Melluish (Inspector of Taxes) v BMI (No 3) Ltd and related appeals
| Jurisdiction | England & Wales |
| Judgment Date | 27 January 1994 |
| Date | 27 January 1994 |
| Court | Chancery Division |
Chancery Division.
Vinelott J.
James Munby QC and Timothy Brennan (instructed by the Solicitor of Inland Revenue) for the Crown.
Graham Aaronson QC and Paul Morgan QC (instructed by Denton Hall Burgins & Warrens) for BMI.
The following cases were referred to in the judgment:
Gough v Wood & Co ELR[1894] 1 QB 713
Hobson v Gorringe ELR[1897] 1 Ch 182
Holland & Anor v Hodgson & Anor ELR(1872) LR 7 CP 328
Sanders v Davis ELR(1885) 15 QBD 218
Costain Property Investments Ltd v Stokes (HMIT) TAXTAX(1984) 57 TC 688; [1984] BTC 92
Corporation tax - Capital allowances - Machinery and plant - Leases of plant to local authorities - Central heating installed in council houses - Other items such as swimming pool, lifts, crematorium equipment etc. - Whether plant fixed to land remained chattels which "belonged" to taxpayer - If property did not belong to taxpayer, whether expenditure was incurred before or after 11 July 1984 for material purposes -Finance Act 1971 section 44 subsec-or-para (1)Finance Act 1971, s. 44(1); Finance Act 1985 schedule 17Finance Act 1985, Sch. 17 (replaced by Capital Allowances Act 1990 section 24 subsec-or-para (1) part II chapter VCapital Allowances Act 1990, s. 24(1), Pt. II, Ch. V); section 102 section 103 schedule 2 group ndHousing Act 1985, ss. 102, 103, Sch. 2, ground 10.
These were appeals by the Revenue against decisions of the special commissioners that central heating systems installed in council houses occupied by tenants and also other equipment fixed to land occupied by local authorities "belonged" to the lessor within the Finance Act 1971 section 44 subsec-or-para (1)Finance Act 1971, s. 44(1) for the purpose of claiming capital allowances.
Five members of a group, Mercantile Group plc ("BMI"), carried on the trade of acquiring and hiring out plant and machinery. Between 1983 and 1985 BMI entered into 201 leasing agreements with local authorities, 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 items other than central heating were 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.
Master equipment leases between BMI and the local authorities provided for schedules to be inserted specifying the leased equipment and the precise terms on which it was to be leased. BMI authorised the local authority to purchase goods on behalf of BMI which BMI might then agree to purchase and let to the local authority. When the goods were identified and the terms were settled, a schedule would be completed for insertion in the lease.
The leases contained a clause specifying that the equipment in question should remain personal or movable property and should continue in the ownership of BMI notwithstanding that it was fixed to the ground.
The first question was whether BMI were entitled to writing down allowances under the Finance Act 1971 section 44 subsec-or-para (1)Finance Act 1971, s. 44(1) in respect of capital expenditure on the provision of leased machinery and plant installed on land belonging to local authorities. It was not disputed that the BMI companies were all carrying on a trade and that they incurred capital expenditure on the provision of plant for the purposes of the trade. The only question was whether in consequence of the incurring of the expenditure the plant could be said to belong or have belonged to them.
If the provisions of Finance Act 1971 section 44 subsec-or-para (1)s. 44(1) were not satisfied, the further question arose whether in any case where the expenditure was incurred after 11 July 1984 the taxpayers were entitled to an allowance under theFinance Act 1985 schedule 17Finance Act 1985, Sch. 17.
The BMI companies appealed against assessments to corporation tax disallowing capital allowances. The special commissioners allowed the appeals on the ground that, notwithstanding that the equipment was fixed to the land, it "belonged" to BMI because BMI was entitled to repossess it on expiry or termination of the lease. The equipment, with a few exceptions, was capable of being removed and had a second hand value for re-use or scrap.
The Revenue appealed to the High Court contending first that the equipment when installed became part of the local authority's land. The question whether a chattel had become a fixture and so part of the land was to be ascertained by reference to external physical circumstances; the motive and intention of the parties and any agreement between them that a chattel should remain a chattel could not determine whether it had become a fixture or not. It followed that, having become part of the local authority's land, the installation belonged to the local authority as the owner of the land. BMI had no estate or interest in the land and therefore no proprietary right to the installation; it had no more than a future right, on the expiry or early determination of the lease, to enter and sever the various component parts of the installation thereby restoring their character as chattels belonging to BMI. Until severance the installation could not be said to belong or have belonged to BMI.
A further question arose under the Finance Act 1985 section 59 schedule 17Finance Act 1985, s. 59 and Sch. 17 if the provisions of the Finance Act 1971 section 44 subsec-or-para (1)Finance Act 1971, s. 44(1) were not satisfied.Finance Act 1985 schedule 17Schedule 17 was to apply in respect of expenditure on plant and machinery fixed to land incurred after 11 July 1984. Under Finance Act 1985 schedule 17 subsec-or-para 3Sch. 17, para. 3 a lessor and an lessee of plant and machinery fixed to land might elect for the plant and machin ery to be treated for "material purposes" (i.e. capital allowances) as belonging to the lessor.
BMI submitted that Finance Act 1985 schedule 17 subsec-or-para 3Sch. 17, para. 3 should be widely construed to give effect to the underlying purpose of the legislation, namely to encourage expenditure on machinery and plant, a purpose which would be achieved in the present case if BMI were enabled by the availability of capital allowances to offer more favourable leasing terms to local authorities than would otherwise be the case.
In relation to the central heating systems BMI also relied on the Housing Act 1985, Sch. 2 which entitled a landlord to possession if necessary in order to carry out work on the building (subject to finding suitable accommodation for the tenant).
Held, allowing the Revenue's appeal in part:
1. Judged by objective criteria the equipment became part of the local authority's land. An agreement that the equipment should "remain personal or removable property" could not contradict the plain and obvious legal consequence of the incorporation of the equipment as part of the land. It made no difference whether a right of entry could be implied or not. In the absence of notice of BMI's contractual right to remove the equipment a purchaser would take the land with the equipment fixed to it as part of the land. Holland v Hodgson ELR(1872) LR 7 CP 323 and Hobson v Gorringe ELR[1897] 1 Ch 182 followed.
2. It did not follow that the equipment "belonged" to the local authority. The local authority had no right to retain the equipment except during the term of the lease and on payment of rent. In the ordinary sense of the word, the equipment other than the central heating systems "belonged" to BMI. Stokes (HMIT) v Costain Property Investment Ltd TAX[1984] BTC 92, per Fox LJ at p. 98 followed.
3. In relation to the central heating systems, tenants of council houses had a legal estate in the land and whether they were already in occupation when the central heating was installed or whether they came into occupation thereafter they were in the position of bona fide purchasers for value. They enjoyed their tenancies free from any right of BMI to enter and remove the central heating or to require the council to enter on its behalf. The fact that a council house tenant had only a limited interest was immaterial. A tenant's legal estate prevailed over any contractual right of BMI to enter and repossess. BMI ceased to have any proprietary interest in equipment installed in tenanted council houses.
4. A landlord's right to possession in the circumstances set out in the Housing Act 1985, schedule 2 group ndSch. 2, ground 10 could not enable a local authority to remove the central heating from a tenanted house. To do so would be an abuse of the power to vary a tenancy under section 102 section 103ss. 102 and 103of the Act.
5. The system of allowances and the machinery for making the allowances available provided by the Finance Act 1985 schedule 17Finance Act 1985, Sch. 17 could not have any application to a leasing transaction involving a local authority which was exempt from income and corporation tax. It was not possible to spell out of the legislation any overriding purpose which would assist in the construction of Finance Act 1985 schedule 17 subsec-or-para 3Sch. 167, para. 3, the purpose of which was to enable an allowance which would have been available if the equipment lessee had incurred the relevant capital expenditure to be made available for the benefit of the person who incurred the expenditure.
1. At a hearing before us (Mr D A Shirley and Mr T H K Everett) on 13-17 and 20-23 January 1992, BMI (No. 3) Ltd appealed against an assessment to corporation tax on profits of £10,000,000 for the accounting period 1 April 1986 to 31 March 1987. In that period all five companies were carrying on the trade of acquiring and hiring out chattels under leases at a rent for a term of years.
2.(a) The...
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