Next Distribution Ltd and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 25 June 2012 |
| Neutral Citation | [2012] UKFTT 405 (TC) |
| Date | 25 June 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2012] UKFTT 405 (TC)
Judge Adrian Shipwright, Ruth Watts Davies FCIPD MIH
Timothy Brennan QC, instructed by PWC appeared for the Appellant
Sam Grodzinski QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
Corporation tax - whether industrial buildings within CAA 1990, Capital Allowances Act 1990 section 18s. 18? - on facts - no - appeal dismissed
The First-tier Tribunal decided that the taxpayer companies' buildings did not constitute industrial buildings or structures as they failed to satisfy the requirements under the Capital Allowances Act 1990 ("CAA 1990"), Capital Allowances Act 1990 section 18s. 18. It held that the goods received by the taxpayers were not the bulk, but the individual items which were comprised in the bulk. Such individual item that came into the buildings as part of the bulk load was not physically changed, although a label or further packaging was attached to the packaging of the goods in question. The Tribunal found that such work was not a major component in the activities in the buildings, but was essentially ancillary. The Tribunal also held that there was no subjection of goods to a process as the goods remained unchanged. It added that attaching an address label was not sufficient to meet the requirement. The Tribunal also found that there was storage of goods in the buildings and that it was part of one of the taxpayers' trade. It also considered that the goods had arrived in the UK before arrival at the buildings. Thus, the Tribunal held that there was no storage in the buildings on arrival in the UK from outside for purposes of CAA 1990, Capital Allowances Act 1990 section 18s. 18. Accordingly, the conditions in CAA 1990, Capital Allowances Act 1990 section 18s. 18 for industrial building allowances ("IBAs") were not met.
The taxpayer companies ("NDL", "NGP", and "PGL") jointly appealed against HMRC's decision, denying their claim to IBAs for the accounting periods ending 31 January 1998 to 31 January 2001. The decision followed HMRC's enquiries in to the taxpayers' corporation tax returns for those accounting periods.
The taxpayers were part of a sub-group of companies under NGP which was a wholly-owned subsidiary of a holding company ("NPLC"). PGL was a wholly-owned subsidiary of NGP that owned NDL. NGP's principal activities comprised three divisions: management services, estates management, and property development. NGP had an interest in over 500 properties, the vast majority of which were occupied for the purposes of its businesses. Those interests included freeholds of a land on which the two warehouse buildings ("the buildings") subject of IBA claims stood. NGP, whose principal activity was commercial property management, granted a lease to PGL out of the freehold interest it held in that land. PGL then sublet the buildings to NDL during the course of their construction in South Elmsall. Consequently, PGL transferred its business and net assets to NGP and became dormant.
NDL was established as a new operating company to carry on warehousing and distribution services. It acquired the existing warehousing and distribution activities of NPLC in August 1997. It commenced a separate trade of warehousing and distribution services which it provided exclusively to a company ("NRL") until 2007. Since then, its services had been provided to third parties.
The taxpayers' total expenditure incurred on the buildings was £19,264,856. The expenditures covered the cost of land preparation, walls and roofs for the buildings, car park and vehicle access areas, as well as other building works which were not incidental to the installation of plant and machinery.
NDL received the goods in question essentially for NRL's business for the relevant periods. It would not sell such goods. Most of those goods came from abroad and generally to the UK by sea or air. The goods that came by the sea were unloaded from the ship, usually onto railway wagons, and sent to a railway depot. The containers were then loaded onto lorries and driven to Doncaster. The goods that came by air arrived at the airport and were made available for collection. They were loaded onto lorries and driven to Doncaster. The stocks were not opened since leaving the port of origin and arriving at the buildings for unloading at dedicated loading bays. Such stocks were either boxed or hanging. Boxed stock items were smaller garments or those which could be folded and packed for delivery to the buildings in boxes. Boxed goods were often packed in bulk delivery cartons ("BDC"). Those BDCs needed to be kept in shape so that they could run easily in the automated systems. Hanging stocks were generally jackets, coats and dresses delivered on hangers.
NDL would receive from third-party suppliers bulk orders of boxed and hanging goods. NDL received boxes and hanging poles of identical garments. NDL held goods received in the UK from suppliers. The activities in its trade included, among others, receiving goods, breaking down bulk deliveries, checking and quality control, collation, stock control, organisation, labelling, despatching of goods, and the like. Stock was stored in the buildings to cover the different selling periods of the different sales cycles. NDL's activities had to fit in with this so that it could happen as and when required.
NDL also had to have in place procedures to deal with unpopular stock that did not sell in stores. Unsold stock would ultimately be destined for sale in NGP's clearance stores or occasionally in the staff stores. In the first instance, unsold stock was held by each store or local depot to be sold in the next calendar sale period. If the item was not sold it would be returned to NDL. Once items were returned to NDL, the items needed first to be sorted. NDL would put all the same items together, grouping for example, all coats, trousers or shirts. NDL would then usually place those items into storage for six months. Goods which were returned had to be refurbished, i.e. cleaned or pressed as appropriate, repacked, and put back into the business, so these products would be returned to storage by NDL and then taken out of storage again to meet future orders. Directory stock was generally held no longer than three months.
The taxpayers contended that the conditions CAA 1990, Capital Allowances Act 1990 section 18 subsec-or-para 1s. 18(1) were fulfilled. They said that buildings were used to subject the goods that were stored there to a process. The process consisted of "stepping down" the bulk delivery of goods into smaller parcels of goods (which might be just one item) so they were more marketable. These items could not be sold in the right way from the container or trailer. They had to be directed to a retail store or directory customer having been checked to ensure that they met the quality standards. In the meantime, they had to be held or stored. They argued that the buildings were used to store goods on their arrival in the UK from a place outside it. NRL's activities were not ancillary to a trade involving the sale of goods by NRL, but were a trade which consisted in the storage and transport of goods which met the requirements of CAA 1990, Capital Allowances Act 1990 section 18s. 18.
The taxpayers argued that there was storage of goods on their arrival in the UK. NRL had to have storage available because it knew its stock would come in and out. It had to be kept somewhere and by someone and NDL did this. The taxpayers added that the test of whether there was storage was not whether there was payment by time for use of an area. This might be relevant to whether there was a licence or a lease of a warehouse. But, NDL was not licensing or leasing its warehouse. It remained in occupation of the warehouse and took in someone else's goods to store them. The taxpayers also argued that there was no linkage to sea and air now to be found in the provision. Arguments based on serving ports and airports had thus disappeared.
The taxpayers further argued that CAA 1990, Capital Allowances Act 1990 section 18s. 18 no longer referred to arrival into the UK. It was not appropriate to cut the analysis of the term on arrival out of its old statutory context, and to paste it into its new context. Neither was it appropriate to do this with storage. That NDL received the goods for NRL did not mean they had reached their destination. On arrival should be interpreted as reason and good sense required (Copol Clothing Ltd v Hindmarch (HMIT)TAX[1984] BTC 35. Reason and good sense required congruence between the impact of customs duties, VAT and IBA, where they all depended on on arrival.
HMRC argued that the requirements of CAA 1990, Capital Allowances Act 1990 section 18s. 18 were not met. They said that there was no subjection of goods to a process, which involved the treatment of goods in some way. There should be a method of manufacture or adaption of the goods towards a particular use. Receiving of goods could neither be a process no matter how automated or on how large a scale. Removing the goods from their bulk packaging, or collating, organising, packing and dispatching the individual items did not amount to subjecting goods to a process.
HMRC also argued that the buildings were used not for purposes of a trade, which consisted in the storage of goods or materials. This should simply be for the keeping of goods, not storage as an adjunct to other activities. The taxpayers erred in their approach that the requirement was met simply because the goods were stored at the buildings. There was undoubtedly some storage of the goods at the buildings, but the storage was not an end in itself. Rather, it was incidental to the collection, sorting and distribution activities carried out by NDL. It could not be said that the storage of the goods in the buildings was in any sense a viable section of NDL's trade...
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