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TMI Blog1994 (1) TMI 293X X X X Extracts X X X X X X X X Extracts X X X X ..... ies. The first question is whether the taxpayers are entitled to writing down allowances under section 44(1) of the Finance Act 1971 in respect of capital expenditure on the provision of machinery and plant on land belonging to certain local authorities for which rent was paid by the local authority. At the material times section 44(1) provided, so far as was material, that : " (1) 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 belongs, or has belonged, to him . . . allowances and charges shall be made to and on him in accordance with the following provisions of this section. " It is not in question that the taxpayer companies are all persons carrying on a trade and that they incurred capital expenditure on the provision of plant for the purposes of that trade. The only question is whether in consequence of the incurring of the expenditure the plant could be said to belong or have belonged to them. If the provisions of section 44(1) are not satisfied as regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " The framework of [a taxpayer company's] operation was as follows : there was a master equipment lease between [the taxpayer company] and the local authority into which from time to time schedules could be inserted, specifying equipment which was being leased and the precise terms upon which it was being leased. There was also an arrangement between [the taxpayer company] and the local authority whereby [ the taxpayer company] authorised the local authority to purchase goods on behalf of [ the taxpayer company] which [ it ] might from time to time agree to purchase and let to the local authority. When the goods the subject matter of the leasing arrangement were identified and the terms were settled upon which the goods would be leased to the local authority a lease schedule was completed and the letting took place. " The commissioners then set out the master equipment lease with Easington. It is dated 29 January 1981. I need only refer to a few of the provisions of the master equipment lease. Clause 2 provides for payment of the rent specified in the lease schedule during the term there specified. It also provides that the lessee is to keep the equipment insured to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act hire, hire purchase or other agreement in respect of such goods in our standard form" or in such other form as might previously have been agreed. In 1982 Easington sought quotations for the provision of leasing finance to cover central heating in 3,000 council houses. It is unnecessary to follow through the quotations received and the resolutions by the council which are fully set out in the decision. A taxpayer company was the chosen finance provider. Terms were agreed and a schedule was inserted in the master equipment lease. The schedule records that the term of the lease was 10 years from 5 January 1984 at an annual rent payable in advance. Easington was given the option to renew the lease on a year to year basis on the expiration of the term at a stated rent equal to 0.5 per cent. of the cost of the equipment. The schedule contains elaborate provisions for the adjustment of the rent in the event of any change in the nature or method of taxation or in the rate or basis of capital allowances or if the capital expenditure incurred by a taxpayer company did not qualify for a first year capital allowance or if an allowance was withdrawn. The rent is in effect to be adjuste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the swimming pool was capable of being removed with little difficulty. If removed some of it, for example the distribution system, being tailored to suit the particular building, could hardly be re-used, though it might have some scrap value. For the same reason, the automatic control unit as a whole unit could not be re-used elsewhere but the individual components that make it up could be dismantled from the whole and re-used. " The cremators In 1983-84 Ogwr Borough Council entered into an arrangement for the replacement of cremators at their crematorium. The council had already entered into a master equipment lease dated 22 March 1982 and the cremators were bought under the terms of a standard agency purchase agreement. The terms of two separate leases, of five years from installation in each case were embodied in schedules annexed to the master equipment lease. The commissioners found that the cremators : " have a useful life of about 20 years. They can be prefabricated or erected on site. At Ogwr they had to be erected on site because access was restricted. An essential part of a cremator is the refractory brickwork of walls, roof and hearth within a steel contain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll beside the front door of the block of flats is a television camera which operates when the door bell is pressed. A bell rings in the resident's flat. By pressing a button on the receiving apparatus, the resident can see and communicate with and provide access to the visitor outside the front door. A wiring system connects the two devices, both of which can easily be removed with no damage to the components or wiring and little damage to the wall, the front door apparatus being removable only from within the building. The wiring system has a life of about 25 years, the devices about 10 years, but the electronic locks on the front door are not so durable. Most of the wiring can be recovered but even it is undamaged it is unlikely to be incorporated in another system. If removed and serviceable the front door apparatus as a whole is unlikely to be of much use elsewhere since it is peculiar to the building in which it is placed. " Lifts In November 1983 Norwich City Council refurbished two lifts in each of two car parks. The council paid the supplier the cost of the equipment and its installation pursuant to an agency facility letter in standard form and a lease schedule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpayer company] acquired chattels which [it] thereupon owned; [it] leased those chattels to a local authority for a term of years at a rent; [the taxpayer company] had power to determine the lease and sever and repossess the chattels on failure by the local authority to pay the rent or to adhere to the provisions in the lease; the local authority was to deliver up the chattels in good order on termination of the lease; as between the lessor and lessee the chattels remained personal property notwithstanding any affixation to land or buildings. With minor exceptions the chattels once fixed in a building could be removed with reasonable care with little or no damage to themselves or the building. They had a second hand value for re-use or scrap. However, some electric wiring, electronic locks in front doors of Stockton's block of flats and refractory brickwork in the cremators rented by Ogwr would be useless once removed. These seem to us to be de minimis." It is not clear to me what the commissioners meant by the statement that "[a taxpayer company] acquired chattels which [it] thereupon owned." In the case of most, if not all, the transactions the equipment was i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne whether a chattel has become a fixture or not; (b) having become part of the local authority's land the installation belonged to the local authority as the owner of the land. A taxpayer company had no estate or interest in the land and therefore no legal title or proprietary right to the installation; it had no more than a future right on the expiry or early determination to enter and sever the bits and pieces which made up the installation or to require the local authority to sever them and deliver them up thereby restoring their character as chattels belonging to a taxpayer company. Until severance the installation could not be said to "belong or have belonged" to a taxpayer company. The first of these propositions is, I think, well-founded. It is plain and cannot be doubted that judged by objective criteria the equipment became part of the local authority's land. A taxpayer company and a local authority could not by agreeing that the equipment should "remain personal or removable property" contradict the plain and obvious legal consequences of the incorporation of this equipment as part of the local authority's land. A. L. Smith L.J., in givin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the local authority it was entitled to rent; and its right to payment of rent and to require the equipment to be severed and restored on the expiry or termination of the lease were assignable. It makes no difference in my judgment that it might not be possible to remove the equipment as part of a functioning system or that it might not be in the commercial interests of a taxpayer company to require it to be dismantled and restored. A taxpayer company is entitled if it wishes to have the equipment severed and restored on the expiry or termination of the lease even if in doing so the equipment were to be so damaged that it could not be re-used and had no scrap value. The local authority was liable under the terms of the master equipment lease to make good any damage to the land. The decisive feature, in my view, is that the local authority had no right to retain the equipment except during the term and on payment of rent. Support for this approach can be found in cases in which the right of a tenant to remove trade fixtures has been considered. In many of these cases trade fixtures have been described as the property of the tenant. In Gough v. Wood and Co. [1894] 1 Q. B. 713 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... local authority had no rights beyond those it would have had if the equipment had retained its character as a chattel. The only effect of the affixing of the equipment to the local authority's land was that it would pass as a part of the land to any person who might acquire a legal interest in the land without notice of a taxpayer company's rights. There is one point that has troubled me. Under section 41(1) of the Finance Act 1971 a first-year allowance is available to a trader who has incurred capital expenditure on the provision of plant. In the simple case where a trader incurs expenditure on the purchase and installation of plant the cost of installation is part of the expenditure on the "provision" of the plant. It is not necessarily so where, as here, plant is purchased and installed on the land of another. The difficulty can be illustrated in this way. Suppose that a local authority purchases the bits and pieces that go to make up a new heating system for its offices and arranges separately for its installation as a complete system with a contractor. A taxpayer company pays the total cost and executes a lease schedule. The cost of the bits and pieces mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioners' answer to this difficulty will be found in the following passage in the decision : " We do not understand how a council tenant on a weekly tenancy or something similar can derive a greater interest than that which is given by the landlord. The tenant has only a limited interest. True, he is in possession. We fail to see, though, how his possessory rights coupled with his limited interest are so superior that thereby [a taxpayer company is] deprived of [its] ownership of the central heating apparatus in respect of which the local authority pays rent to [it]. Counsel suggests that [a taxpayer company] would have no right to enter a council house in order to repossess the heating apparatus in the unlikely event that the local authority did not pay the rent for it. Assuming that the unlikely event were to occur and that [a taxpayer company] wished to repossess rather than come to an arrangement with the tenant, it appears to us that [a taxpayer company] could enter. Under the leasing agreement they have the right to inspect, repossess and remove the equipment (clauses 2.6, 3.8 and 3.10) and by necessary implication enter for those purposes and the local authority h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... special rights first to obtain an order of the court for the possession of a dwelling house let under a secure tenancy (section 84) and second to vary the terms of a secure tenancy (section 103). Section 84(1) provides that the court is not to make an order for possession except on one or more of the grounds set out in Schedule 2 and in the case of grounds 9 to 11 unless satisfied that suitable accommodation will be available for the tenant when the order takes effect. The only relevant provision in Schedule 2 is to be found in ground 10 under which it is a ground for seeking possession that the local authority intends : " within a reasonable time of obtaining possession of the dwelling house (a) to demolish or reconstruct the building or part of the building comprising the dwelling house, or (b) to carry out work on that building or on land let together with, and thus treated as part of, the dwelling house and cannot reasonably do so without obtaining possession of the dwelling-house. " It seems to me quite impossible to contend that the court could make an order under ground 10 authorising a local authority to take possession in order to remove central heating appar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is that the relevant question is whether a taxpayer company had the right on the expiry or termination of an equipment lease to require the local authority to enter the council houses and sever and remove the equipment. Clearly a taxpayer company could not itself enter the council houses for this purpose and the contractual obligation of the local authority to deliver up the central heating equipment is in this context an obligation which could not possibly be the subject on order for specific performance. In my judgment the short answer to this case is that as regards the central heating installed in council houses the provisions of the master equipment lease so far as they confer a right of entry on a taxpayer company or for the severance and delivery up of the equipment by the local authority and so far as they provide that it is to be treated as in the ownership of a taxpayer company are wholly inapt. Once the equipment had been installed in a council house in the possession or which later came into the possession of a tenant a taxpayer company ceased to have any proprietary interest in it. As regards central heating instalments in vacant council houses let shortly thereaf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate. However, it is unnecessary to express any final view on this aspect of the case and the ascertainment of the relevant date would in any event require further facts to be found by the commissioners. In my judgment no reliance can be placed on Schedule 17 even in those cases where the expenditure was incurred after 11 July 1984. The relevant provisions are contained in Schedule 17, paragraphs 2, 3 and 4. Under paragraph 2(1) where a person incurs relevant capital expenditure and at the time when the machinery or plant becomes a fixture that person has an interest in the relevant land then after the time when the fixture became a fixture it is to be treated "for material purposes as belonging to the person concerned in consequence of his incurring the expenditure". Paragraph 4 is the mirror image of paragraph 2. If after machinery or plant has become a fixture a person acquires an interest in the relevant land being an interest in existence prior to his acquisition of the interest and the consideration which he gave for that interest includes a capital sum which in whole or in part "falls to be treated for material purposes" as expenditure on provision of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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. " Sub-paragraphs (a), (b) and (c) are satisfied. The question is whether if the expenditure had been incurred by a local authority the central heating equipment woul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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