Hilary Term [2018] UKSC 15 On appeal from: [2016] EWCA Civ 1150

JUDGMENT
Iceland Foods Ltd (Appellant) v Berry (Valuation
Officer) (Respondent)
before
Lord Kerr
Lord Reed
Lord Carnwath
Lord Hughes
Lady Black
JUDGMENT GIVEN ON
7 March 2018
Heard on 25 January 2018
Appellant Respondent
Daniel Kolinsky QC Tim Morshead QC
Luke Wilcox Zack Simons
(Instructed by TLT
LLP
) (Instructed by HMRC
Solicitors Office
)
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LORD CARNWATH: (with whom Lord Kerr, Lord Reed, Lord Hughes and
Lady Black agree)
1. The court is asked to decide whether the services provided by a specialised
air handling system, used in connection with refrigerated merchandise in the
appellant’s retail store, are “manufacturing operations or trade processes” for rating
purposes. This turns on the construction of the Valuation for Rating (Plant and
Machinery) (England) Regulations 2000 (SI 2000/540) (the “2000 Regulations”). If
they are, then the air handling system falls to be ignored in calculating the rateable
value of the premises. The Valuation Tribunal decided this issue in favour of the
appellants. That finding was reversed by the Upper Tribunal ([2015] UKUT 0014
(LC)), whose decision was upheld by the Court of Appeal ([2016] EWCA Civ 1150;
[2017] Bus LR 766).
Facts
2. The facts (as found by the Upper Tribunal) were set out in full in the judgment
of the Chancellor (with whom Gloster and Sharp LJJ agreed) in the Court of Appeal.
It is sufficient here to note the main points. Iceland is a well-known supermarket
operator specialising in the sale of refrigerated foods, with more than 800 stores in
the UK and Ireland. The appeal property, at 4 Penketh Drive, Liverpool, is typical.
It is a small retail warehouse forming part of a larger retail development known as
the Speke Centre. Iceland took occupation in May 2007. The property was let in a
shell condition, and the air-handling system was installed by Iceland. Its business is
mainly focused on the sale of refrigerated products, which represent roughly 80%
of its sales by value, divided evenly between chilled and frozen lines. At the Penketh
store, frozen and chilled products are stored and displayed in about 80 refrigerated
cabinets, arranged around the perimeter of the sales floor and in four aisles running
from front to rear.
3. All but one of the cabinets at the Penketh store are “integral” rather than
“remote” units. The Upper Tribunal explained the difference:
“18. … The object of any refrigerator is to maintain the
internal temperature (and thus that of the goods stored in it) at
the desired level by absorbing heat from within the cabinet and
expelling it outside the cabinet by means of a condenser.
Integral cabinets achieve this using refrigeration equipment
and condensers installed within the body of the cabinet itself,
and by expelling heat to the environment immediately
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surrounding the cabinet. Remote cabinets, in contrast, employ
refrigeration equipment at a distance from the cabinets; heat is
absorbed by a liquid refrigerant which is conveyed to the
cabinet through pipes permanently installed in the store and is
expelled remotely through condensers located outside the
building.

20. As integral cabinets are designed to operate below a
particular ambient temperature (25ºC in the case of Iceland’s
… cabinets) the heat generated by the cabinets themselves must
be controlled to ensure that they perform as intended and do
not malfunction. Where a large number of integral cabinets is
present in a confined space, it is necessary to provide an air
handling system with a correspondingly large cooling capacity.
If the design parameters of the cabinets are exceeded the
permitted product storage temperature within the cabinets may
be breached causing a deterioration in the quality of the
products stored or displayed in them.”
The advantages for Iceland of integral cabinets include flexibility, independence of
operation, and lower capital cost. It is common ground that the value of the cabinets
themselves is to be left out of account for rating purposes.
4. The air handling system was described by the Upper Tribunal as follows:
“12. The air handling system provides a ventilating, heating
and cooling service to the appeal property, and comprises three
main elements. A large air handling unit with a mechanical
cooling capacity of approximately 85 kW is located outside and
to the rear of the building; this unit serves a network of ducts
by which warm or cold air is supplied to and extracted from the
retail area through an array of ceiling mounted diffusers and
grilles. On our inspection we were able to observe the air
handling unit and to contrast it with the very much smaller units
on the rear walls of adjoining stores – one of which is
considerably larger than the [premises]. Iceland’s equipment
occupies its own fenced compound and in size and shape
resembles a very large refuse skip (4.5 metres by 2.35 metres
in area) from which rise two vertical supply and return air
ducts, each a metre square, which enter the rear wall of the
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building 4 metres above the ground. A separate but linked
mechanical extract system is located at the rear of the retail
area, furthest from the entrance, to deal with the removal of
excess heat in that area. Finally, the whole system is controlled
by means of a computerised control unit located adjacent to the
air handling unit. …”
5. The air handling system functions at all times, day and night. It is designed
and programmed to maintain the store temperature during trading hours at an
acceptable level for both the functioning of the refrigerated cabinets and the comfort
of staff and customers. To achieve the acceptable temperature range during trading
periods, Iceland’s control strategy targets a temperature within the store of 21ºC
which is in the middle of the recommended range of comfortable temperatures for
staff and customers. For the majority of the time an acceptable temperature is
maintained on the sales floor without the use of mechanical cooling, but at 21ºC
mechanical cooling commences. The aim is to ensure that the maximum temperature
at which the cabinets are designed to function is not exceeded. Although a
substantial proportion of the heat load is generated by other sources, the cabinets are
by far the largest single contributor. Without the integral cabinets, the heavy-duty
air handling system installed in the store would not be required and a very much
smaller system would be sufficient.
The statutory provisions
6. Schedule 6 to the Local Government Finance Act 1988 is headed “NonDomestic rating: Valuation”. Paragraph 2(1) provides that the rateable value of a
non-domestic hereditament is taken to be “an amount equal to the rent at which it is
estimated the hereditament might reasonably be expected to let from year to year”
on certain specified assumptions (none of which is now in issue). By paragraph 2(8),
the Secretary of State is authorised to make regulations providing that in applying
the preceding paragraphs, in relation to a hereditament of a prescribed class,
“prescribed assumptions (as to the hereditament or otherwise) are to be made”. The
2000 Regulations were made under that provision.
7. The present form and content of the regulations are derived from a report by
an Expert Advisory Committee under the chairmanship of Mr Derek Wood QC,
Rating of Plant and Machinery (Cm 2170) (“the Wood Report”), published in March
1993. The committee was established to review the law and practice relating to the
rating of plant and machinery, with a view to updating and harmonising it
throughout the United Kingdom. The report was followed by the Valuation for
Rating (Plant and Machinery) Regulations 1994 (SI 1994/2680), which replaced the
previous law. They were in turn replaced by the 2000 Regulations (applying to
England only, following devolution), but without any change to the provisions
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material to this appeal. As indicated in the explanatory notes to both sets of
regulations, they “reflected” the recommendations of the Wood Report. (Equivalent
Regulations, also said to reflect the Wood recommendations, have been made by the
relevant legislatures in Scotland, Wales, and Northern Ireland.) It will be necessary
to refer in more detail later to parts of the Wood Report, which is clearly an
appropriate aid to construction of the Regulations (see Bennion on Statutory
Interpretation 7th ed (2017), para 24.9).
8. Paragraph 2 of the 2000 Regulations is headed “Prescribed assumptions as to
plant and machinery”. It provides:
“2. For the purpose of determining the rateable value of a
hereditament for any day on or after 1 April 2000, in applying
the provisions of sub-paragraphs (1) to (7) of paragraph 2 of
Schedule 6 to the Local Government Finance Act 1988 –
(a) in relation to a hereditament in or on which there
is plant or machinery which belongs to any of the classes
set out in the Schedule to these Regulations, the
prescribed assumptions are that:
(i) any such plant or machinery is part of the
hereditament; and
(ii) the value of any other plant and machinery
has no effect on the rent to be estimated as
required by paragraph 2(1); and
(b) in relation to any other hereditament, the
prescribed assumption is that the value of any plant or
machinery has no effect on the rent to be so estimated.”
It is important to emphasise the significance in the valuation of the Classes set out
in the Schedule. Those Classes are the only categories of plant and machinery which
are brought into account for valuation purposes. They are in effect exceptions to the
general rule (embodied in sub-paragraphs (a)(ii) and (b)) that the value of plant and
machinery has no effect on the estimation of value of the hereditament for rating
purposes.
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9. The Schedule sets out the classes of plant “to be assumed to be part of the
hereditament” (in the words of the title). In broad terms, Class 1 covers plant and
machinery used for generation, storage or transmission of power on the
hereditament. Class 2 (relevant in this case) covers plant and machinery used in
connection with heating, cooling and other services to the hereditament. Class 3
covers such items as railway lines, lifts, cables and other items used for transmission
of electricity or communications, pipe-lines and drain or sewers. Class 4 covers a
number of bulky items of plant and machinery (listed in Tables 3 and 4) such as
blast furnaces, fixed cranes, and turbines and generators, but excludes smaller
movable items (not exceeding 400 cubic metres) and those that are not “in the nature
of a building or structure”.
10. Class 2 provides:
“Plant and machinery specified in Table 2 below … which is
used or intended to be used in connection with services to the
hereditament or part of it, other than any such plant or
machinery which is in or on the hereditament and is used or
intended to be used in connection with services mainly or
exclusively as part of manufacturing operations or trade
processes.” (emphasis added)
“Services” are defined as meaning –
“heating, cooling, ventilating, lighting, draining or supplying
of water and protection from trespass, criminal damage, theft,
fire or other hazard.”
The plant and machinery specified in Table 2 includes (under the heading “Heating,
Cooling and Ventilating”) ten items of equipment (such as water heaters, and
refrigerating machines) and associated “accessories”. It is not in issue that the
disputed air handling system is covered by the Table, nor that it is used “in
connection with services to the hereditament” within the meaning of Class 2. The
only issue is whether it is excluded by the italicised words quoted above. For
simplicity in this judgment (following earlier usage – see below), I shall refer to
those words as the “Class 2 proviso” or the “proviso”. References in the judgment
to the word “plant” should be read (where appropriate) as including reference also
to “machinery”.
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Legislative history
11. In this court, as in the Court of Appeal, both parties sought to draw assistance
from the background history of these provisions, dating back to the latter part of the
19th century, and including reports by a number of expert committees. The history
is of some value in explaining the genesis of Class 2, and more particularly the
background of the law and practice as understood at the time that the Wood
Committee made its recommendations.
12. The main problem has been to draw a defensible line between, on the one
hand, plant properly treated as part of the hereditament for the purpose of assessing
its hypothetical letting value, and plant more fairly attributable to the tenant’s
business within it (“the tools of the trade”), having regard also to the need to keep
up with changes in technology. The search for a coherent legislative solution can be
traced back to the much-criticised decision of the House of Lords in Kirby v Hunslet
Union Assessment Committee [1906] AC 43. The House there disapproved a
distinction based on whether the plant was a fixture, in the traditional land law sense,
but failed (so it was said) to put in place a workable alternative.
13. The resulting uncertainty led in due course to the establishment of an interdepartmental committee (“the Shortt Committee”), to inquire into the law and
practice regarding the rating of plant in both England and Scotland. The committee
reported in February 1925: Report of the Inter-Departmental Committee on the
Rating of Machinery and Plant in England and Wales (Cmd 2340). Its
recommendations led in turn to the enactment of the Rating and Valuation Act 1925.
Section 24 of that Act, taken with the Third Schedule, can be seen as setting the
pattern, albeit in simpler form, for subsequent enactments including the 2000
Regulations. It established the general principle that value of plant on the
hereditament was to be left out of account for rating purposes, save for the classes
specified in the Schedule, which were “deemed to be a part of the hereditament”.
14. There is a helpful description of the general effect of the Third Schedule in
the judgment of Lord Hewart CJ in Townley Mill Co (1919) Ltd v Oldham
Assessment Committee [1936] 1 KB 585 (DC), although the facts (relating to plant
in a disused mill) are too different from the present to make it of any direct
assistance. In particular he drew a distinction (as had the Shortt Committee, para 15)
between “motive” and “process” plant, only the former being taken into account for
rating purposes. He said:
“When one turns to the Third Schedule of the Act, it is apparent
that it enumerates that type of machinery and plant which is
conveniently described in the case as motive machinery; it is
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the machinery without which the mill could not begin to work,
as, for example, the generation of power, heating and cooling,
lifts and elevators, railways, tramlines and tracks, and other
things, the foundation of that which was to become the work of
the mill. When the machinery and plant referred to in the Third
Schedule are eliminated, what is left is the kind of machinery
which is concisely described in this case as process plant and
machinery, operative plant and machinery, working and
manufacturing plant and machinery. By section 24(1)(b), no
account is to be taken of the value of any plant or machinery of
that kind …” (p 598)
He noted that under the previous law the value of plant in a mill, though not rated
as such, was taken into account as “enhancing the value of the hereditament to be
rated” (p 599). The effect of the Act, intended as “beneficial to those interested in
the carrying on of industry”, was “to get rid of all the doctrine of enhanced value”,
and to lay it down that “process” plant must henceforth be disregarded when
ascertaining the rateable value of the hereditament (pp 602-603). The decision was
upheld by the House of Lords, where can be found statements to similar effect (see
[1937] AC 419, pp 428-429 per Lord Russell of Killowen).
15. Turning to the detail of the Third Schedule, Class 1(b) can be seen as the
precursor of Class 2 of the current regulations. It covered plant used –
“… mainly or exclusively in connection with –
(a) …
(b) the heating, cooling, ventilating, lighting,
draining, or supplying of water to the land or buildings
of which the hereditament consists, or the protecting of
the hereditament from fire:
Provided that, in the case of machinery or plant
which is in or on the hereditament for the purpose
of manufacturing operations or trade processes,
the fact that it is used in connection with those
operations or processes for the purpose of
heating, cooling, ventilating, lighting, supplying
water, or protecting from fire shall not cause it to
be treated as falling within the classes of
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machinery or plant specified in this Schedule.”
(emphasis added)
The other classes were (in very broad terms) similar in scope to what became the
classes in the 2000 Regulations (see para 9 above).
16. The italicised words in the proviso to Class 1 seem to have been the first
appearance in this context of the expression “manufacturing operations or trade
processes”. The circumstances in which the proviso came to be included are of some
historical curiosity, since it was proposed by Mr Neville Chamberlain MP, as the
responsible Minister (Hansard Standing Committee A, 4 August 1925, col 1093).
He explained the purpose as being to exclude “such processes as really belong to the
precise work which is being carried on in the shops” rather than “the general heating
or ventilating of the plant”. He gave an example:
“where, for instance, a man is polishing at a buff, and there is
a fan drawing off the dust so that it shall not go down his throat,
that is to be treated as part of the machinery, and not as part of
the heating or ventilating plant which is run.”
It is unnecessary to decide whether those observations are admissible under the
principle in Pepper v Hart [1993] AC 593 (see Bennion op cit para 24.11). The
general purpose is clear enough from the wording of the proviso itself, and the
example is so far from the present facts as to be of no practical assistance in this
appeal.
17. Returning to the 1925 Act itself, section 24(3)-(6) enacted a procedure to
provide more precise information about the contents of the specified classes. A
special committee was to be established to prepare a statement “setting out in detail
all the machinery and plant [appearing] to fall within any of the classes specified in
the Schedule”. The statement (modified if necessary following consultation) was to
be embodied in a Ministerial order having effect as though substituted for the Third
Schedule. Provision was also made for its subsequent revision at intervals as directed
by the Minister.
18. The first such order was made in 1927 (The Plant and Machinery (Valuation
for Rating) Order 1927 (SR & O 1927/480)). No further change was made until the
setting up of the Ritson Committee, which reported in 1959: Report of the
Committee on the Rating of Plant and Machinery. Its report included a revised
statement under section 24(4), leading to the Plant and Machinery (Rating) Order
1960 (SI 1960/122). Between 1987 and 1990, section 24 was replaced in similar
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terms by section 21 of the General Rate Act 1967, which preserved the 1960
regulations (section 117(3)). The first regulations made under the 1988 Act (The
Valuation for Rating (Plant and Machinery) Regulations 1989 (SI 1989/441)) were
in similar form. There was no material change to the substance of Class 1(b) (or 1B
as it became) over this period.
19. Meanwhile, as explained by the Wood Report (chapter 4), the law in Scotland
had developed separately. The general rule was established by section 42 of the
Lands Valuation Act (Scotland) Act 1854 (17 & 18 Vict, c 91), which included
within the definition of lands and heritages subject to rates “all machinery fixed or
attached to any lands or heritages”. The perceived burden was partially relieved by
the Lands Valuation (Scotland) Amendment Act 1902 section 1, which added a
proviso to section 42, limited to any building occupied “for any trade, business or
manufacturing process”. More recently, in response in part to unfavourable
comparisons with the position in England, the Local Government and Planning
(Scotland) Act 1982 section 4 gave the Secretary of State power to amend the
proviso to section 42. That was done by the Valuation (Plant and Machinery)
(Scotland) Order 1983 (SI 1983/120). It included (inter alia) an exception for certain
categories of plant “used in an industrial or trade process”, if located “wholly or
mainly outwith” any building (regulation 3(2)).
The Wood Report
20. As already noted, the 2000 Regulations were designed to reflect the
recommendations of the Wood Report. The committee included representatives of
the professions, and the private sector, and of the Valuation Offices of the three
jurisdictions The report itself contains a valuable survey of the development of the
law, in the different parts of the United Kingdom, and discussion of its difficulties
and inconsistencies.
21. Chapter 8, headed “The new scheme – competing principles”, outlined the
committee’s general approach. In particular they accepted the validity “up to a
point” of a “tools of the trade” exemption, but considered that it must be subject to
qualification in the interests of fairness as between ratepayers (paras 8.6-7). They
commented on the problems of dealing with plant used to provide services to a
building but also having a trade purpose. Since this passage is relied on by Mr
Morshead QC for the respondent, it is right to quote it in full:
“8.8 What we have said so far relates to plant and machinery
which is used for the purpose of a trade or industrial process.
There is also the problem of plant and machinery which is
introduced for the purpose of providing services for the
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premises, or which forms part of its infrastructure. This type of
equipment has never given rise to any difficulty as a matter of
principle. In the letting market landlords typically provide the
services and infrastructure, and it has been taken for granted
that such items should always be deemed to form part of the
hereditament, even in the case of property which is not
normally found in that market.
8.9 The difficulty arises in the practical application of the
principle, again as our predecessors have found, because it is
extremely unusual, in the case of large-scale industrial
property, to find plant and machinery which is installed
exclusively for the purpose of providing general services, such
as light, heat and ventilation, and is not also closely bound up
with the trade process. In the existing regulations in each of the
countries of the United Kingdom it has therefore proved
necessary to draw some fairly arbitrary line in order to indicate
the point up to which such plant and equipment can fairly be
rated, by analogy with commercial hereditaments generally,
and beyond which rateability should cease, because at that
stage it is impossible in practical terms to disentangle the
service from the process function. We have looked at the
boundaries which have been drawn in the past, and have redrawn them in order to simplify the task of valuers, assessors
and agents and to reflect some of the technical changes which
have taken place in industry since they were last reviewed.”
22. The committee concluded, at para 8.10, that the “underlying conceptual
approach” of the existing regulations in each part of the UK was “soundly based”.
They then summarised the principles on which future regulations should be based:
“Rateability should continue, in our opinion, to be determined
in accordance with the following rules:
(1) that the land and everything which forms part of it
and is attached to it should be assessed;
(2) that process plant and machinery which can fairly be
described as ‘tools of the trade’ should be exempt
within certain limits;
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(3) that process plant or machinery (in certain cases
exceeding a stated size) which is or is in the nature
of a building or structure or performs the function of
a building or structure should, however, be deemed
to be part of the hereditament or subject;
(4) that service plant and machinery, and items forming
part of the infrastructure of the property should be
rated; and
(5) that, in the case of plant and machinery which
performs both a service and a process function
sensible lines have to be drawn which will indicate
exactly how much falls to be rated and how much
does not.”
23. In chapter 9, the committee commented specifically on Class 1B of the
English regulations (paras 9.11-12). They noted the distinction between plant and
machinery which “services property”, and that provided for use “in connection with
the trade process being undertaken”, adding:
“But many services in non-domestic property, which might be
found whatever the use of the property, are also used
incidentally for manufacturing operations in some instances.”
The definition in Class 1B was “not … free from ambiguity” and had given rise to
disputes as to when plant should be treated as falling within it. As an example of the
problem, they referred to the treatment of an air-conditioning plant, which may have
been installed “to facilitate a particular process – for instance computer suites or
clean rooms”, or to “enhance the working conditions of employees”, but it was
impossible to distinguish between the two purposes. They concluded:
“9.14 We have considered whether the current definition
should be amended or dropped altogether. For example, we
discussed whether it might be preferable to exclude from
rateability only that service plant which ‘solely’ supports a
process function. However to treat plant as process plant only
if it was wholly for process purposes would increase the
rateability of this type of plant and machinery. Such plant is
rarely met in practice. As an alternative, we considered whether
it would be possible to apportion the value of the plant between
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Classes 1B and 4 reflecting the relative use for service and
process activity. But this would run contrary to our desire for
cost-effectiveness of valuation effort and could create new
opportunities for dispute.
9.15 We therefore conclude that notwithstanding the
difficulties which have been encountered in deciding the
degree to which plant is used for process purposes the law as
we understand it in both England and Scotland should remain
unaltered but that the draftsmanship should be improved to
eliminate the difficulties inherent in the English Regulations.”
Although the committee did not include their own draft, these paragraphs can be
taken as a useful indication of the thinking behind the Class 2 proviso in its current
form.
24. Annex L to the report contained a “Summary of worked examples with Wood
Committee recommendations”. This listed some “typical items of plant and
machinery”, for different categories of “Industry”, with an indication of their
rateability respectively in England (including Wales, and Northern Ireland),
Scotland, and under the Wood recommendations. One category, headed “Industry –
(e) Retail distribution”, included the example of “refrigeration plant”, and gave the
answers as no, yes, no; so indicating that, at least in the perception of the Committee,
such refrigeration plant was currently exempted from rateability and should continue
to be so under their recommendations. It is also of interest that the Committee
received written evidence from the Cold Storage and Distribution Federation, and
the National Association of Warehousekeepers, and paid a visit to the Safeway Main
Distribution Centre.
25. Finally, in anticipation of a submission of Mr Morshead, I should note one
feature of the Scottish system on which the Wood Committee commented
unfavourably. This was the distinction drawn by the 1902 Act between, on the one
hand, premises “occupied for any trade, business or manufacturing process”, and
other types of premises, for example, “institutional premises such as hospitals,
schools, colleges and universities …”. They recommended against the perpetuation
of this distinction in the harmonised system (paras 5.2(1), 8.21, 13.19).
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The decisions below and the submissions in the appeal
The decisions
26. The Upper Tribunal (paras 64-66) found difficulty in finding “a satisfactory
line to distinguish between uses which amount to trade processes and those which
do not”. They thought that “the conjunction of the expression with manufacturing
operations”, and the fact that it was “an exception to a general rule”, pointed to “a
less expansive approach to the scope of trade processes”. They saw force in Mr
Morshead’s submission that –
“… the common defining characteristic of manufacturing
operations and trade processes is activity bringing about a
transition from one state or condition to another, including by
the creation, completion, repair or improvement of the subject
matter of that activity.”
They did not think that the display or storage of goods in itself, nor the creation of
an environment conducive to the display or storage of goods, could properly be
regarded as involving a trade process. The requirement of a particular retailer for
more substantial or powerful equipment than is normally found in retail premises
did not create a relevant distinction. They added:
“66. All retail warehouses require heating, cooling and
ventilation to a greater or lesser extent. We do not consider that
the plant and machinery installed to provide those services can
properly be regarded as being used or intended to be used as
part of manufacturing operations or trade processes. We
appreciate that the scale of Iceland’s particular air handling
system is dictated by the presence in its store of substantial
numbers of integral cabinets, each of which creates heat, and
which collectively are essential to Iceland’s preferred style of
trading. A serious malfunction of the air handling system
would therefore put its stock at risk. That feature distinguishes
Iceland’s air handling needs from those of other retailers, but
we do not regard that difference as critical. Although the
particular needs of Iceland create a greater need for those
services than the norm, we do not agree that they make its air
handling system an exception to the general rule that such plant
and machinery is to be assumed to be part of the hereditament
and therefore to be rateable.”
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The tribunal went on to consider whether, assuming the air handling system was
used as part of a trade process, it was “mainly” so used. They would have answered
this question in favour of Iceland. They accepted Iceland’s evidence that “the main
technical and operational reason for Iceland’s selection of this air handling system
is its suitability for the maintenance of an environment in which integral cabinets
can operate successfully” (para 78). This part of their decision has not been
challenged.
27. In the Court of Appeal, the Chancellor (paras 40-46), having found little help
in the authorities cited or the legislative history, relied on “the usual principles of
construction”. He agreed substantially with the reasoning of the Upper Tribunal. He
thought that, normally at least, manufacturing operations and trade processes would
be activities that “bring about a transition from one state or condition to another”,
and would “include the creation, completion, repair or improvement of the subject
matter of that activity” (para 41). He noted also that the relevant sub-clause was “an
exception, not a proviso”, and should be construed “quite narrowly” (para 42). He
thought the display of goods for retail sale was “the antithesis of a trade process”.
He accepted that “the process of freezing chickens” would probably be a trade
process, but not “just keeping them frozen to be offered for sale”. He also agreed
with the tribunal that the fact that the environment appropriate for the methods of a
particular retailer requires more substantial and complex equipment than normal
does not mean that it is used for “a trade process” (para 45).
The submissions
28. In this court, Mr Kolinsky QC for Iceland submitted that the Court of Appeal
misunderstood the underlying purpose of the legislation, as disclosed by a study of
the legislative history, and adopted an unduly restrictive reading of the provision.
He identified Iceland’s trade process as “the continuous freezing or refrigeration of
goods to preserve them in an artificial condition without which they would be
worthless”. Neither the ordinary use of language nor the case law justified the view
that a transition was required from one state to another.
29. He relied (as he did in the Court of Appeal) on three authorities which
supported a wider approach:
i) Union Cold Storage Co Ltd v Southwark Assessment Committee
(1932) 16 R & IT 160, relating to the application of the precursor of Class 4
of the 2000 Regulations to cooling chambers in a warehouse used for storing
food. The case proceeded on the basis (recorded at p 164) that the chambers
were “admittedly plant on the hereditament for the purpose of manufacturing
operations or trade processes”.
Page 16
ii) Union Cold Storage Co Ltd v Bancroft [1931] AC 446, where the issue
was whether, for the purposes of industrial derating, certain refrigeration
equipment was for storage purposes or for the purposes of altering or adapting
goods for sale. Viscount Dunedin described the plant as used as part of an
“elaborate process involving the use of machinery … for the preservation of
goods during storage” (pp 492-493).
iii) Assessor for Lothian Region v BP Oil Grangemouth Refinery Ltd
(1985) SLT 453, where the Lands Valuation Appeal Court proceeded on the
basis that a marine terminal at a petrochemical works, used solely for the
purpose of loading refined oil, was premises “used in an industrial or trade
process” (p 459, per Lord Ross).
30. As a further illustration of the practice of the Valuation Office at the time of
the Wood Report, he referred to Hays Business Services Ltd v Raley (Valuation
Officer) [1986] 1 EGLR 226 (LT) (Emlyn Jones FRICS). That concerned a
warehouse used for the storage of archival materials including documents, films and
audio-magnetic tapes. For some items of a sensitive nature, there had been installed
specialist items of plant, including heating plant, humidifiers, and fire-protection
equipment which utilised Halon gas so as to extinguish fires without damaging the
stored items. The tribunal recorded that the Solicitor for the Inland Revenue, for the
Valuation Officer, had conceded that the specialist heating and humidification
equipment were non-rateable (p 227J). The tribunal reached the same conclusion in
respect of the fire protection plant, which was not rateable because it was “on the
hereditament primarily to protect the material that is stored there”. It added:
“Even if it were to be found that this could only be done by the
protection of the building and therefore that that was the main
use of the equipment, it would nevertheless not be included
within the schedule because it was there expressly for the
purpose of the trade process being carried on.” (p 228E)
To similar effect, Mr Kolinsky relied also on the Wood Report, which proceeded on
the assumption that an air-conditioning plant installed “to facilitate a particular
process” such as a computer suite, was excepted from rating (see the passage quoted
at para 23 above).
31. He found more recent support for the same broad approach in Leda
Properties Ltd v Howells (Valuation Officer) [2009] RA 165 (LT George Bartlett
QC President). Although no issue arose under the proviso as such, it was common
ground that the sophisticated air handling system of a computer hall, described in
the decision (para 3) as “provid[ing] the temperature and humidity control necessary
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for process purposes”, was to be left out of account under the regulations (paras 3,
34). Mr Kolinsky (who coincidentally appeared on that occasion for the respondent
Valuation Officer) asked us to note that the Valuation Officer, Mr Howells, was
described as having had since 1996 “a lead role” in the valuation of “specialist
classes of property, including computer centres” (para 32). We were asked to infer
that the common ground reflected the Valuation Office’s considered and established
position at the time.
32. For the Valuation Officer, Mr Morshead supported the reasoning of the
Upper Tribunal and the Court of Appeal. Like them he submitted that the Class 2
proviso constitutes an exception to the general principle of rateability, and should
be narrowly construed. The composite phrase “manufacturing operations or trade
processes” must be read as a whole. It was not enough that the ratepayer’s activity
could be labelled as a “trade” and that one or more of its activities could be labelled
as a “process”. This was the error made by the tribunal in the Hays case, the
reasoning of which was “plainly misconceived”. The Union Cold Storage cases, to
the extent that the statutory context was the same, were not necessarily comparable
on the facts. In so far as they involved the application of a reduction in temperature
to turn fresh goods into frozen or chilled ones, it would be uncontentious to describe
that activity as a “manufacturing operation or trade process”. He referred also by
way of analogy to the Capital Allowances Act 1968 section 7, which defines
“industrial building” as including (inter alia) a building in use for the purposes of “a
trade which consists in … the subjection of goods … to any process” (section
7(1)(e)). In Bestway (Holdings) Ltd v Luff [1998] STC 357, 381, Lightman J had
summarised, under heads (1) to (7), the effect of the authorities on the meaning of
the expression “subjection to process” (notably Kilmarnock Equitable Co-operative
Society Ltd v Inland Revenue Comrs (1966) 42 TC 675, 1966 SLT 224):
“(3) Subjection to a process means a treatment (or course of
operations) involving the application of a method of
manufacture or adaptation of goods or materials towards a
particular use, purpose or end …”
This showed that “process” implied some form of adaptation of the goods, not
simply their storage in a constant state as in this case.
33. Mr Morshead also went further than the Court of Appeal. He submitted that
Iceland’s retail activities were wholly outside the scope of the Class 2 proviso, which
was directed towards plant serving productive activities in industry, rather than
commercial activities more generally. He supported that submission by reference to
the history, including the reports summarised above, and specifically to the Wood
Report (in particular paras 8.8-9 quoted above). He read the report as recognising a
wide-ranging general rule applicable to “commercial hereditaments generally”,
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distinguished from the activities of industry; and as proposing for the latter (in his
words) “an exemption only in the narrow case of plant which serves a ‘process
function’ in industry”.
Discussion
34. It is appropriate to begin by addressing Mr Morshead’s broader submission,
not in terms adopted by the Upper Tribunal or the Court of Appeal: that is, that the
Class 2 proviso was concerned with productive activities in industry and not with
other forms of commercial activity, such as the retail activities of Iceland. With
respect to him, and to those instructing, I find this an impossible contention, both on
the wording of the Regulations and against the background of the Wood Report. As
to the first, if the draftsman had wished to limit the proviso to industrial activities, it
would have been easy to say so. The inclusion of “trade processes”, as an alternative
to “manufacturing operations” can only be read as designed to widen the scope of
the proviso to include other forms of trade and their processes. Trade is a familiar
word which naturally extends to Iceland’s retail activities. Subject to the
interpretation of the word “process”, there is nothing in the proviso or in its context
to justify a narrower approach.
35. Further, far from gaining support from the Wood Report, the submission
seems to me wholly inconsistent with it. It is true that there were some references in
chapter 8 to particular issues affecting industry, but I cannot read those as intended
to limit the scope of the recommendations more generally. On the contrary, the
emphasis was on “the principle of fairness between ratepayers”, which was regarded
as “of paramount importance” for the political credibility of the “business rating
system” (para 8.6). Nor was there any such limitation in the general rules proposed
at paragraph 8.10, or the specific discussion of Class 2 (paras 9.14-15) (see above).
Rule (2) proposed exemption for plant and machinery that can fairly described as
“the tools of the trade”, without any limitation of the nature of the trade. Similarly
rule (5) which dealt with the need to draw lines between the “service” and “process”
functions was expressed in general terms.
36. The submission is even less easy to reconcile with the Scottish legislation,
which referred to “any trade, business or manufacturing process”. As noted above,
the report criticised that, not for extending its scope too far, but for not going far
enough. Finally, Mr Morshead was unable to explain why, if his submission were
correct, the worked examples extended to “retail distribution”; nor why from 1986
until as recently as 2009 the practice of the Valuation Office had apparently taken a
wider view, so as for example to treat air conditioning plant for a computer centre
as within the scope of the proviso. The Hays case (1986) is of course not binding on
this court, nor indeed on the Valuation Office. It is unnecessary to decide whether
on its facts it was correctly decided. However, if it had been thought in any way
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controversial at the time of the Wood Report, it would be very surprising for it not
to have been addressed.
37. Turning to the reasoning below, the Court of Appeal and the Upper Tribunal
both saw the proviso as an “exception to a general rule”, to be construed narrowly;
and as naturally referring to a process designed to bring about a “transition” from
one state to another. The Court of Appeal even saw some significance in the change
(between 1925 and 1994) from a “proviso” to an “exception”: para 42. In my view
this approach pays insufficient regard to the place of the proviso in the scheme of
the Regulations as a whole. Whatever word has been used at different times, it is
and always was an exception to an exception. As already explained, the classes are
themselves exceptions to the general rule of non-rateability; the relevant proviso (or
exception) brings items of plant back into the scope of the general rule. The rationale
is that, although they may provide a service to the building, they also provide a
service to the activities of the trader within it, and the latter is their main or exclusive
function. They are therefore more fairly considered for rating purposes as “tools of
the trade” (in the words of the Wood Report) within the general rule of nonrateability.
38. There is certainly nothing in the Wood Report to suggest that the use of the
word “except” or the other changes of language were intended to signal a substantive
change. On the contrary, the passages quoted above show that the intention was to
retain the law substantially without alteration, while improving the draftsmanship.
How this was done (reflecting the language of Wood Report paras 9.11-12) is
apparent from a comparison of the wording of the 2000 Regulations with that of its
predecessors. An important change was the introduction of the expression “services
…” to distinguish the functions of different categories of plant. Thus, it is recognised
that plant which is used in connection with “services to the hereditament” may also
be used in connection with “services … as part of manufacturing operations or trade
processes …”. Viewed in this way, the key distinction lies in the main use to which
the services are put: in connection with the hereditament, or with the processes
within it.
39. In my view, there is nothing in the word “process” itself which implies a
transition or change. The cases under the Capital Allowances Act 1968 were no
doubt coloured by the context, related to “industrial” buildings, and the need for
goods to be “subjected” to a process. This is apparent in particular from the opinion
of Lord Guthrie in the Kilmarnock case (42 TC 675, 681, 1966 SLT 224, 228). He
recognised “process” as a word with “various meanings some wider than others”,
including “the widest significance of ‘anything done to the goods or materials’”; but
in conjunction with the word “subjection” a narrower reading was appropriate. I
agree respectfully with that view of the wider meaning of the word “process”, which
is also consistent with the standard dictionary definitions. A “trade process” is
simply a process (in that wide sense) carried on for the purposes of a trade.
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40. Mr Kolinsky submits that, in the context of Iceland’s trade, the word is apt to
cover “the continuous freezing or refrigeration of goods to preserve them in an
artificial condition”. I agree. Since the services provided by the relevant plant have
been held to be used “mainly or exclusively” as part of that trade process, they
should be left out of account for rating purposes.
41. For these reasons, I would allow the appeal, and, on this issue, restore the
decision of the Valuation Tribunal.