Corporation tax – Capital allowances – Industrial buildings – Section 18 of the Capital Allowances Act 1990 – Appellant companies challenging refusal of claim for capital allowances in relation to expenditure on construction of business premises – Whether premises qualifying as industrial buildings – Appeal dismissed
The appellants were three companies in the Next group which carried on clothing and household goods retailing on a large scale both in shops and online. They operated from two buildings near Doncaster, built between 1997 and 1999, which had the capacity to hold over 20m items. The second appellant was the freehold owner of the land on which the building stood. It granted a lease of the land to the third appellant which, in turn, granted a sublease to the first appellant during the course of construction. The warehousing and other activities were carried on at the buildings by the first appellant as a separate trade of holding and distribution of goods in a group context.
The total expenditure incurred by the appellants on the buildings was £19,264,856, which 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. The respondents refused the appellants’ claim to allowances under section 3 of the Capital Allowances Act 1990, for the accounting periods from 1998 to 2001. The First Tier Tribunal dismissed the appellants’ appeal against that decision on the ground that the premises were not “industrial buildings” within section 18 of the 1990 Act. (Capital allowances on industrial buildings were abolished with effect from 2011.)
The appellants appealed. The issues for the Upper Tribunal were: (i) whether the goods in question were to be subjected to any “process”, in which case the buildings qualified as industrial buildings by virtue of section 18(e) and might also do so by virtue of paragraph (f)(ii); (ii) whether the buildings were used for the purposes of a trade consisting in the storage of goods, a condition which had to be satisfied before either paragraph (f)(ii) or (f)(iv) could apply; and (iii) whether the buildings were used for the storage of goods on their arrival in the UK from a place outside the UK, in which case the buildings qualified as industrial buildings by virtue of paragraph (f)(iv).
Held: The appeal was dismissed.
(1) In view of the association of the word “process” with “manufacture” in each of paragraphs (e) and (f) in section 18(1), processes of a familiar, industrial-like character fell or were very likely to fall within those paragraphs, but the courts had given a much wider meaning to the subjection of goods to a process. In circumstances where a word such as “process” was not defined by the legislation and was construed as bearing a wide meaning, there would be uncertainties as to what did or did not constitute a process: Kilmarnock Equitable Co-operative Society v Inland Revenue Commissioners (1966) 42 TC 675 and Bestway (Holdings) Ltd v Luff (1998) 70 TC 512 distinguished; Buckingham v Securitas Properties Ltd [1980] 1 WLR 380, Vibroplant Ltd v Holland (1981) 54 TC 658 and Girobank plc v Clarke [1997] PLSCS 352; [1998] 1 WLR 942 considered.
The operations at the buildings in the present case essentially involved the receipt of very large quantities of complete garments and other goods in bulk cases, their storage and the unpacking of the garments and other goods into smaller packages for delivery to retail outlets and online customers. That involved the selection of goods, by reference to size, quantity and colour, according to the requirements of the individual outlets and customers. The unpacking of goods received in large quantities, and their repackaging in parcels of smaller quantities, involving no treatment or adaptation of the goods in question, did not constitute the subjection of those goods to a “process” for the purposes of section 18(1)(e). The fact that it was done on a very large scale, to a great extent by automated mechanical means, did not affect the essential characteristics of the operation.
(2) Since the claim based on section 18(1)(e) failed, the claim that the buildings fell within section 18(1)(f)((ii) also failed since both provisions required that the goods or materials in question should be subjected to a “process”. For the purposes of the claim that the buildings fell within section 18(1)(f)(iv), the FTT had correctly found that the buildings were in use for the purposes of a trade which consisted in the storage of goods or materials. Even if the unpacking and allocation procedures did not take place at the buildings, the storage of goods belonging to the first appellant and other companies in the Next group by the first appellant would constitute a viable section of a trade which would be recognisable as a separate trade, i.e. the business of storage.
(3) The buildings did not qualify as industrial buildings under section 18(1)(f)(iv) as they were not in use for the purposes of a trade which consisted in the storage of goods or materials on their arrival in any part of the UK from a place outside the UK. The words “on arrival” involved some degree of immediacy and could not be treated as if they merely meant “after”. There was a requirement that the warehouse could, having regard to its location, be reasonably regarded in the normal course of its trade as providing a storage service in the UK for goods or materials in transit before they were delivered to their final destination: Copol Clothing Ltd v Hindmarsh [1984] 1 WLR 411 applied.
In the present case, the imported goods were purchased by a company in the same group and delivered to the buildings for storage by the first appellant. The goods could not be said to be in transit to their ultimate purchaser. They had been received by their ultimate purchaser. Goods which were purchased by online customers would be sent directly to those customers and goods destined for sale in retail shops would be extracted from the bulk containers and delivered to those shops. The fact that the storage was being undertaken by a separate company in the same group did not affect the position.
Timothy Brennan QC (instructed by PricewaterhouseCoopers Legal LLP) appeared for the appellants; Sam Grodzinski QC (instructed by the Solicitor to HM Revenue and Customs) appeared for the respondents.
Eileen O’Grady, barrister
