Maco Door and Window Hardware (UK) Ltd v HM Revenue and Customs
| Jurisdiction | England & Wales |
| Judge | Mr Justice Patten |
| Judgment Date | 19 July 2006 |
| Neutral Citation | [2006] EWHC 1832 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CH/2005/APP/0888 |
| Date | 19 July 2006 |
[2006] EWHC 1832 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr Justice Patten
Case No: CH/2005/APP/0888
Mr Timothy Brennan Q.C (instructed by HMRC Solicitors) for the Appellant
Mr Giles Goodfellow Q.C (instructed by Gregory Rowcliffe & Milners) for the Respondent
Hearing dates: 3rd and 4th May 2006
Introduction
Since 1945 it has been possible to write down against the profits of a business for the purposes of calculating its liability to tax the capital expenditure which it has incurred on buildings or structures in use for the purposes of certain specified trades and undertakings. The current legislation is contained in the Capital Allowances Act 2001, but on this appeal I am concerned with the provisions of the Capital Allowances Act 1990 ("the 1990 Act").
HMRC appeal against a decision of a single Special Commissioner (Dr John Avery Jones) released on 25 October 2005 who allowed the appeal of the taxpayer, Maco Door & Window Hardware (UK) Limited ("Maco") against the refusal of its claim for industrial buildings allowances in respect of a warehouse with office and lecture room facilities at Eurolink Business Centre, Sittingbourne, Kent. The allowances were claimed in respect of the accounting periods ended 31 December 1999 and 31 December 2000.
This appeal lies of course only on a point of law and I can take the facts found by the Special Commissioner as set out in paragraph 2 of his decision:
"(1) The Building comprises 4,445 square metres of which 855 square metres is a high-bay warehouse allowing storage of products on 15 levels, and 1,497 square metres is a distribution building also containing storage for items too large to fit on standard size pallets. The Building can hold 5,500 pallets. In addition there are offices and a lecture theatre, and an area with equipment for testing products.
(2) The Appellant's business is that of importing products manufactured by its Austrian parent company, Mayer & Co Beschlage GmbH ("Mayer"), promoting and selling them in the UK. The products are hardware for the PVC window and door market, such as locks, handles, espagnolettes, hinges and strikers. There is a substantial number of different shapes, sizes and styles for each product required to fit a large number of different sized and styled windows and doors. The products are compatible with 70 different types of window extrusions. For example, the sales literature showed four different types of door lock and 9 colours of handles. There are regular changes in design necessitated by changes in design by the window and door fabricators. The Appellant currently holds 2,300 different items of stock.
(3) Mayer mainly manufactures for the mainland European market for which the products are standard. The UK market, on the other hand, has different products because tilt and turn window fittings are different in the UK. Normally in the rest of Europe, at the first position of the handle (at right angles to the closed position) the window opens inwards, and at the second position (opposite the closed position) it tilts. In the UK, in the first position the window tilts and in the second it opens but outward, which reduces the risk if a child opens the window to the first position. A tilt and turn window requires about 21 different fittings sold by the Appellant and completely different designs of most of these are required for the UK market. Of the products held by the Appellant 85 to 90 per cent are made solely for the UK market. The UK market represents 13 to 14 per cent of Mayer's total market.
(4) Because UK products have to be manufactured separately by Mayer, the standard ordering time is six weeks. Mayer's factory is set up to produce products in large batches. Products can be ordered and supplied in a shorter time than 6 weeks if Mayer can fit the order into their production, but Mayer might say this is not possible for a particular order. Manufacturing products for the UK market alone requires the machines to be re-tooled, a process that takes three hours and therefore interrupts the larger production for the mainland European market, which is uneconomic to do for small orders. Accordingly Mayer requires the Appellant to place orders for minimum quantities. The Appellant cannot obtain products for the UK market from any of Mayer's other subsidiaries because they will not hold products manufactured for the UK market. By way of example of the time taken, a purchase order made on 21 February 2005 was for three items with a required delivery date of 25 February 2005, a further three items for 14 March 2005 and 35 items for despatch on 4 April 2005 (6 weeks). Despatch was on 31 dates between 23 February 2005 and 1 June 2005 (more than 14 weeks) with arrival about 3 days later, 19 of which were up to 4 April 2005 and 12 after that date. The largest item ordered for 4 April 2005 was despatched in 8 parts between 15 March and 29 March 2005. I infer from this that the 6 weeks is a standard time requested by Mayer and production is fitted into Mayer's schedule resulting in some products being despatched more quickly and some more slowly than the 6 weeks, so that the Appellant cannot rely on despatch within 6 weeks. Mayer does not store any products manufactured for the UK market. If it produces more than is ordered for the UK market the excess is sent to the Appellant.
(5) The Appellant's customers are primarily wholesalers ("distributors") who sell the products in smaller quantities to window and door fabricators. A few large fabricators are direct customers. Customers, whether distributors or fabricators, do not hold large stocks and expect orders to be delivered within 7 to 10 working days. The Appellant can deliver in 3 to 5 working days, or overnight in emergencies. In some cases customers make forward orders roughly corresponding to the Appellant's six weeks ordering time from Mayer. During January to June 2005 these forward orders amounted to 11 per cent of items, 17 per cent of quantity, 18 per cent of value and 7 per cent of order quantities, which is considered to be representative of the period under appeal. Even when customers have ordered in advance it may be commercially necessary to use part of a delivery to satisfy short-term orders.
(6) It is important to the Appellant's business that it holds sufficient stock to satisfy orders otherwise fabricators will be forced to use the Appellant's competitors' products completely; parts of different manufacturers are not interchangeable. I saw letters from two of the largest customers saying that since the Building opened problems of obtaining supplies of Maco products had greatly reduced which had resulted in increased ordering of them. The Appellant's speed of delivery and stock levels are understood to be better than many of its competitors.
(7) Products are sold by the Appellant with a ten-year guarantee corresponding to the guarantee that fabricators offer to their customers. This requires the holding of products that are no longer manufactured (and for which further manufacture by Mayer is not possible as the tooling is not retained when manufacturing ceases) in case the Appellant needs to replace these, which is more cost-effective than repairing them. About 2.5 per cent of the stock held in the Building is of obsolete products. Such stock is available for sale.
(8) The high-bay part of the Building contains the most hi tech equipment available enabling orders to be picked, packed and despatched quickly. A crane is moved on rails automatically to the place where the product is found and takes a pallet which is then automatically loaded onto a conveyor belt for despatch. Many of the customers' orders are for a whole pallet of a particular product, but smaller quantities can be retrieved easily. The equipment can move quickly from one product area to another enabling the processing of smaller quantity orders of a range of items.
(9) Eight employees work on the receiving, breaking down bulk deliveries, storing, retrieving, packaging and despatching products.
(10) In the year to 31 December 1998 before the Building was opened the closing stock was £1.1m with a turnover of £12.1m corresponding to 5 weeks of sales. In the year to 31 December 2000, the first full year with the Building closing stock was £2.2m and turnover £14.3m, corresponding to 11.9 weeks of sales.
(11) Sales and ordering are dealt with in the office part of the Building. Customers do not visit the Building in connection with ordering. Eight salesmen are working away from the Building virtually all the time, visiting customers and potential customers, such as architects and local authorities to encourage them to specify Maco products. The salesmen do not take orders."
The relevant legislation is contained in s.18 of the 1990 Act which provides as follows:
"(1) Subject to the provisions of this section, in this Part "industrial building or structure" means a building or structure in use mdash;
…
(e) for the purpose 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 the 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 ….
(2) The provisions of subsection (1) above shall apply in relation to a part of a trade or undertaking as they apply in relation to a trade or...
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