Melluish (Inspector of Taxes) v. BMI (No 3) Ltd

[1995] 4 All ER 453
[1996] AC 454

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(Decision by: LORD BROWNE-WILKINSON)

Melluish (Inspector of Taxes)
v MBI (No 3) Ltd

Court:

Judges: Lord Goff of Chieveley
Lord Browne-Wilkinson
Lord Slynn of Hadley
Lord Nicholls of Birkenhead
Lord Steyn

Subject References:
Capital allowances
Machinery or plant
Expenditure on provision of machinery or plant
Capital expenditure incurred by taxpayer companies on plant and machinery leased out and installed in premises owned and occupied by local authority
Central heating installed in council houses
Whether lessors entitled to writing-down allowances
Whether plant and machinery becoming fixtures on local authority's land
Whether plant 'belonging' to lessors
Whether central heating 'belonging' to lessors
Whether plant could be treated as belonging to lessors if expenditure had been incurred by local authority
Whether lessors having 'interest in the relevant land'

Legislative References:
Finance Act 1971 - s 44(1)
Finance Act 1985 - s 59; Sch 17, para 3

Case References:
Gough v Wood & Co - [1894] 1 QB 713, CA
Hobson v Gorringe - [1897] 1 Ch 182, CA.
Morrison, Jones & Taylor Ltd, Re, Cookes v Morrison, Jones & Taylor Ltd - [1914] 1 Ch 50, CA
Pepper (Inspector of Taxes) v Hart - [1993] 1 All ER 42; [1993] AC 593; [1992] 3 WLR 1032, HL
Reynolds v Ashby & Son - [1904] AC 466; [1904-7] All ER Rep 401, HL
Samuel Allen & Sons Ltd, Re - [1907] 1 Ch 575
Simmons v Midford - [1969] 2 All ER 1269; [1969] 2 Ch 415; [1969] 3 WLR 168
Stokes (Inspector of Taxes) v Costain Property Investments Ltd - [1984] 1 All ER 849; [1984] 1 WLR 763, CA

Judgment date: 12 October 1995

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Decision by:
LORD BROWNE-WILKINSON

My Lords, these appeals raise a number of questions as to the capital allowances which can be claimed by taxpayers who carry on the business of finance leasing, ie the purchase of plant and the leasing to end-users of the plant they have purchased. The particular problem in the present case arises from the fact that the plant purchased by the appellant taxpayer companies (eg central heating) was incorporated into the structure of buildings owned by the lessees of the plant. In consequence they became fixtures. Under the general law, chattels fixed to the land become the property of the owner of the land. But in order to be entitled to capital allowances taxpayers have to show that, at the material times, the plant 'belongs' to them. Can this requirement be satisfied in relation to a chattel that has become a fixture?

The facts

The full facts are set out in the decision of the Special Commissioners and the judgment of Vinelott J ([1994] STC 315). For present purposes it is unnecessary to set them out again in full and I will seek only to summarise them from the facts agreed between the parties to this appeal.

Each of the five appellant taxpayer companies carries on the trade of acquiring and hiring out plant and machinery to users. The companies are part of the Barclays Mercantile Group. The relevant users of the plant are local authorities who are (or were at the time of affixation) freeholders of the premises in which the items of plant were affixed. There are 28 local authorities involved in the present case.

The nature of the plant is such that, for the most part, it has to be fixed to the structure of the building in which it is installed so that, on being so fixed, it would on ordinary principles of the general law be regarded as a fixture. Various types of plant and machinery are involved, viz (a) central heating installed in council flats and houses; (b) video door entry systems installed in blocks of council flats and alarm systems in sheltered housing accommodation; (c) lifts installed in council car parks; (d) boilers installed in council offices; (e) cremators installed in a council crematorium; and (f) ventilation and filtration plant installed in a council swimming pool.

There were altogether 201 relevant transactions between the taxpayer companies and the local authorities. Of these, 180 concerned central heating in council dwellings and the remainder concerned plant of other kinds. The only relevant difference between the various transactions is that in the case of plant and machinery installed in council flats or council houses (and possibly also in the case of alarm systems installed in sheltered housing) the flats or houses were, either at the time of installation or shortly thereafter, let to council tenants on weekly tenancies. In all other cases the buildings in which the plant has been installed have at all times remained in the occupation of the local authority.

The arrangements between each taxpayer company and the local authority were as follows. There was a master equipment lease between the taxpayer and the local authority. This master lease was entered into before the relevant plant and machinery was acquired. It purported to relate to equipment, rent, term and location as stated in the schedule, but the schedule was initially blank. In relation to each transaction, a schedule was subsequently inserted into that master lease. The schedule sets out certain details of the transaction, including the identification of the equipment, the term, the commencing date of the term, the rent and how it was to be paid and the rent payable if the lessee elected to renew the leasing on a year-to-year basis upon the expiration of the original term. The schedule contained a declaration that it should be read and construed as a schedule incorporated in and forming part of the master lease.

The relevant terms of the master lease (including the relevant schedule) were as follows: (a) The local authority agreed to take the equipment on lease for a term, typically, of ten years, renewable on a year-to-year basis thereafter, the hirer agreeing to pay a rent annually in advance to the taxpayer company for the use of the equipment. (b) The local authority agreed to use the equipment properly and to allow the taxpayer company access to inspect the equipment (cll 2.2 and 2.6). (c) The local authority agreed to keep the equipment properly repaired and maintained (cl 2.5). (d) The local authority agreed to allow the taxpayer company to indicate its ownership on the equipment being leased (cl 2.7). (e) The local authority agreed to keep the equipment in its sole possession and not to sell, assign, mortgage, charge or sublet the equipment (cl 2.8). (f) The local authority agreed to insure the equipment for the benefit of the taxpayer company (cl 2.9). (g) The local authority agreed to return the equipment to the taxpayer company on the expiry or sooner determination of the lease (cl 3.7). (h) The taxpayer company was given the right to repossess the equipment on the happening of certain specified events including the non-payment of rent and other breaches of the provisions of the agreement by the local authority, or the insolvency of the local authority (cl 3.8). (i) Clause 3.10 of the master lease provided:

'As between the lessor and the lessee the equipment hereby leased shall remain personal or moveable property and shall continue in the ownership of the lessor notwithstanding that the same may have been affixed to any land or building. The lessee shall be responsible for any damage caused to any such land or building by the affixing to or removal therefrom of the equipment (whether such affixing or removal be effected by the lessor or the lessee) and shall indemnify the lessor against any claim made in respect of such damage.'

There was also between the taxpayer company and the local authority an agency purchase facility. That facility authorised the local authority to purchase goods on behalf of the taxpayer company. The agency was stated to apply only to goods which the taxpayer company might from time to time agree to purchase and let to the local authority. The facility required the local authority to obtain the prior approval of the taxpayer company of a proposed transaction. The facility was withdrawn and renewed from time to time. There is a dispute between the taxpayer companies and the Crown as to whether goods purchased by a local authority and subsequently leased from a taxpayer company were purchased by that local authority as agent for the taxpayer company as undisclosed principal (pursuant to the agency purchase facility) or as principal for itself. I will have to revert to that matter later.

It appears that in practice, whether or not the taxpayer companies had approved the purchase, the local authority ordered the chattels from the suppliers, and caused them to be incorporated in their freehold properties, whereupon they became fixtures. The local authority then submitted an invoice to the taxpayer company for the full cost of the equipment, including the cost of installation. The taxpayer company then paid to the local authority the full amount of the invoice and the lease schedule relating to the transaction was executed. It is of importance to note that the Special Commissioners found as a fact that in relation to each transaction the chattels in question had been fixed to the freehold property and become fixtures prior to the date on which the relevant lease schedule was completed.

Different legislation applies to claims for capital allowances for fixtures depending upon the date upon which the relevant expenditure was incurred. If it was incurred up to 11 July 1984, the position is regulated by s 44 of the Finance Act 1971; if incurred thereafter the position is regulated by s 44 as fundamentally modified and expanded by s 59 of and Sch 17 to the Finance Act 1985. I will deal separately with these two periods.

Section 44 of the 1971 Act

Section 44(1) provides:

'Subject to the provisions of this Chapter, where-(a) a person carrying on a trade has incurred capital expenditure on the provision of machinery or plant for the purposes of the trade, and (b) in consequence of his incurring the expenditure, the machinery or plant belongs, or has belonged, to him, and (c) the machinery or plant is or has been in use for the purposes of the trade, allowances and charges shall be made to and on him in accordance with the following provisions of this section.'

It is common ground that the requirements of paras (a) and (c) are satisfied in each of these cases. Therefore, the sole question is whether the plant which has at all material times been affixed to land owned by the local authorities 'belongs' to the taxpayer companies. (It is common ground that the words 'or has belonged' are not relevant to the present question.)

The Special Commissioners held that each taxpayer company had acquired 'chattels' which it then owned; the subsequent leasing of those chattels on the terms of the master lease and the fixing of the chattels to the land did not lead to the conclusion that they ceased to 'belong' to the taxpayer company. Vinelott J rightly held that the Special Commissioners had misdirected themselves: since the chattels had been acquired and fixed to the land before the relevant lease schedule was completed, the taxpayer company never became the owner in law of the chattels. At all relevant times the chattels had become part of the land owned by the local authority and were therefore themselves owned in law by the local authority.

Vinelott J held, however, that the fact that the plant was at all relevant times owned in law by the local authority did not mean that, for the purposes of s 44(1), they did not 'belong' to the taxpayer company. He held that the contractual rights enjoyed by the taxpayer company under the master lease were sufficient to justify it being said that, notwithstanding the affixing of the plant, it still belonged to the taxpayer company. However, he drew a distinction between the plant which was installed in land which was immediately let by the local authority (ie the council houses and sheltered accommodation) and that installed in land the possession of which was retained by the local authority. As to the latter, the plant 'belonged' to the taxpayer company because of the contractual rights under the master lease. But as to the former, the taxpayer company's contractual and possibly equitable rights would not be enforceable against the tenants of the council housing since they would be purchasers for value without notice. Therefore, he held, the plant in tenanted properties did not 'belong' to the taxpayer companies.

The Court of Appeal (Dillon, Hoffmann and Saville LJJ) ([1994] STC 802) unanimously allowed an appeal against the decision of Vinelott J in relation to the plant fixed to the property of which the local authority retained possession. They held that the concept of a fixture which remains personal or removable property was a contradiction in terms and an impossibility in law. The future right to remove equipment at the expiry of the term or in the event of a default by the local authority did not mean that the equipment 'belongs' to the taxpayer company so long as it remains attached to the realty.

I agree with the conclusion and reasoning of the Court of Appeal. The equipment in these cases was attached to the land in such a manner that, to all outward appearance, they formed part of the land and were intended so to do. Such fixtures are, in law, owned by the owner of the land. It was suggested in argument that this result did not follow if it could be demonstrated that, as between the owner of the land and the person fixing the chattel to it, there was a common intention that the chattel should not belong to the owner of the land. It was said that cl 3.10 of the master lease disclosed such an intention in the present cases. In support of this argument reliance was placed on the decision in Simmons v Midford [1969] 2 All ER 1269, [1969] 2 Ch 415, where Buckley J held that even where the outward and visible signs were only consistent with the chattels' (in that case an underground drain) having become part of the land, the circumstances and language used in the grant of the right to lay the drain showed an intention that the ownership of the drain should not be vested in the owner of the soil. He held that in consequence the drain was not owned by the owner of the soil in which it had been laid.

Unfortunately, the decision in Hobson v Gorringe [1897] 1 Ch 182 was not cited to Buckley J. That case (which was approved by this House in Reynolds v Ashby & Son [1904] AC 466, [1904-7] All ER Rep 401) demonstrates that the intention of the parties as to the ownership of the chattel fixed to the land is only material so far as such intention can be presumed from the degree and object of the annexation. The terms expressly or implicitly agreed between the fixer of the chattel and the owner of the land cannot affect the determination of the question whether, in law, the chattel has become a fixture and therefore in law belongs to the owner of the soil (see [1897] 1 Ch 182 at 192-193). The terms of such agreement will regulate the contractual rights to sever the chattel from the land as between the parties to that contract and, where an equitable right is conferred by the contract, as against certain third parties. But such agreement cannot prevent the chattel, once fixed, becoming in law part of the land and as such owned by the owner of the land so long as it remains fixed. To the extent that Simmons v Midford decides otherwise it was wrongly decided.

Before your Lordships (but not, so far as I can detect, before the courts below) the taxpayer companies sought to distinguish between the legal and the equitable ownership of the fixtures. This argument, whilst accepting that the legal title to the fixtures was vested in the local authority, sought to establish that in equity the beneficial ownership has at all times been vested in the taxpayer companies. The argument, as I understand it, is as follows. At the date a lease schedule was completed, the local authority in law owned the affixed chattels. The master lease and the schedule proceed on the basis that the chattels were owned by the taxpayer companies. Therefore, it is said, the completion of the lease schedule must have given rise to an agreement by the local authority to sell to the taxpayer company that part of the 'land' occupied by the former chattels and a lease back of that part of the 'land' by the taxpayer company to the local authority. Such contract of sale, being specifically enforceable in equity, constituted the local authority a trustee for the taxpayer company of that part of the 'land'. Therefore, it was submitted, in equity the taxpayer company was the sole beneficial owner of the affixed chattel which accordingly 'belongs' to it for the purposes of s 44.

In my judgment, that argument is wholly unrealistic and unsustainable for a number of reasons. I need only mention two. First, the documentation to which we were referred discloses no shred of an intention to enter into such a sale and lease back transaction. Although the parties were plainly proceeding on the basis that at the time of the completion of the schedule the equipment was owned by the taxpayer company, that provides no basis for implying a complicated legal transaction of a kind not contemplated by the parties. The reality of the matter is that the parties were proceeding under a misapprehension as to the ownership of the equipment. Despite such misapprehension, as between the local authority and the taxpayer company the contract is entirely effective to carry out the parties' intentions because cl 3.10 would estop the local authority from denying the taxpayer company's ownership of the equipment if and when it is severed from the land. Second, I am quite unable to define what is the subject matter of the alleged sale. Is it the equipment alone? If so, who owns the air space occupied by the equipment while it remains fixed? If it is the equipment and the air space occupied by it, who owns the air space formerly occupied by it when, pursuant to the rights under the master lease, the equipment is removed? In my judgment the argument is wholly untenable.

The final argument of the taxpayer company on this issue was that, even if under the general law the local authority was the owner of the fixtures, those fixtures 'belong' to the taxpayer companies for the purposes of s 44. They relied on the fact that they had paid for the equipment and were in receipt of a rent for its use. They further relied on the provisions of the master lease permitting the labelling of the equipment (cl 2.7), requiring its insurance for their benefit (cl 2.9), and prohibiting alienation of the equipment (cl 2.8). They relied in particular on the right of the taxpayer company to the return of the equipment on the determination of the lease (cl 3.7) and the right, in the event of default by the local authority, to remove the equipment (cl 3.8). All those provisions, coupled with the express provision in cl 3.10 that, as between the taxpayer companies and the local authorities, the former are to be treated as the owners of the equipment, it was said justify a conclusion that the equipment 'belongs' to the taxpayer companies.

In support of this argument reliance was placed upon cases where the rights of a third party who has supplied equipment to be fixed to land (reserving a right to re-enter, sever and repossess it) have been held to prevail over the rights of a mortgagee of the land. The general rule is that, as between mortgagor and mortgagee, the mortgagee is entitled to all fixtures on the mortgaged land. However, it is said that Gough v Wood & Co [1894] 1 QB 713 shows that the general rule does not apply where, as in that case, the equipment which had become a fixture had been supplied on terms which reserved to the supplier the title in the equipment until it had been fully paid for. It was held that where, before the mortgagee took possession, the supplier had severed it and repossessed the equipment, he was not liable to the mortgagee for so doing. But, as explained in Hobson v Gorringe [1897] 1 Ch 182 at 189, the decision in that case depended upon the finding that, since the mortgagor was a nurseryman, the mortgagee had impliedly licensed the mortgagor to sever and remove trade fixtures in the course of his trade and that accordingly the mortgagee's rights had not been infringed by the severance and removal of the fixtures (see Gough v Wood & Co [1894] 1 QB 713 at 720, 722 per Lindley and Kay LJJ). If the mortgagee had taken possession (thereby terminating the authority of the mortgagor to sever the trade fixtures) and subsequently the supplier had sought to recover the equipment, the supplier's claim would have failed (see Hobson v Gorringe ). In my judgment Gough v Wood & Co provides no support for the contention of the taxpayer companies.

The other cases relied on were Re Samuel Allen & Sons Ltd [1907] 1 Ch 575 and Re Morrison, Jones & Taylor Ltd, Cookes v Morrison , Jones & Taylor Ltd [1914] 1 Ch 50. In those cases equipment (subsequently fixed to the land) had been supplied under an agreement which provided that the equipment should remain the property of the supplier until paid for and that in the event of default by the purchaser the supplier should have a right to enter and remove it. The land was subsequently charged by way of equitable charge. It was held that the right to re-enter and remove the equipment gave the supplier an equitable right which, being earlier in time than the subsequent equitable mortgage, took priority over the latter. In my judgment these cases do provide some support for the taxpayer's argument since they demonstrate that the rights conferred by the master lease are not purely contractual (and as such only enforceable between the parties) but also confer on the taxpayer company an equitable right in the equipment enforceable against any subsequent taker of the land to which it is affixed other than a bona fide purchaser for value without notice.

I turn then to consider whether the bundle of rights enjoyed by the taxpayer companies (including the limited equitable right to which I have referred) is sufficient to justify describing the equipment as 'belonging' to the taxpayer company for the purposes of s 44. In my judgment the factors relied upon are not sufficient to constitute 'belonging'. The taxpayer company has never been the owner of the equipment, whether in law or in equity; it became a fixture (and therefore the property of the local authority) before the lease was entered into. Unless and until the local authority is in default or decides not to renew the lease the taxpayer company has no right to possession of the equipment or to direct how it shall be used. Its only property right is a contingent right to become the owner at a future date. In the meantime the property is owned and enjoyed exclusively by the local authority. The fact that the taxpayer company has an equitable right which may in the future be enforceable against some third parties does not, in my judgment, carry much weight; it indicates that there are rights relating to the equipment which belong to the taxpayer company, not that the equipment itself belongs to them.

It is important to bear in mind that the question whether the equipment 'belongs' to the taxpayer company does not fall to be answered once and for all at one particular date. The question has to be answered in relation to each chargeable period; moreover, in calculating the disposal value which has to be brought into account for the purpose of the balancing charge, it is necessary to determine whether and when the equipment has ceased 'to belong to' the taxpayer (s 44(5)(c)). Therefore in construing the word 'belongs' as used in s 44 one would expect, first, that the question whether equipment belongs or has ceased to belong to the taxpayer would be capable of a ready answer and, second, that the taxpayer could control, or at least be aware of, circumstances which caused the property to cease to belong to him. Yet if the taxpayer companies' submission is correct, equipment which belongs to them could at any time 'cease to belong', thereby giving rise to a balancing charge, without the taxpayer companies' knowing anything about it. Vinelott J held (in my view rightly) that even if otherwise the equipment belonged to the local authority, as soon as it granted a tenancy of a council house the equipment in the house could not thereafter be said to belong to the taxpayer company so long as the tenancy continued. The tenant would be a purchaser for value of a legal estate without notice and would take free of the contractual and equitable rights of the taxpayer company under the master lease. The right to enter the house and remove the central heating would not be exercisable against the tenant. Similarly, a sale or mortgage of the house or other property to which equipment was affixed would in the ordinary case leave the taxpayer company without any rights over such equipment. Yet the grant of such tenancy or the sale or charge by the local authority would normally take place without the knowledge or consent of the taxpayer company. True, such tenancy, sale or charge would constitute a breach of cl 2.8 of the master lease but that would make no difference to the fact that the taxpayer company would enjoy no rights of any kind against the person acquiring the fixtures. In my judgment, Parliament cannot have intended the word 'belongs' to produce such a result.

I therefore reach the conclusion that for the purposes of s 44 property belongs to a person if he is, in law or in equity, the absolute owner of it. Such a construction reflects the obvious, prima facie, meaning of the word: what belongs to me is what I own. It produces a coherent and easily applicable formula and, save in relation to fixtures, avoids anomalous results. I am fortified in this conclusion by the decision of the Court of Appeal in Stokes (Inspector of Taxes) v Costain Property Investments Ltd [1984] 1 All ER 849, [1984] 1 WLR 763. In that case the taxpayer had developed a site belonging to local authority under an agreement which required the inclusion of certain plant and equipment as fixtures. Pursuant to the agreement, on completion of the development the developer was granted a 99-year lease by the local authority. The developers' claim for capital allowances for the plant and equipment they had installed failed because as a fixture it was owned by the local authority as freeholders and could not, for the purposes of s 44, 'belong' to the developers as lessees. Fox LJ said ([1984] 1 All ER 849 at 854, [1984] 1 WLR 763 at 769):

'I agree that "belong" and "belonging" are not terms of art. They are ordinary English words. It seems to me that, in ordinary usage, they would not be satisfied by limited interests. For example, I do not think one would say that a chattel "belongs to X" if he merely had the right to use it for five years.'

Robert Goff LJ treated the expression 'belonging to' as the same as 'owned by' (see [1984] 1 All ER 849 at 856, [1984] 1 WLR 763 at 771). In my judgment that case was rightly decided. The same conclusion must apply to the much lesser rights enjoyed in the present case. A long leaseholder enjoys a legal estate in the land (including the fixtures) which gives him immediate possession and enjoyment of the fixtures. In contrast, in the present case the rights enjoyed by the taxpayer company confer no immediate right of any kind to enjoyment of the property and only nebulous contingent future rights so to do.

In Stokes v Costain Property Investments Ltd the Court of Appeal expressed the view that the law as they had found it was not satisfactory. As a result, Parliament enacted further provisions regulating the right to capital allowances in relation to fixtures in the 1985 Act to which I now turn.

The 1985 Act, s 59 and Sch 17

Section 59 provides:

'(1) The provisions of Schedule 17 to this Act apply to determine entitlement to an allowance under Chapter I of Part III of the Finance Act 1971 in respect of expenditure on the provision of machinery or plant which is so installed or otherwise fixed in or to a building or any other description of land as to become, in law, part of that building or other land; and at any time when, by virtue of that Schedule, any machinery or plant is treated as belonging to any person, no other person shall be entitled to such an allowance in respect of it.

(2) Schedule 17 to this Act applies to expenditure incurred after 11th July 1984, unless that expenditure-(a) consists of the payment of sums payable under a contract entered into on or before that date; or ...'

Schedule 17 contains a very detailed system for determining who is entitled to claim capital allowances. The provisions which are directly relevant are: 'Expenditure incurred by holder of interest in land

2.-(1) Subject to sub-paragraph (2) below, in any case where-(a) a person incurs capital expenditure on the provision of machinery or plant either for the purposes of a trade carried on by him or for leasing otherwise than in the course of a trade, and (b) the machinery or plant becomes a fixture, and (c) at the time the machinery or plant becomes a fixture he has an interest in the relevant land, then, subject to paragraphs 3 and 7 below, on and after that time the fixture shall be treated for material purposes as belonging to the person concerned in consequence of his incurring the expenditure ...

Expenditure incurred by equipment lessor

3.-(1) In any case where-(a) a person (in this Schedule referred to as "the equipment lessor") incurs capital expenditure on the provision of machinery or plant for leasing, and (b) an agreement is entered into for the lease, directly or indirectly from the equipment lessor, of the machinery or plant (otherwise than as part of the relevant land) to another person (in this Schedule referred to as "the equipment lessee") for the purposes of a trade carried on by the equipment lessee or for leasing otherwise than in the course of a trade, and (c) the machinery or plant becomes a fixture, and (d) if the expenditure referred to in paragraph (a) above had been incurred by the equipment lessee, the fixture would, by virtue of paragraph 2 above, have been treated for material purposes as belonging to him in consequence of his incurring the expenditure, and (e) the equipment lessor and the equipment lessee elect that this paragraph should apply, then, subject to paragraph 7 below, on and after the time at which the expenditure is incurred the fixture shall be treated for material purposes as belonging to the equipment lessor in consequence of his incurring the expenditure ...

Expenditure included in consideration for acquisition of existing interest in land

4.-(1) In any case where,-(a) after any machinery or plant has become a fixture, a person (in this paragraph referred to as "the purchaser") acquires an interest in the relevant land, being an interest which was in existence prior to his acquisition of it, and (b) the consideration which the purchaser gives for that interest is or includes a capital sum which, in whole or in part, falls to be treated for material purposes as expenditure on the provision of the fixture ... then, subject to paragraph 7 below, on and after the purchaser's acquisition of his interest in the relevant land, the fixture shall be treated for material purposes as belonging to him in consequence of his incurring expenditure as mentioned in paragraph (b) above º'

Paragraph 1(2) of Sch 17 defines 'interest in land' as including the fee simple, in Scotland the estate or interest of the proprietor of the dominium utile , any leasehold estate in or (in Scotland) lease of land and '(d) an easement or servitude or any agreement to acquire an easement or servitude'.

(A) Do s 59 and Sch 17 provide an exclusive code?

Before the Special Commissioners and Vinelott J it was assumed by both the taxpayer companies and the Crown that, if a case did not fall within any of the specific paragraphs of Sch 17, the taxpayer could still succeed if he could show that, on the true construction of s 44 of the 1971 Act, the fixed equipment 'belonged' to the taxpayer. Thus it was assumed, for example, that in a case otherwise falling within para 3(1) of Sch 17 but where there had been no election under para 3(1)(e), that was not fatal to the claim for an allowance: if the taxpayer companies could show that under s 44 the equipment 'belonged' to the taxpayer companies, they would be entitled to claim the capital allowances.

In the course of the hearing before your Lordships, the question was raised whether this was the right view or whether s 59 and Sch 17 now provide a complete and exclusive code for determining the only circumstances in which capital allowances can be claimed in respect of fixtures. After consideration, the Crown sought to resile from its former position and argue that s 59 and Sch 17 provide an exclusive code. In view of the general importance of the point your Lordships permitted the Crown to change its position and heard full argument on the point. Since in my judgment in the present case the fixtures do not in any event 'belong' to the taxpayer companies for the purposes of s 44, the question does not strictly require to be decided in the present case. But in view of its general importance, it is desirable that your Lordships should express your view on it.

The principal argument in favour of Sch 17 being an exclusive code is founded on the wording of the first sentence of s 59(1) and the comprehensive nature of the scheme established by Sch 17. Section 59(1) provides that the provisions of the Schedule apply 'to determine entitlement to an allowance' in respect of fixtures. If those words stood alone, it would not be arguable that in a case not provided for by the Schedule an allowance is payable: the allowance has to be 'determined' by the Schedule. This construction is much supported by the extremely detailed provisions of the Schedule which deals, so far as I can see, with every conceivable permutation in which there might be competing interests in a fixture as between those who, under the general law, own the land (and therefore the fixture) and others who by incurring expenditure on the fixture have a just claim to an allowance for such expense. Moreover, the Schedule is drafted by reference to the technical concepts of the laws of England and Scotland. It would be strange if, because the Schedule did not cover a particular case (eg because an election had not been made), the effect was to throw one back to all the uncertainties as to the person to whom the fixture 'belongs' disclosed by Stokes v Costain Property Investments Ltd Ltd [1984] 1 All ER 849, [1984] 1 WLR 763.

However, Mr Aaronson QC has put forward formidable arguments to the contrary effect. He relies primarily on four points. First, he submits that the 1985 amendments were introduced to remedy the mischief disclosed by Stokes v Costain and therefore should not be given an over-wide construction. I cannot accept this argument since, although Stokes v Costain was the initiating event, on any view Sch 17 goes much wider. It deals not only with the position between lessor and lessee but also that between freeholders and licensees and those entitled to easements. It further deals with equipment lessors and purchasers. It is clear that, to a substantial extent, the Schedule was intended to regulate the whole field of capital allowances in respect of fixtures.

Next Mr Aaronson places reliance on the second part of s 59(1): 'and at any time when, by virtue of that Schedule, any machinery or plant is treated as belonging to any person, no other person shall be entitled to such an allowance in respect of it.' He submits that, if apart from the Schedule nobody could be entitled to an allowance, this sentence is unnecessary. Its presence indicates that the contrary proposition is equally true, viz if at any time when, under the Schedule, any machinery or plant is not treated as belonging to any person, some other person may be entitled to an allowance under the unrepealed s 44(1). This is a more formidable argument but not one that is decisive. If Mr Aaronson's argument is correct, in respect of expenditure incurred after 11 July 1984 there would be a conflict between the first and second parts of s 59(1): if an allowance can be claimed for such expenditure under some other statutory provision, the entitlement to such allowance will not have been 'determined' in accordance with the Schedule. In order to avoid such conflict, in my judgment the second sentence can, and should, be construed as being addressed to timing alone, ie the words 'at any time when' cover the period from 11 July 1984 to the passing of the 1985 Act, the Act being to that extent retrospective. The words are introduced to ensure that claims relating to expenditure incurred between 11 July 1984 and the passing of the 1985 Act cannot be established on the grounds that, under the general law as it stood during the intervening period, the fixture 'belonged' to the person incurring the expenditure.

Mr Aaronson next relied on para 7(1) of Sch 17 as showing that the Schedule did not provide an exclusive code. Paragraph 7 deals with the circumstances under which fixtures are to be treated as ceasing to belong to a person. Sub-paragraph (1) provides that it is 'without prejudice to any other circumstances in which the disposal value of a fixture falls to be brought into account in accordance with section 44 of the Finance Act 1971'. I attach no weight to this argument. Under s 44 there are circumstances other than the property ceasing to belong to the taxpayer which give rise to a balancing charge, eg cesser of the trade or cesser of the use of the equipment in the trade. Therefore the reference in para 7 to s 44 is explicable as being required in order to ensure that these other circumstances giving rise to a balancing charge are not excluded.

Finally, Mr Aaronson relies on an argument to which there is no satisfactory answer. UK taxpayers are entitled to capital allowances on plant and machinery used by them in their businesses outside the United Kingdom. Some of such equipment is no doubt fixed to the land. If Sch 17 is a comprehensive code regulating allowances for fixtures, how are such overseas fixtures to be treated? Schedule 17 is drafted in technical terms only applicable to the United Kingdom and common law countries: its provisions are not capable of being applied to cases where a different system of law applies. Therefore, says Mr Aaronson, Sch 17 cannot be a comprehensive code since, in relation to overseas fixtures, one is necessarily thrown back to s 44(1) to ask whether, under the relevant foreign law, the fixture belongs to the taxpayer.

I find this last argument most persuasive. But ultimately I cannot regard the inability to apply Sch 17 to overseas fixtures as being determinative. It appears that the legislature must either have overlooked them or taken the view that whilst Sch 17 was to 'determine' the right to allowances for fixtures regulated by the law of the United Kingdom the Schedule did not apply to foreign fixtures. In my judgment this fact is not sufficient to outweigh, in relation to UK fixtures, the words of s 59(1) ('to determine entitlement') or the anomalous results which would follow if Mr Aaronson's argument were correct.

I can illustrate the anomalies by reference to paras 3 and 5 of Sch 17. In both those paragraphs the question whether the fixture is to be treated as belonging to a person (who therefore has the right to claim an allowance) depends, inter alia, on whether there has been an election to treat the paragraph as applying. If no such election is made, the Schedule does not determine to whom the fixture belongs. But on Mr Aaronson's argument that is not the end of the matter: since, in the absence of an election, the paragraphs do not determine the matter, in his submission the taxpayer is free to contend that under the general law the fixture 'belongs' to him and he is entitled to an allowance to which, under Sch 17, he is not entitled. Such an anomalous result, coupled with the clear words of s 59(1), force me to the conclusion that, in relation to expenditure incurred after 11 July 1984, Sch 17 provides a comprehensive code regulating the entitlement to capital allowances on fixtures in the United Kingdom.

(B) Pepper (Inspector of Taxes) v Hart

On the last point which I have been considering, the Crown sought to introduce statements made by ministers in the course of the progress through Parliament of the 1985 Finance Bill. I accept that the language of s 59 and Sch 17 is ambiguous and obscure and that in consequence it would be helpful to refer to parliamentary materials which clearly indicate Parliament's intention in using the language it did. But, as the speeches in Pepper (Inspector of Taxes) v Hart [1993] 1 All ER 42, [1993] AC 593 sought to make clear, the only materials which can properly be introduced are clear statements made by a minister or other promoter of the Bill directed to the very point in question in the litigation (see [1993] 1 All ER 42 at 49, 52, 65, 69, [1993] AC 593 at 617, 620, 635, 640 per Lord Bridge of Harwich, Lord Oliver of Aylmerton and myself).

The parliamentary materials sought to be introduced by the Crown in the present case were not directed to the specific statutory provision under consideration or to the problem raised by the litigation but to another provision and another problem. The Crown sought to derive from the ministerial statements on that other provision and other problem guidance on the point your Lordships have to consider. Such process involves the interpretation of the ministerial statement and the question whether anything said in relation to the other provision can have any bearing on the provision before the court. In my view this is an improper use of the relaxed rule introduced by Pepper (Inspector of Taxes) v Hart which, if properly used, can be a valuable aid to construction when Parliament has directly considered the point in issue and passed the legislation on the basis of the ministerial statement. It provides no assistance to a court and is capable of giving rise to much expense and delay if attempts are made to widen the category of materials that can be looked at as the Crown sought to do in the present case. Judges should be astute to check such misuse of the new rule by making appropriate orders as to costs wasted. In the present case, if it were otherwise appropriate to order the taxpayers to pay the costs of this issue, I would advise your Lordships to disallow any costs incurred by the Crown in the improper attempt to introduce this irrelevant parliamentary material.

(C) Sch 17, paras 2 and 4

The taxpayer companies claim that, in respect of expenditure incurred after 11 July 1984, they are entitled to capital allowances under one or other of these paragraphs. In order to succeed the taxpayer companies have to establish that 'at the time the machinery or plant [became] a fixture [they had] an interest in the relevant land' (para 2(1)(c)) or after the equipment became a fixture they acquired an 'interest in the relevant land' (para 4(1)(a)). They rely on the definition of 'interest in land' as including 'an easement or servitude' (para 1(2)(d)).

This argument was summarily dismissed by Vinelott J and the Court of Appeal. I agree with them. Whatever may be the correct analysis of the right of the taxpayer companies to enter and take the equipment, it is not a servitude within the meaning of para 1(2)(d). Schedule 17 is drafted by reference to the law of both England and Scotland. Paragraph 1(2)(d) is referring to an easement in English law and the equivalent concept in the law of Scotland, a servitude. The taxpayer companies' rights certainly do not constitute an easement in English law; the law of Scotland has no application to the present cases. Therefore it is not a 'servitude' within the meaning of the Schedule and the taxpayer companies have not demonstrated any 'interest in land'.

(D) Sch 17, para 3

Paragraph 3 is expressly directed to claims to capital allowances by equipment lessors. It is common ground that the equipment leases granted by the taxpayer companies to the local authorities satisfy the requirements of para 3(1)(a), (b) and (c). It is further accepted that, in a number of the cases, the necessary election has been made under sub-para (e). The issue is whether the requirements of sub-para (d) are satisfied.

The taxpayer companies contend that, if the local authorities had incurred the expenditure for the purchase of the equipment, the equipment would, by virtue of para 2 of Sch 17, have been treated for material purposes as belonging to the local authority. Under para 2, the local authority would have incurred the expenditure on the plant which became a fixture at the time when the local authority owned the land. Therefore, contend the taxpayer companies, they are entitled to the allowances under para 3. The Crown, on the other hand, contends that if the local authority had incurred the relevant expenditure the fixture would not by virtue of para 2 have been treated for material purposes as belonging to the local authority. The phrase 'material purposes' is defined in para 1(1) of Sch 17 as meaning 'the purposes of Chapter I of Part III of the Finance Act 1971', which part includes ss 41 and 44 of the 1971 Act. The Crown contends that, if the local authority had incurred the expenditure on the fixtures, it would not have been treated 'for material purposes' as belonging to the local authority since the local authority is exempt from all liability to tax and would not therefore have been entitled to claim any allowances. Vinelott J upheld the Crown's argument, but on appeal the Court of Appeal reversed his decision. The Crown appeals to your Lordships on this issue.

On this issue too I agree with the Court of Appeal. The purpose of capital allowances is to stimulate capital investment by individual taxpayers and also to stimulate economic activity generally. Capital allowances have always been available to equipment lessors, such as the taxpayer companies, whether or not the end-user has been tax-exempt. Thus, if taxpayer companies were to lease to a local authority equipment which was not attached to the land (eg computers) the taxpayer companies would be entitled to capital allowances on the expense incurred in purchasing the computers even though the local authority, as end-user and lessee, is tax-exempt. I can find no good reason why the legislature should seek to produce differing results dependent upon whether or not the equipment purchased is fixed to the land. Certainly the method of achieving the result, if intended, is extremely obscure.

I therefore approach the question what is meant by 'for material purposes' with a disinclination to reach the view put forward by the Crown. In my judgment it is not necessary to give the words the meaning for which the Crown contends. Section 59(7) provides that that section and Sch 17 are to 'be construed as if they were contained in Chapter I of Part III of the Finance Act 1971'. Therefore, the phrase 'for material purposes' includes the purposes of Sch 17 itself. Schedule 17 is a code for ascertaining the person to whom a fixture is to be treated as belonging: the taxation consequences of having identified the person to whom the fixture belongs are regulated by s 44 of the 1971 Act. In my judgment, fixtures are treated as belonging 'for material purposes' to a person if one of the purposes is to identify the person to whom, under Sch 17, the fixture belongs irrespective of the tax consequences of that person being so identified. For example if, under Sch 17, the fixture is to be treated as belonging to a local authority, no other person is entitled to an allowance even though the local authority itself is not entitled to an allowance (see s 59(1), second part).

This view is strengthened by para 5 of the Schedule, which deals with incoming lessees. One of the requirements to be satisfied under para 5(1) is that 'the lessor would be entitled ... to an allowance' (see para 5(1)(b)). Paragraph 5(2) then expressly provides that, if the lessor is not within the charge to tax, it is to be assumed that he is within the charge. Thus when the Schedule is directing its attention to whether a person identified as the owner of the fixture is entitled to any allowance by reason of such ownership it deals with the matter expressly and not by the obscure formula 'for material purposes'.

For these reasons, I would reject the Crown's appeal on this point and uphold the claims of the taxpayer companies under para 3 of Sch 17.

(E) When was the liability incurred?

The result of my conclusions so far is that the taxpayer companies will not be entitled to allowances unless the expenditure was incurred at a time to which para 3 of Sch 17 applies. Under s 59(2), Sch 17 applies to expenditure incurred after 11 July 1984 'unless that expenditure-(a) consists of the payment of sums payable under a contract entered into on or before that date'. It is the Crown's contention that there are, or may be, cases where, although the relevant schedule to the master lease was not completed until after 11 July 1984, the fixtures were acquired before that date by the local authority from the suppliers as agent for the taxpayer company.

As I have mentioned, it was part of the arrangements made between the taxpayer company and the local authority that the taxpayer company appointed the local authority its agent on the terms of a letter of which a typical example provided as follows: 'Agency Purchase Facility

We authorise you to purchase goods on our behalf subject to the following conditions:-

1.

Your agency extends only to the purchase of the goods which we may from time to time agree to purchase and let to you ... on lease ...

2.

When you require such goods you will first obtain our approval of the proposed transaction and thereafter you may order the goods from the suppliers and have them invoiced to you in your own name, without disclosing that you are acting as our agent.

3.

You will pay the supplier's invoice for such goods and thereafter send it to us in support of your invoice for reimbursement of the expenditure incurred by you on our behalf.

4.

You will execute ... an appropriate lease, lease schedule ... in respect of such goods, in our standard form or such other form as may previously have been agreed between us in writing ("the Agreement").

5.

You will take delivery of the goods on our behalf, making all necessary inspections or tests before accepting them and immediately insuring them in accordance with the provisions of the Agreement, whether or not the same has at that time been signed by both parties.

6.

On receipt of the documents referred to in 3. and 4. above, we will pay the relevant reimbursement invoice.'

The Crown contends that there are cases where, pursuant to such a letter, the taxpayer company approved the purchase of equipment before 11 July 1984 although the lease schedule relating to the transaction was not completed until after that date. The Crown argues that in such a case the expenditure was incurred on the date on which the local authority incurred the expenditure by ordering the equipment as agent because, at that date, the taxpayer company became liable to indemnify the local authority for the cost.

The Special Commissioners rejected the Crown's claim. They held, first, that on the only case considered by them on the facts (Easington District Council) there was no unconditional 'approval' by the taxpayer company for the purposes of para 2 of the facility letter, because the letter of approval disclosed that at that time there was no full agreement on the terms of the lease schedule. But, secondly, they held that because of para 1 of the facility letter no agency could come into existence until the lease schedule was completed. The Court of Appeal broadly upheld their decision.

I am unable to accept the second ground of decision. One of the factors underlying the transactions was that it was important to the local authorities that they never became the owner of the equipment: by so doing they avoided any charge against their capital allocations. The intended scheme appears to have been that, although the local authority made all practical arrangements and, to the outside world, was the purchaser and owner of the equipment when purchased, it should in fact purchase as agent for the taxpayer companies. For that purpose what was required was (a) an agreement of the terms eventually to be included in the lease schedule (para 1 of the letter) and (b) approval by the taxpayer company of the purchase by the local authority. The Special Commissioners reached the conclusion that there was no contract of agency until the lease schedule was executed. If that was a finding of fact in relation to the Easington case, in my judgment it is unimpeachable. But if, as I think, it was intended to be a finding in law applicable to all the cases, in my judgment it cannot stand. The whole scheme of the arrangements between the parties and the wording of the facility letter show that there were intended to be three stages: first, the approval by the taxpayer company of the purchase by the local authority as agent (para 2); second, the purchase by the local authority as agent for the taxpayer company (para 2); third, the reimbursement of the local authority and the simultaneous execution of the lease schedule (paras 3, 4 and 6). If, in any case, those arrangements were properly operated, the approval of the purchase by the local authority and the actual purchase would predate the execution of the lease schedule. Provided that, at the time that approval was given, there was a final and certain agreement as to the terms which were to be included in the lease schedule, there is no reason in law why the approval should not have been given to the purchase by the local authority at a time before the lease schedule was executed.

In my judgment therefore, contrary to the decision of the Court of Appeal, the Special Commissioners' decision was erroneous in point of law in so far as it purported to decide all the cases in issue. The true determination of the question 'when was the liability incurred?' requires a finding of fact in relation to each individual case. If it can be shown that in any case (a) the taxpayer company specifically gave unconditional approval to the purchase by the local authority of the equipment and (b) at that time there was final agreement of the terms to be included in the lease schedule, in my judgment the taxpayer company incurred the expenditure when the local authority purchased the equipment because it then came under a liability to reimburse the local authority. In any other case, liability was not incurred until the lease schedule was completed when, for the first time, the full terms of the letting were agreed and the contractual obligation to reimburse arose.

I would therefore vary the order of the Court of Appeal by setting aside the declaration made on this issue and remitting the cases to the Special Commissioners to determine this issue in relation to each of the cases in accordance with your Lordships' decision. On all other issues, I would dismiss all the appeals.