Capital allowances – Corporation tax – Industrial buildings allowance - Warehouse

Revenue & Customs Commissioners v Maco Door & Window Hardware (UK) Ltd: HL (Lords Hoffmann, Scott of Foscote, Walker of Gestingthorpe, Mance, Neuberger of Abbotsbury): 30 July 2008

The appellant commissioners appealed against a decision ([2007] EWCA Civ 545, [2007] Bus LR 1686) that ­expenditure on a warehouse and ­distribution centre qualified for capital allowances under section 18(1)(f) of the Capital Allowances Act 1990, because the building was in use for the purposes of part of a trade, which consisted in the storage of goods or materials which were to be used in the manufacture of other goods or materials. The respondent (M) traded as an importer and distributor of ­products manufactured by its Austrian parent company.

The products were hardware, such as locks, handles and hinges, to be ­fitted to a wide range of PVC doors and windows produced by other ­manufacturers. M purchased its stock from its parent and sold it to ­wholesale distributors or direct to manufacturers of doors and windows as a principal, not as an agent. The nature of its business meant that M had to hold large and varied stocks at its warehouse and distribution centre. M had claimed writing-down allowances under section 3 of the act in respect of the distribution centre as an industrial building, on the basis that part of its trade was storage of goods within section 18(1)(f)(i) of the act, but the commissioners had amended M’s self-assessments so as to disallow the claims, taking the view that no part of M’s trade was storage. The issue turned on the effect of section 18(2) of the act, which provided that the ­provisions of section 18(1) ‘shall apply in relation to a part of a trade... as they apply in relation to a trade’. M ­contended that ‘a part of a trade’ in section 18(2) referred to any activity which formed a component of the ­taxpayer's trade, such as an activity which was ancillary to, or inherent in, that trade. The commissioners argued that it only applied to any activity which was itself a trade, although ­carried on as part of a taxpayer’s ­composite trade.

Held: (Lords Scott and Mance ­dissenting) Section 18(2) and its place within section 18 showed that it was concerned with part of a trade which was a qualifying trade under section 18(1). There was a clear and important distinction between a trade and an activity undertaken in the course of a trade. The second half of section 18(2), which referred to the case where ‘part only of a trade or undertaking ­complies with the conditions set out in sub-section (1)’ suggested that the ‘part’ must be something that had the same sort of characteristics as the trade as a whole or was an activity in the nature of a trade. To come within section 18(2), ‘a part of a trade’ must be not simply one of the activities ­carried out in the course of a trade, but a viable section of a composite trade which would still be recognisable as a trade if separated from the composite whole, Bestway (Holdings) Ltd v Luff (Inspector of Taxes) [1998] STC 357 ChD approved. It was not enough to be able to isolate some activity ­carried on in the course of a vertically integrated trade, even if that activity was significant, separate and ­identifiable. As a matter of strict logic, the second part of section 18(3) was unnecessary on the commissioners’ construction, but it was not ­inconsistent with that construction, and had originally been enacted to put beyond argument a point about repair which had arisen in another case, Vibroplant Ltd v Holland (Inspector of Taxes) [1982] 1 All ER 792 CA (Civ Div) considered. The other cases relied on by M were not authority for M’s case that it was not necessary for part of the trade under section 18(2) to be a qualifying trade under section 18(1), Inland Revenue Commissioners v Saxone Lilley & Skinner (Holdings) Ltd [1967] 1 WLR 501 HL, and Kilmarnock Equitable Cooperative Society Ltd v Inland Revenue Commissioners [1966] SLT 224 IH (1 Div) considered.

Appeal allowed.

Timothy Brennan QC, Akash Nawbatt (instructed by the in-house solicitor) for the appellants; Giles Goodfellow QC, James Rivett ­(instructed by Gregory Rowcliffe Milners) for the respondents.