Melluish (Inspector of Taxes) v BMI (No 3) Ltd and related appeals
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE DILLON |
| Judgment Date | 28 July 1994 |
| Judgment citation (vLex) | [1994] EWCA Civ J0728-6 |
| Docket Number | Nos. CHRVF/94/0178.0179. |
| Court | Court of Appeal (Civil Division) |
| Date | 28 July 1994 |
[1994] EWCA Civ J0728-6
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
(ON APPEAL FROM THE HIGH COURT OF JUSTICE)
(CHANCERY DIVISION)
(Mr. Justice Vinelott)
Before: Lord Justice Dillon Lord Justice Hoffmann and Lord Justice Saville
Nos. CHRVF/94/0178.0179.
0180.0181.0203/B
MR. J. MUNBY QC and MR. T. BRENNAN (instructed by Solicitors for the Inland Revenue) appeared on behalf of the Appellants.
MR. G. AARONSON QC, MR. P. MORGAN QC and MR. S. JOURDAN (instructed by Messrs. Denton Hall, London) appeared on behalf of the Respondents.
DILLON L.J.:— These proceedings involve five taxpayer companies, B.M.I. (No 3) Ltd, B.M.I. (No 6) Ltd, B.M.I. (No 9) Ltd, Barclays Mercantile Business Finance Ltd and Fitzroy Finance Ltd. They are members of a group of which the parent is Mercantile Group plc, a company associated with Barclays Bank plc. In relation to each of the five companies there is an appeal and a cross-appeal against a decision of Vinelott J given on the 27th January 1994. He had before him appeals by the Crown from decisions of the Special Commissioners in respect of each of the five companies. For the purposes of this judgment it is unnecessary to draw any distinction between any of the five companies; the issues are the same. It is also immaterial that in the cases of four of the companies the appeals to this Court are by the Crown and the cross-appeals are by the companies, while in the case of the fifth company the appeal is by the company and the cross-appeal is by the Crown.
The essential facts lie in a very small compass.
Each of the five companies carries on the trade of acquiring and hiring out plant and machinery to users. In all the cases with which we are concerned, the users have been local authorities who are freeholders of the premises in question. In all the cases with which we are concerned, the nature of the plant and machinery concerned is such that it has to be fixed to the structure of the building in which it is installed, and such that, on being so fixed, it would, on ordinary principles of the general law, be regarded as a fixture. The types of plant and machinery are various, e.g. lifts installed in council car parks, boilers installed in council offices, cremators installed in a council crematorium, plant and equipment installed in a council swimming pool and central heating installed in council flats or council houses and entry phone or alarm systems installed in blocks of Council flats. The only difference between these various types of plant and machinery which has any relevance to the issues in these proceedings is that in the case of central heating systems installed in council flats or council houses and entry phone or alarm systems installed in blocks of council flats, the flats or houses will, either at the time of the installation or shortly afterwards, have been let to council tenants on weekly tenancies; in all other cases the buildings in which the plant and machinery has been installed have at all times remained in the occupation of the local authority concerned.
I should stress that we are not concerned with the leasing by the taxpayer companies to local authorities (or any one else) of items of plant and machinery, being chattels for use in the local authorities premises —e.g. valuable office equipment —which are never fixed to the buildings in which they are used and so never lose their chattel status.
The question is whether in respect of these items of plant and machinery which have been leased by the five companies to local authorities and are such as by the ordinary law have become fixtures on installation, the five companies are entitled to tax allowances, in respect of the cost of acquiring and installing the plant and equipment, under relevant statutory provisions relating to income and corporation tax allowances.
The primary sections are in the Finance Act 1971.
Section 44, which is concerned with writing down allowances provides:-
"(1) Subject to the provisions of this Chapter where:-
(a) a person carrying on a trade has incurred capital expenditure on the provision of machinery or plant for the purposes of the trade and
(b) in consequence of his incurring the expenditure, the machinery or plant belongs or has belonged to him.
allowances …. shall be made to him" etc.
The key phrase is "machinery or plant belongs or has belonged to him." Precisely the same provision as section 44(1)(b) is to be found in section 41(1)(b) in relation to first year allowances.
On that wording, this Court held, in Stokes v Costain Property Investment Ltd [1984] 1 WLR 763, that where the taxpayer company installed plant and machinery, including central heating equipment, in premises of which it only had a 99 years lease, the plant and machinery became on installation a landlord's fixture, and therefore "belonged" within the meaning of the 1971 Act to the freeholder and not to the taxpayer company. The taxpayer company's claim to allowances under the 1971 Act therefore failed. Fox LJ said at 769F that the words "belong" and "belonging" were not terms of art; they were ordinary English words and would not be satisfied by limited interests. Robert Goff LJ said at 771H:-
"why it was thought right by the legislature to use in that section, or indeed thereafter, the expression 'belonging to' rather then 'owned by' nobody could explain. But it is plain that that is what is meant."
The Court did not, however, regard that construction, at which it was constrained to arrive, as satisfactory. In the event and in response to the Court's invitation, the ambit of the legislation was reconsidered by the legislature, and amending legislation was introduced by section 59 of and the 17th Schedule to the Finance Act 1985. But under section 59(2) of the 1985 Act the amending legislation only applies to expenditure incurred after the 11th July 1984, and only then if it does not consist of the payment of sums payable under a contract entered into on or before that date.
We have to consider the position first under the 197l Act on its own, since it is submitted for the companies that all the various items of plant and machinery have continued to belong to the relevant companies since they were installed, whether or not in law they became fixtures on installation. I therefore leave over for the moment the application under the 1985 Act.
So far as the 197l Act is concerned, Vinelott J. held
(l) that all the items of plant and machinery became fixtures on installation
(2) that, despite that, all the items installed in premises which the local authorities continued to occupy (i.e. all the items except central heating equipment etc. installed in council flats or council houses which were let to weekly tenants) continued to belong, and still belong to the companies and
(3) that 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 or her flat, including the fixture, without notice of any equitable or merely contractual rights of the relevant company. Therefore as against the tenant in occupation, the company had no right to enter and remove the central heating equipment etc.
In my judgment, the Judge was right on issues (l) and (3) for the reasons he gave, which I do not need to restate.
So far as issue (2) is concerned, the practice followed by the companies was that a company would enter as lessor into an Equipment Lease or Master Lease with a local authority as lessee well before any plant or machinery was acquired. This Equipment Lease was merely facultative at the outset and did not create at that stage any lease or other contract in respect of any property at all. It purported to relate to Equipment Rent Term and Location as stated in the Schedule, but the Schedule was initially blank. The practice was, as the evidence showed, that in relation to each particular installation a time came, probably just after the equipment had been installed, when the company paid the contractor's bills for supplying and installing the equipment, or reimbursed the amount to the local authority, and on the same day the company and the local authority signed what was called a Lease Schedule, as a Schedule, in respect of that equipment, to the Equipment Lease.
The Lease Schedule set out all the relevant details of the particular transaction, including identification of the equipment, the term, and commencing date of the term, of the lease, the rent and how it was to be paid, the rent payable if the lessee elected to renew the leasing, on a year to year basis upon the expiration of the original term and so-forth. The Lease Schedule plainly constituted a binding contract and lease, as of its own date, to the local authority of the particular equipment. But the Lease Schedule also contained a declaration that it had been agreed that the Lease Schedule should be read and construed as a Schedule incorporated in and forming part of the Equipment Lease.
One of the terms set out in the Equipment Lease thus incorporated into the Lease Schedule is Clause 3.10 which provides:
"3.10 As between the Lessor and the Lessee the Equipment hereby leased shall remain personal and moveable property and shall continue in the ownership of the Lessor notwithstanding that the same may have been affixed to any land or building. The Lessee shall be responsible for any damage caused to any such land or building by the affixing to or removal therefrom of the Equipment (whether...
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