Maco Door and Windows Hardware (UK) Limited (Respondents) v Her Majesty's Revenue and Customs (Appellants)

Under section 18(2) of the Capital Allowances Act 1990, a qualifying “part of a trade” must be a viable section of a composite trade. It must remain recognisable as a trade if separated from the whole. An activity which is merely ancillary to, inherent in, or undertaken during a trade does not suffice.

Consequently, a merchant does not carry on a storage trade merely by storing its own stock pending resale. A warehouse used for that activity does not qualify as an industrial building under section 18(1)(f)(i), even though the stored goods are intended for use in manufacturing other goods.

The respondent imported door and window hardware from its Austrian parent, stored the goods in its own warehouse and distribution centre, and resold them as principal. It claimed industrial-building writing-down allowances under the Capital Allowances Act 1990 for accounting periods ending in 1999 and 2000.

The Special Commissioner allowed the claim. Patten J allowed the Revenue’s appeal, but the Court of Appeal, by a majority, restored the claim in [2007] EWCA Civ 545. The Revenue appealed to the House of Lords.

The central issue was whether storage of the respondent’s own goods was “a part of a trade” within section 18(2), so that the warehouse qualified under section 18(1)(f)(i), or whether the relevant part had itself to possess the character of a trade.

1. Appeal allowed by a majority of three to two. Lord Walker of Gestingthorpe delivered the principal majority reasoning. Lord Neuberger of Abbotsbury reached the same conclusion in separate reasons, and Lord Hoffmann agreed with both of them and with Patten J and Lawrence Collins LJ. Lord Scott of Foscote and Lord Mance dissented.

2. Per Lord Walker, section 18(1) of the Capital Allowances Act 1990 is concerned with the use of buildings for specified kinds of trade. There is an important distinction between a trade and an activity undertaken during a trade. Under section 18(2), a “part of a trade” must be a viable section of a composite trade which would remain recognisable as a trade if separated from the whole. It is insufficient merely to isolate an activity within a vertically integrated business, even where the activity is significant, separate and identifiable.

3. The respondent traded as a merchant by purchasing and reselling hardware. Storage of its own stock was essential to that trade but was not itself a storage trade. A person cannot trade merely by storing that person’s own goods. The warehouse therefore did not fall within section 18(1)(f)(i) through section 18(2).

4. Per Lord Neuberger, that construction accorded with the language, structure and policy of section 18 and produced the more practical result. Section 18 distinguishes qualifying types of business rather than every component activity within a business. The contrary construction could require artificial and subjective division of businesses into activities and could exclude facilities used for purposes subsidiary to an otherwise qualifying trade.

5. The majority explained Kilmarnock Equitable Co-operative Society Ltd v IRC as involving processing and packing which could itself be regarded as a separate commercial operation within a composite trade. Saxone Lilley & Skinner (Holdings) Ltd v IRC did not decide the present point. The approach in Bestway (Holdings) Ltd v Luff was approved.

6. Lord Scott and Lord Mance would have dismissed the appeal. They considered that section 18(2) substituted “part of a trade” for “trade”, so that an activity consisting in qualifying storage could suffice without itself constituting an independent trade.

7. The order of Patten J was restored.

1. House of Lords: The Revenue’s appeal was allowed by a majority of three to two, and Patten J’s order was restored: [2008] UKHL 54.

2. Court of Appeal: Carnwath and Hallett LJJ allowed the taxpayer’s appeal and restored its claims; Lawrence Collins LJ dissented: [2007] EWCA Civ 545.

3. High Court, Chancery Division: Patten J allowed the Revenue’s appeal from the Special Commissioner: [2007] STC 721.

4. Special Commissioner: The taxpayer’s appeal against the amendments to its self-assessments was allowed.