Maco Door and Window Hardware (UK) Ltd v Revenue and Customs [2007] EWCA Civ 545

[2007] EWCA Civ 545Case No C3/2006/1948
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
MR JUSTICE PATTEN
CH/2005/APP/0888
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 19/06/2007
Before
LORD JUSTICE CARNWATHLADY JUSTICE HALLETTLORD JUSTICE LAWRENCE COLLINS
Between
MACO DOOR AND WINDOW HARDWARE (UK) LTDAppellantCOMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMSRespondent
(Transcript of the Handed Down Judgment ofWordWave International LtdA Merrill Communications Company190 Fleet Street, London EC4A 2AGTel No: 020 7421 4040 Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Giles Goodfellow QC & James Rivett (instructed by Messrs. Gregory Rowcliffe Milners) for AppellantTimothy Brennan QC (instructed by HMRC Solicitor's Office) for RespondentHearing Hearing date : Monday 30th April, 2007
Judgment
[1]This is an appeal from a decision of Patten J, reversing the decision of the Special Commissioner (Dr Avery-Jones). The case concerned the correct classification, for the purposes of capital allowances, of expenditure on a building provided for the business of the appellant (“Maco”).[2]The facts were not in dispute and are set out in the judgment below. The main points can be summarised as follows: i) The building is at Eurolink Business Centre, Sittingbourne, Kent. It comprises 4,445 square metres of which 855 square metres is a high-bay warehouse, 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. The high-bay part of the building contains “the most hi tech equipment available” enabling orders to be picked, packed and despatched quickly. Eight employees work on the receiving, breaking down of bulk deliveries, storing, retrieving, packaging and despatching of products. ii) Maco’s business is that of importing products manufactured by its Austrian parent company ("Mayer"), and promoting and selling them in the UK. The products are hardware for the PVC window and door market, such as locks, handles, and other fittings. iii) Mayer mainly manufactures for the mainland European market for which the products are standard. Products have to be manufactured separately for the UK market, where different window fittings are used. The standard ordering time is six weeks. Mayer does not store any products manufactured for the UK market. iv) Maco’s customers are primarily wholesalers who sell the products in smaller quantities to window and door fabricators, and also a few large fabricators. Customers do not hold large stocks and expect orders to be delivered within 7 to 10 working days. It is accordingly important to the Maco’s business that it holds sufficient stock to satisfy orders. In addition, its ten-year guarantee requires the holding of products that are no longer manufactured. v) In 1998 before the new building was opened, the closing stock corresponded to 5 weeks of sales. In 2000, the first full year with the building, it corresponded to 11.9 weeks of sales.[3]The relevant legislation is section 18 of the Capital Allowances Act 1990, which provides: “(1) Subject to the provisions of this section, in this Part "industrial building or structure" means a building or structure in use— … (e) for the purposes of a trade which consists in the manufacture of goods or materials or the subjection of goods or materials to any process; (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;...(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 undertaking except that where part only of a trade or undertaking complies with the conditions set out in subsection (1), a building or structure shall not by virtue of this subsection be an industrial building or structure unless it is in use for the purposes of that part of that trade or undertaking. … (4) Notwithstanding anything in subsections (1) to (3) above, but subject to subsections (5) and (7) below, 'industrial building or structure' does not include any building or structure in use as, or as part of, a dwelling-house, retail shop, showroom, hotel or office or for any purpose ancillary to the purposes of a dwelling-house, retail shop, showroom, hotel or office.” (i) of goods or materials which are to be used in the manufacture of other goods or materials;... (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 ….[4]The Special Commissioner held that the expenditure qualified under subsection (1)(f)(i), as applied by subsection (2). Taking the elements in turn, he held: i) The building was used for storage; ii) The storage was a part of Maco’s trade; iii) As was common ground, the products stored in the warehouse were goods or materials “to be used in the manufacture of other goods or materials”.[5]The decision was reversed on appeal by Patten J. He held that, for an operation to be “part of a trade” within the meaning of the section “it must itself be an activity in the nature of a trade”. The storage activity in this case did not qualify, because it was carried out “to support the company's wholesale trading operation and not as a trading or commercial activity in itself” (para 40-41).

Authorities

[6]Section 18 reproduces, with some modifications, provisions first introduced in the Income Tax Act 1945. The most authoritative guidance is to be found in two Scottish cases, heard by the same Court of Session in February 1966, the second of which went to the House of Lords. They are Kilmarnock Equitable Cooperative Society Ltd v IRC 42 TC 675 (“Kilmarnock”) and Saxone Lilley & Skinner (Holdings) Ltd v IRC 44 TC 122 (“Saxone”). They were decided under section 271 of Income Tax Act 1952 Act, the material parts of which are in the same terms as section 18.[7]In Kilmarnock, a co-operative society carried on business as general merchants. A substantial part of its business was the sale of coal in 1cwt bags and in bulk. It also sold coal in 28 lb paper bags through its shops as part of its retail business and to other co-operative societies as a wholesaler. It erected a building at its coal depot for the machinery used to pre-pack the coal in the paper bags.[8]The Court of Session held that it was an industrial building, under section 271(1)(c) (equivalent to s 18(1)(e)) because the packing involved a “process”, and that it was not excluded by section 271(3) (s. 18(4)), as being a purpose “ancillary to the purposes… of a retail shop”. Lord Clyde noted an additional argument by the Crown that it was not used “for a trade or part of a trade” within section 271(2) (s 18(2)). Lord Clyde said:
“The argument was that if the Society's only trade was screening and packing of coal in paper bags then the situation might have been different, but this Society operated a trade of general merchants, and only a small part of their total operations involved paper packaging of screened coal. But the relative proportions of the Society's various activities appear to me to be quite irrelevant. The building in question houses a definitely identifiable part of their industrial operations and a quite separate activity, and that separate activity alone. This is in my view enough to satisfy the requirements of Sub-section (2).”
(p 680) This point was not in terms dealt with by the other members of the court. However, I think it is implicit that they agreed, since the argument if accepted would have been fatal to the taxpayer’s case. The Crown did not appeal.[9]In Saxone the provision under consideration was section 271(d)(iii) (equivalent to s 18(f)(iii)), which covers manufactured goods which have not yet been delivered to any purchaser. The taxpayer (a holding company) had a warehousing subsidiary (Jacksons Ltd). In its warehouse it kept shoes of two types, some manufactured by another subsidiary (Kilmarnock), and some bought in from outside suppliers. It was common ground that the Kilmarnock shoes qualified under the sub-section, whereas the latter did not. The different categories were not separated in the warehouse. The sole issue for the House of Lords was whether the storage of qualifying goods was “a part of the trade” of Jacksons, within section 271(2). The Crown did not pursue a contention that the use was within the retail shop exception. Lord Reid (with the agreement of the whole House) said:
“I reject the argument that there is no sufficient distinction between the ways in which the two kinds of shoes are treated to enable one to say that storing the one kind is one part of the trade and storing the other kind is another part. If a trader stores or sells or otherwise deals with two kinds of goods, A and B, I think that it is the ordinary use of language to say that dealing with A is one part of his trade and dealing with B is another part, and I see nothing in the context here to justify giving any other interpretation to ‘a part of a trade’ in s 271(2). The question therefore comes to be whether this warehouse is in use for the purposes of that part of the warehouseman’s trade which consisted in the storing of Kilmarnock shoes. Again taking the ordinary use of language, it appears to me that it clearly was. Premises can be and often are in use for more than one purpose, and I think that the whole of this warehouse was in use for both parts of the warehouseman’s trade, because both kinds of shoes could generally be found stored in every part of it.”
(p 139-40)[10]Closer on the facts to the present case are two first-instance cases, from which the Special Commissioner drew assistance: Crusabridge (1979 - HH Judge Finlay QC) and Bestway (1998 – Lightman J).[11]Crusabridge Investments Ltd v Casings International Ltd (1979) 54 TC 246 was not a tax case. It concerned a claim by a landlord of light industrial premises for breach of the user covenant in the lease. The tax issue became relevant, because the covenant tied the permitted use to the definition of "industrial building”, as defined by the Capital Allowances Act 1968. The tenant’s business consisted principally of purchasing used tyre casings for sale to remoulders. The tyres were stored and inspected to see whether they were suitable for making re-moulds. Those thought to be suitable were then consigned to a re-moulder. The nature of its business meant that at any one time there would be a large number of tyres stored in the building awaiting despatch to a re-moulder.

Judge Finlay held that the building was an industrial building.

(f) , because:

“… an essential part of the business of disposing of these used tyre casings to the remoulders is the storage of casings with a view to their sale and despatch to an appropriate potential customer.”
(p 249D) He did not think that it mattered that the storage was only part of the overall business. He reached this conclusion without referring to section 18(2), but by a broad interpretation of the term “consist in” in paragraphs (e) and (f), intended to reconcile Kilmarnock with an earlier first instance case, Dale v Johnson Bros (1951) 32 TC 487):
“… both paragraphs are referring to the purposes of a trade which involves, and so far as the user of the building in question is concerned, consists in, in the one case, the subjection of goods to a process and, in the other case, the storage of goods of the kind therein more particularly mentioned.”
(p 253)[13]Bestway (Holdings) Limited v Luff (1998) 70 TC 512 concerned a wholesale cash and carry business operated from a number of self-service supermarkets. The stores sold groceries, household goods, and other items. The customers were mainly retail traders and caterers, who had access to most parts of the store and were able physically to remove the goods they wanted to buy from the shelves. Goods were paid for at a checkout and most customers removed their purchases in their own transport. The Special Commissioners held that this was not an industrial building within paragraph (f) because the goods were not “stored”. Those items not available for immediate sale were – “… merely back-up stock held at a minimum level in order to ensure that an adequate supply is available for purchase by customers” (p 520) Lightman J upheld the decision but on broader grounds. Since his reasoning contains a detailed analysis of the authorities, and it forms the foundation of Patten J’s judgment in the present case, it is necessary to refer to it in more detail.[14]Referring to the meaning of “storage” he said:
“The authorities make clear that there may be "storage" where goods are kept or held for a limited period and indeed for shorter periods than the 6–8 week period during which Bestway's goods are in the building…. In this case what is critical is the nature of the enterprise intended to be carried on and actually carried on by Bestway at the buildings and the role played by the stock in that enterprise. For a building is only used for storage if the purpose of keeping goods there is their storage as an end in itself: there is no such use for storage if the goods are kept there for some other purpose: consider Kay v. Burrows & Others [1931] AC 454. All the stock in the present case is kept in the buildings, not for storage, but for sale… In short, as it seems to me, "storage" in s 7(1)(f) means keeping in storage as a purpose and end in itself, and does not extend to such storage as is merely a necessary and transitory incident of the conduct of the business of a wholesale supermarket. The goods enter the buildings upon their final journey to the customers. The 6–8 weeks of stock at any time in the buildings may be likened to stock on an extension to the open shelves or on a conveyor belt to the open shelves. Far from being kept in reserve, the stock is in the process or in the course of being made available to purchasers at the buildings.”
(pp 536-7) (The emphasised words in the last paragraph are a direct quotation from the speech of Viscount Dunedin in Kay v Burrows at p 485.)[15]Of the argument that this conclusion was inconsistent with Crusabridge, he said: “The decision in Crusabridge may be explained on its own facts, namely that there was in that case a finding that the collection and storage of tyres was “an essential part” of the business: see pages 248C–249G. But in any event I do not think that that decision should stand in the way of what is clearly the correct answer in this case.” (ibid.)[16]He also rejected the argument that the storage activities could be considered “a part of” Bestway’s trade, within the equivalent of section 18(2). He referred to the well-known passage in the judgment of Rowlatt J in Graham v Green (Inspector of Taxes) [1925] 2 KB 37 at 40, 9 TC 309 at 312— “ … a conception of a trade … differs in its nature, in my judgment, from the individual acts which go to build it up, just as a bundle differs from odd sticks. You may say, I think, without an abuse of language, that there is something organic about the whole which does not exist in its separate parts.”[17]He continued:
“Mr Brennan (for the Revenue) submits that the statutory language is 'part of a trade', and not 'any activity undertaken in the course of the trade'; and that it is not sufficient for an activity to be a component element in the trade. What is needed is (using the language of Rowlatt J) a bundle of sticks or activities which constitute a significant separate and identifiable 'part' of the building user's trade. His submission seeks to reflect the commercial reality that a trade may incorporate more than one separately identifiable 'part-trade'. Thus for example the trade of a garage proprietor may consist of two parts, a car showroom and a car repair shop. Likewise a trade may consist in making as well as selling surgical products… The choice between these two alternative constructions must depend on a consideration of the language used in s 7(2) in the context of the legislation as a whole with attention to the statutory purpose of the legislation. On such a consideration I am satisfied that Mr Brennan's construction is correct. The trade of a company or an individual includes all its activities ultimately directed towards making profits (see Rolls-Royce Motors Ltd v Bamford (Inspector of Taxes) [1976] STC 162 at 185 per Walton J). Its trade may be a composite one. Mr Brennan gave an apt example of the trade of a person carrying on a garage business. The use of a building for the composite trade may not qualify for allowances under s 7(1): but, if use for one of the two or more component parts does qualify, s 7(2) extends qualification for allowances to the part or parts of the building used for this qualifying purpose. I think that the primary purpose of s 7(2) is to make provision in this way for use of a building for a composite trade; and on any basis, to constitute a part of a trade within the meaning of s 7(2) and to qualify for the allowances, the activities in question must be a significant, separate and identifiable part of the trade carried on…. This construction is in my judgment necessary to give effect to the statutory choice of the word 'part' and the purpose which the legislation is intended to achieve. It cannot sensibly have been intended that the allowance should be available wherever and to the extent that any activity of the type described in s 7 takes place, and the statutory language is not apposite for this purpose.”
(pp 543-4, emphasis added)[18]With reference to the view that the broader interpretation “cannot sensibly have been intended”, it is of interest to note that the Revenue appears to have accepted such an approach for almost 20 years following Crusabridge, until the decision in Bestway understandably led to a change in its practice. This can be seen in a Revenue Bulletin in December 1999, which states:
“We previously took the view that anything done in the course of a trade is a part of the trade for this purpose. Bestway shows that this view was too wide. The Court held that although the activities in question do not need to be self-contained, they must be a significant, separate and identifiable part of the trade carried on.”
This perhaps illustrates the force of Mr Brennan’s submission (following Carr v Sayer [1992] STC 398, 402c-d) that this legislation should not be approached with an a priori assumption as to what should or should not be available to a trader by way of capital allowance.[19]One other authority deserves mention. In Vibroplant Ltd v Holland (HMIT) (1981) 54 TC 658 it was held by the Court of Appeal, upholding the decisions below, that a building used for the servicing and repair of the plant, as part of a plant-hire business, was not an industrial building, because repair of such individual items was not a “process” within paragraph (e). The Commissioners had also rejected the claim on the basis that the activities in the building did not constitute a trade or part of a trade. At first instance, Dillon J thought this “very doubtful”. Assuming servicing and repair were a “process”, he saw great force in the argument that those activities were “an essential part of the business of plant hire operators” and accordingly “a part of their trade and a part which consists… in the subjection of goods to a process” (p 666).[20]Parliament quickly intervened to reverse the Court of Appeal’s interpretation of “process”. The Finance Act 1982, section 75 introduced what is now section 18(3), to provide that references to a “process” should include maintaining and repairing any goods. This, however, was subject to a proviso:
“… notwithstanding subsection (2) above, paragraph (e) shall not apply to the maintenance or repair by any person of any goods or materials employed by that person in any trade or undertaking unless that trade or undertaking itself falls within any of the paragraphs of subsection (1).”
[21]I cite Dillon J’s statement and its sequel for two reasons. First, it is to be noted that Lightman J saw no inconsistency between Dillon J’s statement and the test as formulated by him (p 543), a position which Patten J found difficult to accept without qualification (para 32). Secondly, Mr Goodfellow relies on the legislative intent shown by the sequel as showing that Parliament implicitly endorsed Dillon J’s view of the section. As he submits, the proviso is drafted on the assumption that, apart from the specific provision, an activity included in any of the categories in subsection (1) would qualify, even if part of a wider business which was not so included.

The judgments below

[22]The Special Commissioner first considered whether “storage” was carried on in the building. He held that it was. He saw no conflict between Crusabridge and Bestway:
“In Bestway the purpose of holding the goods on the shelves was so that customers could come in and buy them; in Crusabridge the purpose of holding the tyres was so that after inspection and categorisation they could be collected together pending sale in a suitable minimum quantity. In the former case it was not storage, and in the latter case it was.”
He found support also in section 18(4) :
“Section 18(4) excludes from the definition of industrial building, a building in use as a retail shop, or for any purpose ancillary thereto, suggesting that there are circumstances in which a retail shop might otherwise qualify, and it is notable that wholesale premises are not excluded.”
On the facts, he held: “Here the products were held for sale in circumstances where sale was not expected to be immediate because the Appellant had to buy on a 6 week delivery cycle and sell on a 7 to 10 day delivery cycle…. (The arrangements with Mayer) meant that it was inevitable that the Appellant had to order in larger quantities and consequently would hold a stock of goods in excess of its immediate needs. The stock levels had risen considerably on the Building coming into use, and this was deliberate for good commercial reasons. Picking the products out of the correct part of the Building and packing them in different quantities seems to me to be incidental to storage of the products…” (paras 13-15)[23]He then considered whether storage was “part of the Appellant’s trade”. On this aspect he considered that Lightman J’s approach was obiter and inconsistent with Kilmarnock and Saxone. Having referred to the passages in those cases to which I have referred, he said: “I agree with Mr Goodfellow that the decision on the meaning of part of the trade is part of the ratio of Saxone, and it is similar to that in Kilmarnock on another part of the same section. I doubt whether Lord Reid would have described storing each kind of shoes as a "significant, separate and identifiable part of the trade," or a "separately identifiable 'part-trade'," or whether the Court of Session would have applied these descriptions to the packaging of screened coal. Their approaches seem to me to be much closer to "an activity undertaken in the course of a trade." They are clearly different from Lightman J's approach in the passage quoted, which is in any case obiter for the reasons I have set out, that part of a trade is construed in the same way as in the context of carrying forward losses. I am therefore bound to construe the words part of a trade according to the ordinary use of language so as to include Lord Reid's example of the storage or selling of each of two kinds of goods.” (para 20)[24]He concluded: “The Appellant's whole trade is that of importer and buyer from a single manufacturer, for sale mainly to the wholesale market of distributors who supplied products to window and door fabricators. On whether part of the Appellant's trade consists of storage of goods which are to be used in the manufacture of other goods, I apply Lord Reid's approach of the ordinary use of language consistently with his decision that storage of manufactured goods and bought-in goods are each separate parts of the trade. Here, because of the terms on which Mayer will supply the products, it is necessary to the Appellant's trade that products have to be stored. I find that the storage here is a separate part of the Appellant's trade.” (para 21)[25]In the High Court, Patten J also considered separately the questions whether the business involved “storage”, and if so whether it was a “part of the trade”. However, he expressed no separate conclusion on the first question. As he said: “I find it difficult to see how the question of what constitutes "storage" in s.18(1)(f) can ever really arise as a separate or relevant issue in cases (such as the present one) in which the storage relied on is at most one facet or part of the taxpayer's overall trade or business and is not carried on as a separate trade in itself….” (para 17)[26]He accepted that as a matter of ordinary language the goods were “stored” in Maco’s warehouse. However, he thought that Lightman J in Bestway had adopted “too narrow a focus” in treating the meaning of “storage” as a separate issue. He continued:
“But I agree with his basic conclusion in the sense that there cannot be a trade consisting in storage within the meaning of s.18(1)(f) unless storage of the qualifying goods is the trade (or is at least one of the trades) of the taxpayer company which is being carried on. As he himself expressed it, what is critical is the nature of the enterprise carried on at the building and the role played by the stock in that enterprise. To repeat the wording of s.18(1)(f), what qualifies is use which consists in the storage and does not merely involve or include it… The determining factor… is the nature of the trade not the quality of the storage.”
In relation to Crusabridge, he went further than Lightman J, holding that it was wrongly decided, insofar as it was based on construing “consists in” as meaning no more than “involves”. In any event, since section 18(2) was not referred to in that case, it offered no help on that issue (paras 18-22).[27]On the section 18(2) issue, he identified what he saw as “the real issue”: “But authority aside, the real issue in relation to the application of s.18(2) is whether and, if so, to what extent the characteristics of what would constitute a trade for purposes of s.18(1) are replicated in relation to what constitutes part of a trade. No-one, I think, disputes the proposition that trade normally involves the manufacture of goods, provision of or dealing in goods or services for profit in some way: see the examples contained in s.18(1)(e), (g), (h) and (j). All these are commercial activities designed to produce a return. By the same token, storage as a trade in s.18(1)(f) must also mean storage conducted as a business in itself. Section 18(2) applies the provisions of s.18(1) to a part of a trade or undertaking. Since s.18(1) merely defines what is meant by an "industrial building or structure" the effect of s.18(2) is to include in the references to a trade or undertaking in s.18 a reference to part of that trade or undertaking. A part of a trade must therefore also satisfy the descriptive conditions which follow in s.18(1). In relation therefore to s.18(1)(f)(i) the building must be in use for the purposes of part of a trade which consists in the storage of the specified goods and materials.” (para 20)[28]Having cited Lightman J’s discussion of section 18(2), he extracted two principles:
“The first is that the trade of a company consists of all its activities which are directed towards producing a profit. Assuming that the activity in question satisfies this condition, then it constitutes part of the trade if it is a significant, separate and identifiable part of the trade carried on.”
Having noted that the first principle would not exclude “storage carried on simply to facilitate the sale of the goods in storage”, he posed the question: “What further element needs therefore to exist for it to be a significant, separate and identifiable part of the trade?” (para 28)[29]To answer that question he started from Lightman J’s view that section 18(2) was directed principally at “composite trades”, such as “a business which both sells and repairs cars” (para 30). However, he accepted, by reference to his comments on Vibroplant, that Lightman J had not regarded the sub-section as limited to composite trades (para 32). He regarded Walton J’s comments in Rolls-Royce (relied on by Lightman J) as of limited assistance, since they were directed to a different issue (para 31).[30]Of Saxone,he said that on any view – “… the storage of each kind of shoe was carried on by the company as a separate activity. It was not incidental to any other commercial activity” (para 35). Having quoted the material parts of the judgments in Kilmarnock he commented: “This decision therefore treated the pre-packing operation (which was not carried on elsewhere) as a separate part of the society's trade on the basis that it was a separate commercial activity in its own right. Mr Goodfellow submits that applying Lightman J's test of what constitutes storage, the packaging of the coal was not an end in itself and was simply a step towards making the coal more attractive for sale to potential customers at the society's retail stores. But that was not the way in which the Court of Session approached the matter. Both Lord Clyde and Lord Guthrie regarded the process as a separate commercial operation in its own right. Lord Clyde's words can, I think, be read as a response to the Crown's contention that the packaging operation was not the society's "only trade". Not that it was not an operation in the nature of trade at all.” (para 39)[31]Finally, having rejected the Special Commissioner’s interpretation of the two Scottish cases, he gave what I take to be his answer to the question posed at paragraph 28: “40. I regard both these decisions as supporting a much narrower and more fundamental view of the scope of s.18(2) than that adopted by the Special Commissioner. It seems to me that for an operation to be part of a trade within the meaning of s.18(2) it must itself be an activity in the nature of a trade. As s.18 itself demonstrates a trade for these purposes is not limited to the selling of goods and can include both manufacturing and processing operations. But like Lightman J, I am not persuaded that storage as a trade in s.18(1) and as part of a trade in s.18(2) involve the application of quite different tests. Section 18(2) operates only to expand the definition contained in s.18(1) not to alter it….” (para 40, emphasis added)[32]He concluded: “It follows that the decision of the Special Commissioner was based on a misdirection as to the correct interpretation of s.18(2) and must be set aside. On the facts found by him there is in my judgment no distinction in substance between the operation of Maco's warehouse and the storage in the Bestway case. Although as indicated earlier, the storage of the qualifying goods in this case is carried out in a separate building and on a quite different scale, it is nonetheless carried out to support the company's wholesale trading operation and not as a trading or commercial activity in itself. On my view of s.18(2) that is not enough.” (para 41)

Discussion

[33]The arguments in this court have generally followed the battle-lines drawn in the lower courts. It is unnecessary to rehearse them in detail, particularly as the opposing positions are conveniently encapsulated respectively in the two judgments below. In choosing between these approaches, I start by reminding myself that the Commissioner was the tribunal of fact, and, unless he can be shown to have erred in law, his decision must stand.[34]The principal difference between the two decisions is in the interpretation of subsection (2), as applied to category (f). What is meant by the expression “a part of a trade… which consists in the storage (of qualifying goods)”? The Commissioner took those words at face value. Having found that storage had a distinct commercial role in Maco’s business (as contrasted with that of Bestway), he held that it was in ordinary language “a part” of Maco’s trade, and therefore within the section. Patten J held it was not “a part” of the trade in the required sense, because it merely supported the company’s trade, and was not “a trading or commercial activity in itself”. Thus the error of law found by Patten J lay essentially in the Commissioner’s reading of the words “a part of”.[35]In adopting the ordinary meaning of those words, the Commissioner could claim the support, not only of the standard approach to interpretation of statutory language, but more specifically of Lord Reid in Saxone. The only further elaboration one can derive from Lord Reid’s speech is that there must be a “sufficient distinction” between the relevant activity and other aspects of the trade “to enable one say that (the activity) is one part of the trade…” (see the quotation at para 9 above).[36]By contrast the judgments cited above disclose a number of different glosses on the statutory words, to indicate the circumstances in which storage would qualify as a part of the business: i) “storage as a purpose and end in itself” (Lightman J) ii) storage as a “significant, separate and identifiable part of a trade” (Lightman J) iii) storage as an “essential part of a trade” (Lightman J, distinguishing Crusabridge and Vibroplant) iv) storage as an “activity in the nature of a trade”, or “a trading or commercial activity in itself” (Patten J).[37]The principal objection to all these formulations is indeed that they are glosses on the statutory words. As such they are inconsistent with the ordinary reading adopted by Lord Reid. In addition, each is open to more specific criticisms. i) “Storage as an end in itself” was the expression used by Viscount Dunedin in Kay v Burrows, but it was used in a different statutory context where the issue was whether the premises were “primarily occupied and used for the purpose of storage”. The word “primarily” does not appear in section 18. Furthermore, as has already been noted, it is arguably implicit in the specific exclusions under subsections (2) and (4) that (apart from those exclusions) a qualifying use need not be “an end in itself”, but could be “part of” a non-qualifying trade ((2)), or “ancillary to” some other use such as a retail shop or showroom ((4)). ii) Lightman J’s proposed test, “significant, separate and identifiable”, gains some support from Kilmarnock, but it is in my view inconsistent with Saxone. In the former, Lord Clyde thought it “enough” that the building housed a “definitely identifiable” part of the operations and “a quite separate activity and that separate activity alone”. However, he was not purporting to lay down a definitive test. In Saxone, by contrast, although the qualifying activity (storage of Kilmarnock shoes) may have been “significant” and “identifiable”, it was not “separate” in any physical or practical sense. On the contrary, the whole warehouse was used indiscriminately for storage of both categories of shoes. iii) In both Crusabridge and Vibroplant the judges spoke of the activities as “an essential part” of the particular trades. No doubt the Commissioner was following that approach in this case, when he referred in his conclusions to the storage being “necessary to” Maco’s trade. However, again they were not seeking to lay down a definitive test. If they had been, it would have been inconsistent with Kilmarnock.There was nothing essential about the packing process; but it was a “definitely identifiable” activity with a distinct commercial purpose. iv) The fourth formulation, which is basis of Patten J’s decision in this case, is the product of his analysis of Lightman J’s reasoning, in the light of the cases referred to by him. I confess, with respect, that I do not fully understand the concept of an activity which is not a trade but is “in the nature of a trade”. If all it means is that it is the kind of activity which might be carried on as a separate trade, the same could be said of the warehouse activities in this case. There is no reason in principle why they could not have been carried out as a separate trade, for example (as in Saxone) by a separate warehousing subsidiary. If it means more than that, it is in my view inconsistent with Kilmarnock. The packing process was ancillary to the overall trade, just as the storage activity is in this case. I see nothing in the judgments to support Patten J’s inference (see para 30 above) that it was regarded as “an operation in the nature of trade” (whatever precisely that means).[38]With respect to the elaborate reasoning of Lightman J and Patten J, and the extensive arguments before us, I see a danger of overcomplicating a relatively straightforward statutory test. It was so regarded by Lord Reid, and the Special Commissioner was right to follow his lead. I would happily have adopted his analysis of the statute and his treatment of the authorities. He was entitled to distinguish Bestway on its facts, for the reasons he gave. His conclusion on section 18(2) applied the statutory language in accordance with its ordinary meaning. In my view, it discloses no error of law.

Conclusion

[39]For these reasons, I would allow the appeal, and restore the decision of the Special Commissioner.[40]I note the contrary view of Lawrence Collins LJ. However, it seems to me, with respect, that his fifth category (intended to cover the present case) pays no regard to the Special Commissioner's finding that the storage in this case was a separate part of the trade. That may have been a generous view of the facts, but it was open to the Special Commissioner, and is not reviewable in this court.[41]I have had the opportunity of reading the judgment of Carnwath LJ in draft. I am indebted to him for the clarity of his analysis. Non-lawyers may be surprised at the considerable amount of judicial exposition of the meaning of 4 ordinary English words. Tempting as it may be, I shall not risk muddying the waters by yet another analysis.[42]Suffice it to say, that for the reasons given by Carnwath LJ, I too would allow the appeal and restore the Special Commissioner’s decision.[43]I share Carnwath LJ’s view that the statutory test should not be overcomplicated. But I have come to a contrary conclusion on the basis of a short point of construction, which needs elaboration in the light of the decisions of the House of Lords and the Court of Session to which Carnwath LJ has referred, and to which I shall revert. In my judgment the appeal should be dismissed on the ground that, on its proper construction, section 18(2) of the 1990 Act does not have the effect of widening section 18(1) to encompass a building or structure in use for the purposes of a trade which does not qualify under section 18(1). In short, if Maco’s trade does not qualify under section 18(1)(f), then the fact that an important part of its modus operandi involves storage of its own goods pending sale does not entitle it to a capital allowance on the basis that “part of [its] trade” consists in storage.[44]By section 18(1)(f)(i), the building must be in use “for the purposes of a trade which consists in the storage … of goods or materials which are to be used in the manufacture of other goods or materials…”[45]It seems to have been accepted by the time of the hearing before the Special Commissioner that it was not realistically open to Maco to argue that (apart from the effect of section 18(2)) its trade “consists in the storage” of relevant goods for the purposes of section 18(1)(f)(i). The skeleton arguments produced for the Special Commissioner by Maco (paras 4 and 5) and the Revenue (paras 2 and 7), and the Decision of the Special Commissioner (paras 5 and 6, and 18 et seq.) proceed on the basis that this was solely a section 18(2) case, as does Patten J’s judgment (para 9).[46]This is no doubt because section 18(1)(f) is primarily (but not necessarily exclusively) concerned with the trade of storage as such, i.e. for third parties. For mere storage incidental to a qualifying trade to be covered by section 18(1)(f)(i) would be quite unnecessary. That is because section 18(1)(e) applies to a building in use 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. Storing goods to be manufactured by the business which stores them would plainly be within section 18(1)(e) and would not need to come within section 18(1)(f).[47]The effect of section 18(2) is that section 18(1)(f)(i) applies “in relation to a part of a trade … as [it applies] in relation to a trade .. except that where part only of a trade … complies with the [condition] set out in subsection (1) [i.e. for this purpose section 18(1)(f)] a building or structure shall not by virtue of this subsection be an industrial building or structure unless it is in use for the purposes of that part of that trade …”[48]In my view the natural and ordinary meaning of the language of section 18(2) and its place within section 18 show that it is concerned with part of a trade which is a qualifying trade under section 18(1), and the authorities at appellate level are consistent with that interpretation: Saxone Lilley & Skinner (Holdings) Ltd v IRC (1967) 44 TC 122 (H.L.) (“Saxone”); and Kilmarnock Equitable Cooperative Society Ltd v IRC (1966) 42 TC 675 (“Kilmarnock”), a decision of the Court of Session, which this court should follow, unless there is some compelling reason for differing from the decision: see Abbott v Philbin (Inspector of Taxes) [1960] Ch 27; Westward Television Ltd v Hart (Inspector of Taxes) [1969] 1 Ch 201.[49]The application of section 18(2) can be tested by reference to some possible commercial situations. Take first, a building exclusively for the purposes of a qualifying trade, such as manufacture (section 18(1)(e)). Storage and all other activities for the purposes of the qualifying trade would come within section 18(1)(e), because the building is in use “for the purposes of” that trade. Section 18(2) does not have a role to play.[50]Take second, a trade of manufacture and subsequent sale of goods. The trade qualifies under section 18(1)(e), because it “consists in” manufacture. If it has one building for retail operations and another building for manufacturing operations, the effect of section 18(2) is that the building used for manufacture would qualify as part of the trade, and that the building used for sale operations would not qualify. Section 18(2) directs an enquiry as to whether the building is in use for the part of the trade which qualifies.[51]Take third, a business which carries on trades of(a) manufacture or processing and subsequent sale of goods, and(b) retailing through supermarkets. The same analysis applies. That is Kilmarnock.[52]Take fourth, a business which carries on the trade of(a) storage of goods to be manufactured (within section 18(1)(f)(i)); and(b) storage of furniture for people living abroad. Section 18(2) directs an enquiry as to whether the building is in use for the part of the trade which qualifies. That is Saxone.[53]Take fifth, a business which does not qualify, e.g. (as in this case) selling window frames to wholesalers and fabricators. In my judgment, section 18(2) does not assist. Activities for the purposes of that trade which do not qualify under section 18(1) do not qualify by virtue of section 18(2), because (in the words of section 18(2)) it is necessary that the part of the trade “complies with the conditions set out in subsection (1)”. Otherwise the effect of section 18(2) would be to expand the categories in section 18(1), and to remove all effect from the words “consists in.”[54]Consequently, it is not sufficient for the purposes of section 18(2) that storage was part of Maco’s trade. The starting point is section 18(1), and Maco would have to fulfil one of the conditions in section 18(1), in this case that its trade “consists in the storage” of the goods. Once that condition is fulfilled any part of that trade will qualify under section 18(2). But it is common ground that Maco’s trade for the purposes of section 18(1) does not consist in storage.

Saxone

[55]In Saxone the taxpayer’s group had a qualifying trade for the purposes of section 18(1)(f)(iii).[56]Saxone Kilmarnock (“Kilmarnock”) was the principal manufacturer of shoes within the Saxone group and also a retailer. Jacksons Ltd (“Jacksons”) was a member of the group, and it had a large warehouse which was a central warehouse for all the companies in the group. The warehouse received shoes which had been manufactured by Kilmarnock, and other shoes which had been bought from manufacturers whether inside or outside the Saxone group. The types of shoes were not segregated, and at any one time there was a mixture of shoes in most parts of the warehouse. During the relevant period at any one time there were 500,000 pairs of shoes in the warehouse. Of these, roughly a third had come from Kilmarnock. The remaining two thirds came from other manufacturers.[57]The shoes manufactured by Kilmarnock were both “goods manufactured or processed in the course of a trade” and “goods which had not yet been delivered to any purchaser”, and were therefore qualifying goods within the meaning of what is now section 18(1)(f)(iii). The shoes which had come from manufacturers other than Kilmarnock were not qualifying goods under section 18(1)(f)(iii). They satisfied the first limb of that section by being goods which had been manufactured or processed in the course of a trade, but not the second limb because they were not goods “which have not yet been delivered to any purchaser”.[58]On the basis that some of the goods in the warehouse were non-qualifying goods, Saxone did not claim that Jacksons’ trade consisted in the storage of goods within section 18(1)(f)(iii) (see (1967) 44 TC at 124).[59]In making its claim under section 18(1)(f)(iii), Saxone contended that: the warehouse was in use for the purposes of a trade of “storage”, any non-storage activities at the warehouse being incidental to the storage activity; the warehouse was not in use for any purpose ancillary to the purposes of retail shops which would otherwise have precluded the storage from qualifying by operation of section 18(4); part of Jacksons’ trade consisted in the storage of shoes which had not yet been delivered to any purchaser; the warehouse was in use for that part of the trade, and the building qualified by operation of section 18(2): see p 125.[60]The Revenue’s argument was that “in use for the purposes of that part of that trade” in what is now section 18(2) meant wholly or mainly in use for such purposes, and that there was no sufficient distinction between the ways in which the two kinds of shoes were treated to enable one to say that storing the one kind was part of the trade and storing the other kind was another part: see pages 139 and 140.[61]The Special Commissioners accepted that part of Jacksons’ trade consisted in the storage of goods falling within section 18(1)(f)(iii) but rejected the contention that the whole of the warehouse was in use for that part of its trade: pp 126-127). The Special Commissioners made their findings on the basis that if it was not possible to identify any separate part of the warehouse as being in use for the purpose of storing qualifying goods, it was not possible to say that any part of the warehouse was in use for such a purpose.[62]The Court of Session allowed Saxone’s appeal. Lord Clyde held that it was not necessary for the building to be wholly or predominantly in use for the purpose of a trade which consists in the storage of shoes manufactured but not yet sold. He said (at 133) “… the test is not whether the building is used for storage of qualified goods. The test is whether the building is used for the purposes of a trade which consists in the storage of qualified goods. If it is, it is enfranchised under the subsection, and the mere fact that it is also used for the purpose of storing other goods will not take it out of the category of an enfranchised building.”[63]Lord Guthrie said (at 134):
“It seems to me in accordance with the natural meaning of the words of [section 18(2)] to hold that, if the trade consists in the storage of shoes delivered to a purchaser and shoes undelivered, then part of the trade consists in the storage of undelivered shoes …Shoes which had been manufactured but not yet delivered to a purchaser were stored within the warehouse to a material extent …It seems to me to follow that the building was in use for the purposes of that part of the trade which consisted in the storage of such shoes.”
[64]Lord Migdale said (at 135) that section 18(1) did not say that the building must be used exclusively or predominantly for the enumerated purposes. He went on (at 135-6):
“ … Section [18(1)(f)], read along with [section 18(2)], recognises that the user may be for the purposes of part of the trade, which clearly implies that there may be other parts of the trade of storage being carried on …In my view it is enough that [Saxone] have shown that the building was in use for the purpose of storing shoes which had not yet been delivered to any purchaser. The proviso to [section 18(2)] deals in express terms with different parts of a trade, and provides that the building is not regarded as an industrial building unless it is in use for the part of the trade which complies with the provisions in [section 18(1)(f)(iii)], that is, unless it is in use for the storage of ‘franked’ shoes. But here again, nothing is said about exclusive or predominate use. The building is not to be an industrial building by virtue of [section 18(2)] unless it is in use for the purposes of the recognised part of the trade. Owing to the kind of operations carried on in this warehouse in fact all parts of the building were in use for the purpose of storing ‘franked’ shoes, and I do not think it matters that parcels of ‘unfranked’ shoes were also in the building.”
[65]Lord Cameron said (at 137) that section 18(2) “requires to be taken into account and read along with [section 18(1)]”. He went on:
“The words of [section 18(2)] are specifically designed to enable part of a trade or undertaking to be treated as a trade or undertaking, and ‘part’ as there used can only mean, as I read the subsection, part of the trade or undertaking referred to in [section 18(1)]. But that trade or undertaking is clearly a trade for which the building or structure is in use, and not the overall trade of the taxpayer as the Lord Advocate’s argument contended. As I see it, this makes it very clear that it is not fatal to a statutory claim that the same building or structure is in use for a qualified or non-qualified trade at the same time, provided always that the building or structure is in use, i.e., actually rather than nominally, at the same time for a qualified purpose.”
[66]The House of Lords unanimously dismissed an appeal by the Revenue. Lord Reid said (at 139):
“The trade of this warehouse keeper is storing shoes from both these sources, and the contention of the Respondents is that, within the meaning of [section 18(2)], storing the Kilmarnock shoes is a part of his trade. The Commissioners so found, and I think that this is clearly right. I reject the argument that there is no sufficient distinction between the ways in which the two kinds of shoes are treated to enable one to say that storing the one kind is one part of the trade and storing the other kind is another part. If a trader stores or sells or otherwise deals with two kinds of goods, A and B, I think that it is the ordinary use of language to say that dealing with A is one part of his trade and dealing with B is another part, and I see nothing in the context here to justify giving any other interpretation to ‘a part of a trade’ in [section 18(2)]. The question therefore comes to be whether this warehouse is in use for the purposes of that part of the warehouseman’s trade which consisted in the storing of Kilmarnock shoes. Again taking the ordinary use of language, it appears to me that it clearly was. Premises can be and often are in use for more than one purpose, and I think that the whole of this warehouse was in use for both parts of the warehouseman’s trade, because both kinds of shoes could generally be found stored in every part of it.”
[67]In my judgment it is clear from all of the judgments in the Court of Session and from Lord Reid’s speech that what qualified under section 18(2) was that part of Jacksons’ trade which qualified under section 18(1).

Kilmarnock

[68]The Kilmarnock Equitable Co-operative Society (“the Society”) carried on business as general merchants in the Kilmarnock district, most of it retail trade.[69]It was found (see (1966) 42 TC at pp 676-677, 679) as a fact, or admitted, that the Society did a substantial trade in the sale of coal in 1 cwt bags and in bulk, which was distributed to its customers by lorry from its coal yard or depot. It also sold coal in 28lb paper packets retail through its grocery branches and self-service stores, and wholesale to other co-operative societies. Expenditure was incurred by the Society on the erection of a building at its coal depot to house machinery to pre-pack coal, and on machinery. The machinery was used to break bulk, remove dross and pre-pack the coal in 28lb bags. The purpose of erecting the building was not only to provide packeted coal to members of the Society but also to develop a trade in packeted coal with other coal merchants in the Kilmarnock area and possibly with other neighbouring co-operative societies. The building contained conveyor belts and specialist machinery for carrying out the various tasks.[70]The live issues before the Court of Session were the Revenue’s contentions:(a) that the goods were not “subjected” to a process for the purposes of section 18(1)(e);(b) that the building was not in use for a trade or part of a trade which consisted in the subjecting of the goods to a process within the meaning of what is now section 18(2) because the Society operated a trade of general merchants, and only a small part of their operations involved paper packaging of screened coal; and(c) that what is now section 18(4) applied to take the building out of the definition of industrial building because the purpose was “ancillary to the purposes of a … retail shop ...”[71]The Revenue does not seem to have argued the point which is central on the present appeal, namely whether the trade consisted in screening and packing.[72]Lord Clyde said that the first question to be determined was whether the building in which the operations were carried out was an industrial building or structure within the meaning of what is now section 18(1)(e), namely “a building or structure in use … for the purposes of a trade which consists in the manufacture of goods or materials or the subjection of goods or materials to any process.” Without identifying what the trade consisted in, he found (at 679) that the breaking of bulk coupled with the separating out of the dross by screening and the subsequent packaging of the coal into paper bags was a “process” to which the goods were subjected.[73]He then referred to the Revenue’s argument that the building was not in use for a trade or part of a trade which consisted in the subjecting of the goods to a process. He said (at 680):
“The [Revenue’s] argument was that if the Society’s only trade was screening and packing of coal in paper bags then the situation might have been different, but this Society operated a trade of general merchants, and only a small part of their operations involved paper packaging of screened coal. But the relative proportions of the Society’s various activities appear to me to be quite irrelevant. The building in question houses a definitely identifiable part of their industrial operations and a quite separate activity, and that separate activity alone. This is in my view enough to satisfy the requirements of [section 18(2)].”
[74]It seems to me implicit in the Revenue’s argument that it was accepted that if it had stood alone the business of screening and packing (and selling) would have been within section 18(1)(e) because the trade would have consisted in “the subjection of goods or materials to any process.” Lord Clyde was meeting the point that that trade was only a small part of the operations of the Society. He was not dealing with a point that there was no separate trade.[75]This is supported by what Lord Guthrie said (at 681):
“But in my opinion the separation of the dross from the coal is its subjection to a process, the process of selection from the mass of coal of lumps which are suitable for packing in bags. There is no doubt that at the building the Appellants carry on a trade, a business conducted with a view to profit, which consists of the subjection of the coal to this process.”
[76]Lord Cameron does suggest (at 686) that the relevant trade was that of merchants, and that the building was being used to further that trade, but this was said only in the context of the Revenue’s argument on section 18(4) that the use was ancillary to the purposes of a retail shop.[77]The gist of the decision in Kilmarnock is that the relevant trade for the purposes of section 18(1) was assumed to be processing and packing, and that the effect of section 18(2) was to make that part of Kilmarnock’s overall trade a qualifying trade for the purposes of section 18(1)(e). I do not consider that it is authority for Maco’s case that it is not necessary for part of the trade under section 18(2) to be a qualifying trade under section 18(1).[78]I do not consider that the other decisions take the matter any further. Crusabridge Investments Ltd v Casings International Ltd (1979) 54 TC 246 (Judge Finlay QC) was a decision on what is now section 18(1), and does not assist on the interpretation of section 18(2). In Bestway (Holdings) Ltd v Luff (Inspector of Taxes) (1998) 70 TC 512 the main argument, and the decision, concerned whether the trade consisted in storage for the purposes of section 18(1)(f). On the subsidiary argument on section 18(2), Lightman J considered (at 535 and 543) that the primary purpose of section 18(2) was to provide for the case where the building was in use only in part for a qualifying trade. With that I agree. But he went on to add:
“and on any basis, to constitute a part of a trade within the meaning of [section 18(2)] and to qualify for the allowances, the activities in question must be a significant, separate and identifiable part of the trade carried on.” (at 543). I agree with Patten J (para 30) that this can only be intended as a description of part of a composite business, and not as a definition of the only conditions for the existence of such a part. The only authority which supports the view that the “part” of the trade under section 18(2) need not itself be a qualifying trade under section 18(1) is Vibroplant Ltd v Holland (HMIT) (1981) 54 TC 658 where Dillon J saw “very great force” in the taxpayer’s argument that servicing and repair was “an essential part of their business of plant hire operators” and accordingly “a part of their trade and a part which consists… in the subjection of goods to a process”
(p 666). But he expressed no final view on the point because the operation did not involve a “process” and his decision was affirmed on that ground alone: p 667.[79]It follows that I agree with the Revenue’s argument that section 18(2) applies the provisions of section 18(1) to a part of a trade but only in the same way that they apply to the trade or undertaking itself, and with that part of Patten J’s reasoning which can be summarised as follows:(a) the question under section 18(1) is whether the warehouse is in use for the purposes of a trade which consists in the storage of qualifying goods and materials;(b) there cannot be a trade consisting in storage within the meaning of section 18(1)(f) unless storage of the qualifying goods is the trade (or one of the trades) of the taxpayer which is being carried on;(c) the real issue in relation to the application of section 18(2) is whether and, if so, to what extent the characteristics of what would constitute a trade for the purposes of section 18(1) are replicated in relation to what constitutes part of a trade:(d) section 18(2) applies the provisions of section 18(1) to a part of a trade or undertaking;(e) a part of a trade must also satisfy the descriptive conditions which follow in section 18(1);(f) in relation therefore to section 18(1)(f)(i), the building must be in use for the purposes of part of a trade which consists in the storage of the specified goods and materials; and(g) section 18(2) does not expand the qualification in section 18(1).[80]Patten J said (at para 40) that he was not persuaded that storage as a trade in section 18(1) and as part of a trade in section 18(2) involved the application of quite different tests. I would go further and hold that they involve the same test, namely whether the trade or relevant part of a composite trade consists in storage. In my judgment, if the trade does not qualify under section 18(1), section 18(2) cannot be used to turn an activity into a qualifying trade. Consequently, I agree with Patten J’s conclusion that the Special Commissioner was wrong.