building or structure’ means a building or structure in use –

…

(e) for the purposes of a trade which consists in the manufacture of goods or materials or the subjection of goods or materials to any process; or

(f) for the purposes of a trade which consists in the storage –

…

(ii) of goods or materials which are to be subjected, in course of a trade, to any process; or

…

(iv) of goods or materials on their arrival in the United Kingdom from a place outside the United Kingdom;”

15. This raises essentially three issues. The first issue is whether the goods in question were (or were to be) subjected to any “process”. If so, the Buildings qualify as industrial buildings by virtue of paragraph (e) and may also do so by virtue of paragraph  (f)(ii).  The  second  issue  is  whether  the  Buildings  were  used  for  the purposes of  a  trade  consisting in  the  storage of  goods. This  condition must  be satisfied before either paragraph (f)(ii) or (f)(iv) can apply. The third issue is whether the Buildings were used for the storage of goods on their arrival in the United

Kingdom from a place outside the United Kingdom. If so, the Buildings qualify as

industrial buildings by virtue of paragraph (f)(iv).

Facts

16. The  Decision of  the  FTT  contains a  very  full  account of  the  operations at  the

Buildings, based on comprehensive written and oral evidence and on a site visit.

17. Very helpfully, for the purposes of this appeal, the parties agreed a summary description of the operations at the Buildings. This is not a substitute for the description and findings set out in the Decision but it is I think sufficient for the general purposes of this judgment. I set it out in the following paragraphs, subject only to a few editorial changes which do not alter its sense.

18. At all material times, the Buildings were used by NDL in providing warehousing and distribution services to another member of the group, NRL.

19. A range of clothing, footwear, accessories and home products were delivered in bulk to the buildings. Most of the goods came from suppliers abroad, using sea, air freight and overland means of transportation. The goods were transferred by road transport in containers or trailers from the point of entry into the UK to the Buildings.

20. The goods were generally either contained in Bulk Delivery Cartons (BDCs) of standard size, or were delivered on hangers.  Multiple items of the same specification were delivered together.

21. The BDCs and hanging items were unloaded and taken into the Buildings.   Their arrival was recorded on a stock control system.

22. Apart from a single sample which would be used for quality control, the goods in sealed BDCs or on hangers were then moved into the large storage areas of the Buildings, using highly automated systems.

23. The goods were held in these storage areas for up to 6 months, but on average for 6 weeks, until NRL needed them to be sent either to their retail stores or to “Next

Directory” online customers.  Stores would need a particular allocation of items, of varying models, colours, and size, at particular times depending on the season and the timing of “phase” launches. Stores needed regular replenishments of stock.

24. NDL carried out quality control on the incoming goods, examining a sample of the delivered goods against a detailed specification.  If a defect was identified, the whole batch could be returned to the supplier, or NDL might remedy the defect itself, although most goods did not require such remedial work and this work did not form a major component of the activities in the Buildings.

25. Once stock was needed for onward distribution, the goods were retrieved from the storage areas, largely through automated systems.   Goods required for onward transmission to NRL stores were put into totes or kept on hangers and were sent to dispatch areas in the buildings.  The totes would be loaded onto pallets, wrapped in plastic for protection, and then manually loaded onto HGV trailers for onward distribution.  For customers who had placed an order with Next Directory, individual items were taken out of the BDCs, conveyed to “picking” stations and parcelled up with other items before transfer to dispatch areas. There were separate picking and despatching procedures for hanging goods.

26. At various points, labels might be placed on the boxes or totes or bags containing the goods, to facilitate their arrival at the correct destination, whether inside the Buildings or for onward distribution.

27. The Buildings also received and dealt with goods that were returned by NRL retail stores and by Next Directory customers (via a different warehouse facility in Bradford). These were again stored until needed for onward distribution, generally to “Next to Nothing” clearance shops or staff shops.   Returned hanging goods were dealt with at a separate building (“Stadium Way”) not forming part of this appeal.

The Decision of the FTT

28.  The FTT set out in its Decision at [261] the questions which it considered needed to be answered for the purposes of this case:

“(1) Although the legislation refers to “goods” there is no helpful definition so the question therefore arises what are the “goods” for the purposes of the IBA legislation? Are they the individual items or the bulk? Can the meaning change as the items progress through the buildings?

(2) What are the goods in the case before us for the purposes of the section? (3) Were the Buildings used for a trade which consisted in subjecting goods

or materials to any process?

(4) Were the Buildings used for a trade which consisted in the storage of goods or materials:

(a) which were to be subjected to any process; or

(b) on their arrival in the United Kingdom from a place outside the United

Kingdom.”

29. The answer given by the FTT to the first and second questions was that the goods in the present case were not the goods in bulk but were the individual items which comprised the bulk. It rejected the submission on behalf of the appellants that the goods on arrival at the Buildings were the goods in bulk which were then broken down by mechanical processes to smaller parcels of goods or to individual goods for the purposes of making them more merchantable.

30. In dealing with the issue of “process”, the FTT described what was done to the goods at [270]–[271]:

“270. The goods in the sense of the individual items came into the buildings as part of a bulk load. The individual item was unloaded, checked, held until “picked” and then labelled on its packaging or hanger or other matter associated with the item so that it could be transported and then despatched. There was generally no physical change to the individual item. Although the label could well be attached to the packaging there was, in general, no change to the individual item. If a defect was detected on checking then the item might be returned to the supplier or in some cases have something done to it such as pressing or cleaning. This would not necessarily be done at the Buildings. The items could be sent out or to another building for what was required to be done.

271. Overall nothing was physically done to most of the goods in question. As we said before at most a label or further packaging was attached to the packaging of the goods in question where work was not required following the  quality  control.  We  were  not  provided  with  any  figures  as  to  the proportion of goods which required work. However, it did seem to us that most of the goods did not require such work and commercially one would expect this to be the case as the suppliers would not want to bear the cost or

suffer the returns and Next would wish to deal with matters as expeditiously and economically as possible. On that basis we find that the work that was done was not a major component in the activities in the buildings. It was essentially ancillary.”

31. The Tribunal found as a fact that the goods arriving in bulk were broken down and held until picked for distribution. It considered, however, that it should look at the individual items and see what was done to them, and, on that basis, the goods were not subjected to any process as they remained unchanged. Attaching a physical or electronic address label was not sufficient to meet the requirements of a process. They accepted the submission made on behalf of HMRC that:

“There was no subjection of goods to a process here. Subjection to a process involves the treatment of goods in some way. There must be a method of manufacture or adaption of the goods towards a particular use. Moving of goods from one part of a building to another or taking items out of one box and putting them in to another does not constitute a subjection of those goods to a process.”

The Tribunal also concluded that the individual products were not subjected to a sufficiently substantial measure of uniformity of treatment or system of treatment to cause the system of operations conducted in the Buildings to be a “process” in the relevant sense.

32. As to storage, the FTT accepted the appellants’ case that there was storage of goods in the Buildings as part of NDL’s trade.

33. As to whether the Buildings were used for “the storage of goods on their arrival in any part of the United Kingdom”, the FTT noted that the distances from Felixstowe and Southampton, the ports at which most of the goods arrived, were more than 180 miles and 210 miles respectively by road or rail. At [295] it expressed the view that arrival connoted the act or instance of reaching a place, in this case the United Kingdom. The reasons for their conclusion that the Buildings were not used for the storage of goods on arrival in the United Kingdom were as follows:

“297. We consider that the phrase has to be given a pragmatic meaning in the context of each case rather than a literal one. We do not consider that the meaning is fulfilled solely when goods come in to territorial waters or UK airspace. It is a more flexible concept which depends to some extent on the

context of the factual matrix which has to be considered.

298. We consider that the goods had arrived in the UK before arrival at the Buildings. For the purposes of this case it does not matter when they arrived in the UK if they had arrived before reaching the Buildings. It is unnecessary for us to determine the precise point of arrival. We find that the point of arrival was before coming to the Buildings.

299. We do not consider that Parliament intended that the holding goods in a large warehouses after they have been unloaded from a ship or aircraft, loaded on to railway wagons and then downloaded on to lorries and then to deliver to buildings or within the UK and then stored can in the particular circumstances be storage on arrival in the UK from outside on the facts of this case.”

The subjection of goods to a process

34. The appellants relied on this appeal on the same arguments as they had put to the FTT. The goods, whether boxed or hanging, were bought and delivered in bulk. The boxes containing non-hanging goods were required by the appellants to be in one of five standard sizes. What were bought, and delivered, were goods in specified containers. This latter point was made only in closing before the FTT and none of the contracts of sale with the suppliers to the appellants were in evidence. Whether the appellants bought the goods or the goods in specified containers is not therefore clear, but I do not think that HMRC disputed, and I am prepared to accept, that it was a contractual requirement that the clothing and other goods should be supplied in containers of specified sizes. The significance of the size of boxes was that the automated handling machinery in the Buildings was designed to operate only with boxes of those sizes.

35. The appellants’ case is that the process involved the delivery of goods in bulk, their storage, their extraction from storage and the breaking down of the goods in bulk into parcels for dispatch to retail outlets or to online customers, in each case in the precise required mix of goods, sizes and colours. This process led to more readily merchantable goods. The appellants submitted that the FTT was wrong to conclude that the “goods” for the purposes of the application of section 18(1) were the individual items rather than the boxed goods. However, even if the goods were for

these purposes the individual items, they were nonetheless subject to a “process”, including recording, sorting, transporting, movement into and out of storage, picking, collating with other goods, packing, labelling and dispatch. A “process” need not involve a change in the goods themselves, whether of their size or nature. A process of selection through a course of operations was sufficient. If, as the appellants submitted, the “goods” were the boxed goods, there was in fact a relevant change to the goods because the boxes were opened, goods were removed and they were repackaged in different configurations and in new packaging.

36. The appellants relied on the wide meaning given to the phrase “the subjection of goods  or  materials  to  any  process”  in  the  authorities  and  in  particular  on  the judgments in Kilmarnock Equitable Co-operative Society v IRC (1966) 42 TC 675, Buckingham v Securitas Properties Ltd [1980] 1 WLR 380, (1979) 53 TC 292 and Girobank plc v Clarke [1998] 1 WLR 942, (1998) 70 TC 387.

37. The untutored reader of section 18(1) might think that, in view of the association of the word “process” with “manufacture” in each of paragraphs (e) and (f) in section

18(1) that the processes envisaged were of a familiar, industrial-like character. The significance of this association has, for more than one purpose, been referred to and relied on in a number of the authorities: see Buckingham v Securitas Properties Ltd [1980] 1 WLR 380 at 388C, Girobank plc v Clarke [1998] 1 WLR 942 at 945F-946A and Bestway (Holdings) Ltd v Luff (1998) 70 TC 512 at 541I. Clearly processes of that character fall or are very likely to fall within those paragraphs, but it is certainly the case that in the authorities the courts have given a much wider meaning to the subjection of goods to a process.

38. Kilmarnock Equitable Co-operative Society v IRC concerned a claim for capital allowances in respect of expenditure on a building used for the purposes of its trade in coal. The precise operation at the building is important and was set out in the facts found by the General Commissioners at p. 676 of the report:

“(g) What happens in the building is that the coal, which is bagged from wagons in the coal yard or depot, is conveyed by conveyor belt and is deposited in a hopper near the roof of the building. It is then fed down a shute through a vibratory screen where dross is removed. The coal is then passed by conveyor belt to the weighing point where it is filled into paper packets. Immediately the set weight of 28 lbs is registered on the weighing machine the machinery is cut off and the filled packet is removed from the machine and is closed by stitching. The packet is then placed on a gravity conveyor to floor level where it awaits disposal.”

39. The First Division of the Court of Session allowed the taxpayer’s appeal from the decision  of  the  General  Commissioners.  The  four  judges  of  the  Court  were unanimous in their decision. In concluding that the coal was subjected to a process for relevant purposes, each of the judges stressed the breaking of the bulk, the cleaning and separating out of dross and the packaging of the clean coal in to paper bags of a standard size: see the Lord President (Lord Clyde) at p. 679, Lord Guthrie at p. 681, Lord Migdale at p. 683 and Lord Cameron at pp 684–685.

40. It should be noted that the Crown conceded on the appeal that a process as envisaged by the equivalent of section 18(1)(e) was in fact occurring in the premises. The Crown’s submission was that goods were not “subjected to” a process within the meaning of the provision unless it resulted in some alteration to the goods: see Lord Migdale at p. 683.

41. Mr Brennan QC, appearing for the appellants in the present appeal, laid stress on what was said by Lord Clyde at p. 679:

“Goods  in  the  form  of  bulk  coal  are  brought  to  this  building  and  are subjected to a process which involves the separating of the dross from the coal and the packaging in 28-lb paper bags of the coal only. The material supplied to the building was altered by the time the coal left the building in these paper bags. Indeed in my view any such alteration is not essential to involve subjecting the goods to a process. To bring the coal under the operation of a process is enough, and in the present case, where the activities in this building do admittedly constitute a process, it seems to me clear that the goods which pass through that process were subjected to it.”

Mr Brennan relied in particular on the statement that alteration of the goods was not essential to a process.

42. All the judges agreed that alteration was not essential, but each of them regarded the

separation of the dross and the cleaning of the coal as an essential ingredient of the

“process”. For example at p. 683, Lord Migdale said:

“Now I am unable to find any warrant in the Sub-section for requiring that the nature or size of the material must be altered before one can say that it has been subjected to a process. In my opinion, when the coal was cleaned and then packed into containers of a convenient size it was subjected to a process. “Subjected to” means that it went through a process, and “process” means some course of operations. It started this operation or series of operations as a stream of dirty coal but it ended up as clean coal in an attractive wrapping. The nature of the material remained the same but it had been made more marketable and will probably attract a higher price for the same weight than if it had been sold unscreened in a large and dirty sack.”

Lord Guthrie made much the same point at p. 681, adding that he did not think the mere conveyance of goods from one part of the building to another would be their subjection to a process. Process, he said, “involves the treatment of the goods in some way” such as occurred in that case. To similar effect was Lord Cameron at p. 684, and at p. 685 he added:

“The word “process” in its ordinary connotation seems to me to mean no more than the application of a method of manufacture or adaptation of goods or materials towards a particular use, purpose or end, while “to subject” means no more than to treat in some manner or other.”

43. The basis of the decision in the Kilmarnock Equitable case was that the subjection of goods  to  a  process, for  the  purposes of  section  18(1)(e), need  not  involve  any alteration in the nature of the goods but it must involve their treatment or adaptation.

44. I  do  not  think  that  the  appellants  can  get  any  support  for  their  case  from  the judgments in the Kilmarnock Equitable case. The treatment of the coal in that case was significantly different from the operations involving the items of clothing, or indeed the boxes in which they arrived, in the present case. The coal arrived in a single mass. It was screened and dross was removed, and the clean coal was then packaged in relatively small bags of identical size. The judges were unanimous in stressing the cleaning of the coal and the removal of dross. This clearly involved the treatment or adaptation of the goods which had first arrived at the building. There is in my view no analogous process in the present case.

45. Buckingham v Securitas Properties Ltd involved a claim for capital allowances in respect of expenditure on the construction of a building which included a secure area occupied for the purposes, among others, of storage and wage-packeting of large sums of cash. The building was owned by the taxpayer and let to another company (Group 4). Group 4 provided wage-packeting services to employers, who supplied Group  4  with  a  cheque  for  the  total  payroll  and  individual  payslips  for  each employee. Group 4 would present the cheque and transport the cash to the secure premises. At the secure premises, the cash was broken down into smaller amounts and then the exact amount required for each employee, together with the appropriate payslip, was put into a packet and sealed. Care was taken to put notes of varying denominations in each pay packet. Group 4 subsequently distributed the pay packets in a number of different ways.

46. Slade J, sitting in the Chancery Division, allowed the Crown’s appeal against the decision of the General Commissioners. He did so on the grounds that cash and money  were  not  “goods”  within  the  contemplation  of  the  relevant  statutory provisions. He expressed the view, in slightly tentative terms, that the treatment of the cash at the secure depot would amount to subjection to a process for the purposes of those statutory provisions:

“I would be inclined to accept Mr. Pinson’s submission that, if the subject- matter  of  Group  4’s  activities  in  the  wage-packeting  area  constituted “goods”, then such activities constituted a subjection of such goods to a process, within the meaning of the subsection. As he pointed out, the coins and notes came into the security area in bulk form and left it reduced to individual wage-packets, after being dealt with through the activities of a staff requiring numeracy and accuracy, who had to take care that each wage packet contained the right amount and selection of notes and coins, broken down according to the employer’s specifications. I am inclined to think that these activities did involve the subjection of the coins and notes to a “process”, within the ordinary meaning of words and within the meaning of the subsection, even though it could not be said that their texture, substance or value was altered by such activities. I derive some support from the Kilmarnock case, where Lord President Clyde, at page 679, specifically said that in his view alteration of the material in question (in that case, coal) was not essential to involve subjecting it to a process.” ([1980] 1 WLR at 386E- G)

47. Girobank plc v Clarke concerned a claim for capital expenditure in respect of a building which was used as the paper processing centre for its banking business. The operations conducted at the centre are summarised in the headnote in (1979) 70 TC

387 as follows:

“…receipt of paperwork, conversion into information on magnetic tape, sending that information by telephone link to a computer elsewhere, and sorting cheques for forwarding to clearing banks. Various machines were used in these processes, and manual operations were also involved.”

48. The taxpayer’s appeal failed before the Special Commissioners, the High Court and the Court of Appeal, but on different grounds at each level. The Court of Appeal dismissed the appeal on the grounds that, applying the decision and reasoning of Slade J in Buckingham v Securitas Properties Ltd, the cheques and other documents which were dealt with at the processing centre were not “goods or materials” within section 18(1)(e).

49. The aspect of the case which is important in the present context is that at each stage the Crown submitted that the cheques and other documents were not subjected to “a process” at the centre. The submission was accepted by the Special Commissioners but rejected by Lindsay J in the High Court. The Court of Appeal considered this point, without reaching a concluded view on it.

50. Nourse LJ considered the question “though briefly”: [1998] 1 WLR 942 at 947-948.

He cited the view of Lindsay J on the requirements for a “process”:

“… I find nothing [in the legislation and the authorities] that limits the very broad width of ‘any process’ to processes only of an ‘industrial’ character, if by that is meant that something has to be made by the process, or that the operations have to be carried out only or chiefly by machines. Nor is it required of a process that it alters the goods and materials subjected to it in any way but rather it may suffice of a process that it should clean, sort or package  the  goods  or  materials  fed  into  it.  I  hold  also  that  it  is  no requirement of a process that it should be done with a view to the sale or disposition of the goods or material processed but that ‘a process’ does connote a substantial measure of uniformity of treatment or system of treatment, in contrast (although doubtless the line will sometimes be difficult to draw) with individual treatments of the kind given, for example, to cars serviced in a garage or patients in a doctor’s surgery.”

Commenting on this passage, Nourse LJ said at p. 948B-C:

“Having already held that the commissioner did not misdirect himself as to goods or materials, I do not find it necessary to express a concluded view as to subjection to a process. I think it is a difficult point. As at present advised, I rather prefer the view of the judge. But even if I was sure that he was right, I would, for the reasons already stated in relation to goods or materials, hold that s 18(1)(e) was not satisfied.”

Schiemann LJ agreed with the judgment of Nourse LJ.

51. Brooke LJ agreed that the appeal should be dismissed. As I read his judgment, he was clear in his view that the operations at the centre did not involve the subjection of the cheques and other documents to a “process” for the purposes of section 18(1)(e). He said at p. 950:

“Nourse L.J. has set out in his judgment the commissioner’s description of the activities being carried out at the Wigan centre. Documents pour into the centre in their thousands where they are read by different means, varying from the use of human eyesight to the use of technological wizardry, before being sifted and sorted and tidied up. The information contained on the face of the documents is then converted into information recorded on magnetic disc or magnetic tape. Whatever the original method of conversion the information is ultimately all lodged on magnetic tape so that it can be sent by telephone link to a Girobank mainframe computer some miles away.

It would, in my judgment, be an abuse of language to say that what was going on in those premises involved subjecting goods or materials to a process so as to constitute the building an industrial building for the purposes of Part 1 of the Capital Allowances Act 1990, and the commissioner was correct when he reached the conclusion that this was not what was happening there. I agree with Nourse L.J. in his approach to the judgment of Slade J. in Buckingham v Securitas Properties Ltd [1980] 1 WLR 380; 53 TC 292. The documents pouring into that centre for the purposes for which it was erected were not “goods or materials” being subjected to a process within the meaning of s 18(1)(e) of the 1990 Act, and the Judge was wrong to hold that they were.”

Mr Brennan suggested that  in  this passage Brooke LJ was referring, not to  the process, but to the identification of the cheques and other documents as goods or materials as being the abuse of language. I do not accept this. The second half of the second paragraph cited above deals with the categorisation of the documents. The first half, referring to the abuse of language, follows the description of the process given by Brooke LJ in the preceding paragraph and appears to me to be expressing agreement with the conclusion of the Special Commissioner at p. 405 that what was being processed was not the documents but the information on the documents.

52. Mr Grodzinski QC, appearing for HMRC, referred me to the decisions of Dillon J and the Court of Appeal in Vibroplant Ltd v Holland (1981) 54 TC 658 and the decision of Lightman J in Bestway (Holdings) Ltd v Luff (1998) 70 TC 5112.

53. Vibroplant Ltd v Holland concerned a claim for capital allowances in respect of expenditure on buildings in which plant, used by the taxpayer in the course of its plant hire business, was cleaned, serviced and, as may be necessary, repaired after each hiring. Dillon J agreed with the Special Commissioners that the operations conducted  within  the  building  did  not  involve  the  subjection  of  goods  to  any “process”. He said at p. 666:

“The essence of the treatment which is provided in these buildings is that it is individual for the particular defects or needs of a particular piece of plant; each item is treated individually. By contrast, in my view “process” connotes a substantial measure of uniformity of treatment or system of treatment.”

He considered that these operations were no different from those of an ordinary garage where cars are serviced and repaired according to their particular requirements or a doctor’s surgery where patients are treated for their individual ailments. The Court of Appeal, in a judgment of the court delivered by Templeman LJ, agreed with Dillon J and specifically approved the passage cited above. This decision establishes that to constitute a “process” for the relevant purposes there must be a substantial measure of uniformity of treatment or system of treatment.

54. Bestway (Holdings) Ltd v Luff concerned a claim for capital allowances for a building in which goods, to be sold by subsidiaries of the taxpayer on a wholesale basis in a number of cash and carry supermarkets, were unpacked, checked and sorted, repackaged and labelled and their product codes read. Lightman J agreed with the Special Commissioners that no “process” as required by the relevant legislation was involved in these operations. At pp 539-541 he summarised in seven sub-paragraphs the “limited” guidance to be derived from the authorities, which by then included the decision of the Court of Appeal in the Girobank case. The guidance included that it was not sufficient that “anything is done to goods”. Mere conveyance of goods was