DILLON L. J. These proceedings involve five taxpayer companies, B. M. I (No. 3) Ltd. B. M. I (No. 6) Ltd. B. M. I (No. 9) Ltd. Barclays Mercantile Business Finance Ltd. and Fitzroy Finance Ltd. They are members of a group of which the parent is Mercantile Group Plc., a company associated with Barclays Bank Plc. In relation to each of the five companies there is an appeal and a cross-appeal against a decision of Vinelott J. given on 27 January 1994 [1994] 2 W. L. R. 795. He had before him appeals by the Crown from decisions of the special commissioners in respect of each of the five companies. For the purposes of this judgment it is unnecessary to draw any distinction between an of the five companies; the issues are the same. It is also immaterial that in the cases of four of the companies the appeals to this court are by the Crown and the cross-appeals are by the companies, while in the case of the fifth company the appeal is by the company and the cross-appeal is by the Crown.
The essential facts lie in a very small compass. Each of the five companies carries on the trade of acquiring and hiring out plant and machinery to user. In all the cases with which we are concerned, the users have been local authorities who are freeholders of the premises in question. In all the cases with which were are concerned, the nature of the plant and machinery concerned is such that it had to be fixed to the structure of the building in which it is installed, and such that, on being so fixed, it would, on ordinary principles of the general law, be regarded as a fixture. The types of plant and machinery are various, e.g., lifts installed in council cart parks, boilers installed in council officer, cremators installed in a council crematorium, plant and equipment installed in a council swimming pool and central heating installed in council flats or council houses and entry phone or alarm system installed in blocks of council flats. The only difference between these various types of plant and machinery which has any relevance to the issues in these proceedings is that, in the case of central heating systems installed in council flats or council houses and entry phone or alarm systems installed in blocks of council flats, the flats or houses will, either at the time of the installation or shortly afterwards, have been let to council tenants on weekly tenancies; in all other cases the building in which the plant and machinery has been installed have at all time remained in the occupation of the local authority concerned.
I should stress that we are not concerned with the leasing by the taxpayers companies to local authorities, or to any one else, of items of plant and machinery, being chattels for sue in the local authorities premises - e.g. valuable office equipment - which are never fixed to the buildings in which they are used and so never lose their chattel status.
The question is whether, in respect of these items of plant and machinery which have been leased by the five companies of local authorities and are such as by the ordinary law have become fixtures on installation, the five companies are entitled to tax allowances in respect of the cost of acquiring and installing the plant and equipment under relevant statutory provisions relating to income and corporation tax allowances.
The primary sections are in the Finance Act 1971. Section 44, which in concerned with writing down allowances provides :
'(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 or plant belongs, or has belonged, to him..... allowances... shall be made to him....'
The key phrase is 'machinery or plant belongs, or has belonged, to him'. Precisely the same provision as section 44(1) (b) is to be found in section 41(1) (b) in relation to first year allowances.
On that wording, this court held, in Stokes v. Costain Property Investments Ltd. [1984] 1 W. L. R. 763, that where the taxpayer company installed plant and machinery, including central heating equipment, in premises of which it only had a 99-year lease, the plant and machinery became on installation a landlords fixture, and therefore 'belonged' within the meaning of the Act of 1971 to the freeholder and not to the taxpayer company. The taxpayer companys claim to allowances under the 1971 Act therefore failed. Fox. L. J. said, at p. 769F, that the words 'belong' and 'belonging' were not terms of art; they were ordinary English words and would not to satisfied by limited interests. Robert Goff L. J. said, at p. 771H : 'Why it was though right by the legislature to use in that section, or indeed thereafter, the expression 'belonging to' rather than 'owned by', nobody could explain. But it is plain that that is what is meant...' The court did not, however, regard that construction, at which it was constrained to arrive, as satisfactory. In the event and in response to the courts invitation, the ambit of the legislation was reconsidered by the legislature, and amending legislation was introduced by section 59(2) of, and Schedule 17 to, the Finance Act 1985. But under section 59(2) of the Act of 1985 the amending legislation only applies to expenditure incurred after 11 July 1984, and then if it does not consist of the payment of sums payable under a contract entered into on or before that date.
We have to consider the position first under the Act of 1971 on its own, since it is submitted for the companies that the various items of plant and machinery have continued to belong to the relevant companies since they were installed, whether or not in law they became fixtures on installation. I therefore leave over for the moment the application under the Act of 1985.
So far as the Act of 1971 is concerned, Vinelott J., held (i) that all the items of plant and machinery became fixtures on installation; (ii) that, despite that, all the items installed in premises which the local authorities continued to occupy (i.e., all the items excepts central heating equipment etc. installed in council flats or council houses which were let to weekly tenants) continued to belong, and sill belong, to the companies; and (iii) that the central heating equipment and entry phone or alarm system installed in council flats ceased to belong to the relevant companies when the flats were let, because each weekly tenant took a legal estate in his or her flat, including the fixtures, without notice of any equitable or merely contractual right of the relevant company. Therefore, as against the tenant in occupation, the company had no right to enter and remove the central heating equipment etc.
In my judgment, the judge was right on issues (i) and (iii) for the reason he gave, which I do not need to restate. So far as issue (ii) is concerned, the practice followed by the companies was that a company would enter as lessor into an equipment lease or master lease with a local authority as lessee well before any plant or machinery was acquired. This equipment lease was merely facultative at outset and did not create at that stage any lease or other contract in respect of any property at all. It purported to relate to equipment rent term and location as stated in the schedule, but the schedule was initially blank. The practice was, as the evidence showed, that in relation to each particular installation a time came, probably just after the equipment had been installed, when the company paid the contractors bills for supplying and installing the equipment, or reimbursed the amount to the local authority, and on the same day the company and the local authority singed what was called a lease schedule, as a schedule, in respect of that equipment, to the equipment lease. The lease schedule set out all the relevant details of the particular transaction, including identification of the equipment, the term, and commencing date of the term, of the lease, the rent and how it was to be paid, the rent payable if the lessee elected to renew the leasing, on a year to year basis on the expiration of the original term and so forth. The lease schedule plainly constituted a binding contract and lease, as of its own date, to the local authority of the particular equipment. But the lease schedule also contained a declaration that it had been agreed that the lease schedule should be read and construed as a schedule incorporated in and forming part of the equipment lease.
One of the terms set out in the equipment lease thus incorporated into the lease schedule is clause 3.10, which provides :
'As between the lessor and the lessee the equipment hereby leased shall remain personal and 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 the lessee) and shall indemnify the lessor against any claim made in respect such damage.'
It is therefore said on behalf of the companies that because of that clause each piece of equipment installed, at any rate if installed in a building which continued to be occupied by the local authority lessee, either never became a fixture or, if it did become a fixture remain as between the lessee and the lessor personal or removeable property.
As I see it, the concept of a fixture which remains personal or removeable property is a contradiction in terms and an impossibility in law. It is accepted by the companies that a legal mortgage of the building would have been entitled, in enforcing his security, to realise the equipment with and as part of the building, whether his mortgage was entered into before or after the installation of the equipment : see Hobson v. Gorringe [1897] 1 Ch. 182, a decision of this court. That case concerned a gas engine which had been let out under a hire-purchase agreement which provided that it should not become the property of the hirer until the payment of all the instalments. It was affixed to the land by bolts and screws, albeit that it bore a plate declaring it to be the property of the grantor under the hire-purchase agreement. It was held to have become a fixture and thus passed to the mortgagee as part of the freehold. Since the mortgage was legal mortgage, the mortgages rights overrode those of the grantor under the hire-purchase agreement.
As I see it, that is conclusive that the items of equipment in the present case, fastened as they were the buildings, became fixture in law. The next question is whether the rights of the companies in respect of these fixtures were such that they can, on a fair sue of language, be said to 'belong' still to the companies, in my judgment, they cannot. One has to look at what rights the companies had under the lease Schedules. They had of course contractual personal rights against the relevant local authorities for payment of rent. That, from the point of view of the companies, was no doubt what the agreement was all about; it was a financial arrangement. But the only right that the companies had in respect of any item of equipment was a right to remove it on the expiration of the term of the lease or of the yearly continuation thereof if the lessee elected to renew, or in the event of default in the payment of rent. It would seem that in the event of default to sue the defaulting authority for payment would have been a simpler and more fruitful remedy than ripping out the lifts in the municipal car park, the cremators in the municipal crematorium or the central heating systems in such council flats as happened to be vacant. Looking at the matter overall, I am of the view that, despite the rights of entry such as they are and any amount of labelling of the equipment, it is unrealistic to say that the various items of equipment 'belong to' or 'are owned by' the lessor companies.
The judge reached the opposite conclusion in reliance in particular on Gough v. Wood and Co. [1894] 1 Q. B. 713. That was a case under which the defendants had under a hire-purchase agreement installed a boiler and pipes for heating a greenhouse on the land of a nurseryman. The nurseryman had mortgaged the land to the plaintiff. He then defaulted under the hire purchase agreement. Thereupon, and before the plaintiff mortgagee made any entry, the defendants removed the equipment from the land. The plaintiff sued the defendants for damages for the removal of the equipment, but their claim failed. It was held that the plaintiff must have impliedly authorised the nurseryman to carry on his business, affixing or removing equipment as he though appropriate, at any rate until the plaintiff mortgagee took steps by entry or otherwise to enforce his security. The case turns on the fact that by the relevant time the equipment had been removed. It does not bear, in my judgment, on the question whether, while still a fixture, a piece of equipment can be said to belong to the supplier of the equipment, and not to the owner of the land, because there are labels on it and the supplier has a contingent right to remove it a possible future event.
Mr. Aaronson for the companies referred us also to In re Samuel Allen and Sons Ltd. [1907] 1 Ch. 575, a decision of Parker J. and In re Morrison Jones and Taylor Ltd.; Cookes v. Morrison Jones and Taylor Ltd. [1914] 1 Ch. 50, a decision of this court. There equipment had been fixed to land under an installment purchase agreement which provided that the equipment should remain and be the property of the vendor until the entire price had been paid. The purchaser subsequently granted an equitable charge to a third party. It was held that the right of removal gave the vendor of the equipment an equitable interest in the land which, being prior in time had priority to the third partys equitable mortgage. But to establish that the rights of removal of the leasing company had priority to the rights of a subsequent equitable mortgagee - though apparently not to the rights of a prior equitable mortgage - does not help, in my judgment, in deciding whether the equipment 'belongs', for the purposes of the Act of 1971, to the local authority which owns the building in which the equipment is a fixture or to the leasing company.
Mr. Aaronson also referred us to the decision of the House of Lords in Heritable Reversionary Co. Ltd. v. Millar [1892] A. C. 598. There it was held that land vested in a person as bare trustee for a company which was the absolute beneficial owner of the land did not vest in the trustee in bankruptcy of the bare trustee because the land did not 'belong' to the bare trustee in the context of the Bankruptcy (Scotland) Act 1856 (19 & 20 Vict. c. 79). But that, so far as the present case is concerned, begs the question. It does not establish that these fixtures in the local authorities building 'belong' to the equipment leasing companies.
Differing therefore, with all respect, from the judge I conclude that the companies cannot claim the allowance under the Act of 1971 on its own. They can only claim, of at all under the Finance Act 1985, to which I now turn. Section 59(1) provides :
'The provisions of Schedule 17 of this Act apply to determine entitlement to an allowance under Chapter I Part of 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.'
Schedule 17 then sets out to whom machinery or plant is to be treated as belonging in various particular cases set out in successive paragraphs in the Schedule. The paragraphs relied on by the taxpayer companies in the present case are, in the alternative, paragraphs 2, 3 and 4. Vinelott J. held that none of them was applicable.
Paragraph 2 applies where a person incurs capital expenditure on the provision of machinery or plant which becomes a fixture and '(c) at the time the machinery or plant which becomes a fixture he has an interest in the relevant land.' Paragraph 4 applies where after machinery or plant has become a fixture a purchaser 'acquires an interest in the relevant land, being an interest which was in existence prior to his acquisition of it'. The key phrase in each of these paragraphs is 'interest in land' and that is defined in paragraph 1(2) of the Schedule :
'(2) In this Schedule interest in land means - (a) the fee simple estate in the land or an agreement or acquire that estate; (b) in Scotland, the estate or interest of the proprietor of the dominium utile (or, in the case of property other than feudal property, of the owner) and any agreement to acquire such an estate or interest; (c) any leasehold estate in, or in Scotland lease of, the land (whether in the nature of a head-lease, sub-lease or under-lease) and any agreement to acquire such an estate or, in Scotland, lease; (d) an easement or servitude or any agreement to acquire an easement or servitude; and (e) a licence to occupy land;........'
The judge held that the taxpayer companies did not at any time have or acquire any interest within that definition in any relevant land. In my judgment, he was plainly right for the reasons he gave. I would reject Mr. Aaronsons submissions, even if bolstered by Heritable Reversionary Co. Ltd. v. Millar [1892] A. C. 598 which I have already mentioned, that each company had an equitable fee simple in the land in so far as the machinery or plant was affixed to the land, or that a companys contingent right to remove the machinery or plant in event which have not happened was, though not an easement, a 'servitude' within the meaning of the definition. It was not 'a licence to occupy land' within paragraph (e) of the definition, and I find it difficult to see that any other form of mere licence comes within the definition.
Paragraph 3 of Schedule 17 provides :
'(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 of 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.....'
It is not in doubt that conditions (a), (b) and (c) of the paragraph are satisfied. It is also not in doubt that there have been election within condition (e); there is an issue of fact between the parties whether there have in fact been as many elections as the companies though or assumed, but that the parties can resolve can resolve by agreement and it is not before us.
The point taken by the Crown, which the judge accepted, is founded on the words 'for material purposes' in condition (d) and also in the final words of the paragraph 'shall be treated for material purposes as belonging to the equipment lessor.' 'Material purposes' is defined in paragraph 1 of Schedule 17 as meaning 'the purposes of Chapter I of Part III of the Finance Act 1971.' That is the chapter which starts with section 40 of the Act of 1971 and includes sections 41 and 44.
The submission for the Crown is that the purposes of Chapter I of Part III of the Act of 1971 are only concerned with income-tax and corporation tax allowances in respect of machinery and plant, and that therefore any person to whom machinery is to be treated as belonging for these purposes under condition (d) in paragraph 3 must be a person who is liable to income-tax or corporation tax. There cannot be an election under condition (e) in favour of an equipment lessor which is subject to corporation tax if condition (d) is not satisfied. It is submitted that condition (d) cannot be satisfied if the person to whom the machinery or plant would be treated for material purposes as belonging if condition (d) were satisfied is a local authority, or a charity or a pension fund or other body which is not subject to income tax or corporation tax.
The point is a short one, and not susceptible of much elaboration. In my judgment, however, all that the various paragraphs of Schedule 17 are concerned to do is to determine to whom machinery or plant is to be treated as belonging. The Schedule was introduced because of the decision in Stokes v. Costain Property Investments Ltd. [1984] 1 W. L. R. 763, which was only concerned with the meaning of the word 'belonging' in Chapter I of part III of the Act of 1971. If the effect of the application of a paragraph in Schedule 17 is to lease the machinery and plant 'belonging', at the end of the application of the paragraph, to a person who is not a taxpayer, then, no doubt, allowances under the Act of 1971 cannot be claimed by that person. But I see no reason for stopping halfway in going through paragraph 3, or paragraph 8.
Since the purpose of paragraph 3 is to enable equipment lessors to claim the allowances, and the scheme of the Act of 1985 is such that there is no possibility of allowances being granted twice over to two separate persons in respect of the same machinery or plant. I cannot see what policy there can be in providing - very elliptical if it was indeed the intention - that equipment lessors should get allowances if the user to whom they supply equipment is liable to income-tax or corporation tax, but not if the user is a local authority or charity or other body which is not liable to those taxes. The practical result of that would be that the equipment lessors would have two price lists - one for users who are subject to tax or corporation tax and the other, with higher prices, for users who are local authorities or others who are not subject to those taxes.
I should mention paragraph 5 in Schedule 17, since Mr. Munby relied on it on behalf of the Crown :
'(2) If in any case the lessor is not within the charge to tax, it shall be assumed that he is within that charge for the purpose of determining whether the condition in sub-paragraph 1(b) above is fulfilled.'
Mr. Munby submitted that that showed that express provision by way of deeming or statutory assumption is made in Schedule 17 in the only case where it was contemplated that a non-taxpayer could be party to an election in respect of the right to allowance. But the answer to that is that the wording used in paragraph 5(1) (b) - 'the lessor would be entitled...... to an allowance in respect of expenditure incurred on the provision of the fixture' - differs from the wording in paragraph 3 or any other paragraph in the Schedule, and makes sub-paragraph (2) necessary in paragraph 5. No comparable sub-paragraph is to be found in paragraph 3 or any other paragraph because it is not necessary.
In my judgment, the taxpayer companies make out their claims under paragraph 3 of Schedule 17 where the relevant elections have been made.
I should add that Mr. Munby intimated in reply a possible point on the construction of condition (c) in paragraph 3, viz., that it could only apply if the machinery or plant is installed after the lease has been granted and could not apply if there was lease of chattels which had already been affixed to the building. However he abandoned that point when he was told that it had been expressly disclaimed by leading counsel who appeared for the Crown before the special commissioner. Mr. Aaronson told us that there had been public statements on behalf of the Revenue in 1984-85 to the effect that it would not matter, in relation to the allowances, whether the lease was granted before or after the item of equipment became a fixture.
Since paragraph 3 applies, there remains one further point for use to consider under Section 59 (2). As already mentioned that section applies Schedule 17 to expenditure incurred after 11 July 1984 which does not consist of the payment of sums payable under a contract entered into on or before that date. The case for the companies was that the expenditure was incurred at the time the relevant company paid its cheque to the local authority and at the same time the company and the local authority signed the lease schedule which was the binding agreement in respect of the equipment comprised in it. The commissioners accepted that case. They held that all leasing facility were offered in effect 'subject to contract' and there was no contract until the lease schedule was executed. The Crown challenges that to conclusion of the facts; it is said that is should be inferred that there was in respect of each transaction a binding agreement before the lease schedule was executed. The judge did not have to deal with this point since on his view Schedule 17 was inapplicable of other reasons.
As I have already said, there was a lease agreement at the outset between a particular company and a particular local authority which was purely facultative and set up a framework, but did not impose or create any binding obligations or rights in respect of any particular equipment. That is not relied on by the Crown as being for the purposes of section 59(2) a relevant contract if entered into on or before 11 July 1984.
There was also between the company and the local authority an agency purpose facility. The typical instance drawn to our attention is dated 1 June 1984 and was contained in a letter written by a company in the group to the Easington District Council. It replaced an earlier facility letter of March 1981. The agency purchase facility letter does not, however, by itself give any authority to the Easington council to purchase anything. It authorises the council to purchase goods on behalf of the company subject to conditions but the first two conditions are :
'1. Your agency extends only to the purchase of the goods which we may from time to timer agree to purchase and let to you....
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 [etc., as agents for us as undisclosed principals].....'
Because to those conditions, such an agency purchase facility letter, though ruled on by the Crown as such, cannot, in my judgment, amount to a relevant contract for the purposes of section 59(2) if entered it, as the letter to Easington was, on or before 11 July 1984.
It was then submitted for the Crown that if in fact we find the local authority buying equipment in its own name it must be inferred that agreement on the transaction had been reached and the local authority had been given authority by the company to buy the equipment as agent for the company. On the facts before us, however, it is impossible to make such an inference.
In particular in relation to the transaction with the Easington District council which was put before us as typical, the documents show that the terms of the lease arrangement were submitted for approval within the companys hierarchy at the end of January and early February 1985 and were only approved subject to trying to achieve higher rates of interest in various respects. The terms were thus even at that date still subject to negotiation, but the contract between the council and its contractors for the supply and installation of the equipment - central heating systems in 3,000 council dwellings - had been entered into many months before. The obvious inference is that the council entered into the contract for the supply and installation of the central heating systems when it was convenient in its building programme to do so, in the expectation that agreement would be reached with the company, whose tender was in principle acceptable although the negotiation of the contractual terms had not been completed.
Finally, it was urged for the Crown that the terms of the arrangements between the company and the local authority must have been approved by the company at some time before the completion of the lease schedule, and the date of that approval was in each individual case the date of the contract, for the purposes of section 59(2), under which the company made its payment to the local authority.
We were asked to remit the cases to the commissioners to consider the date of such approval - or at any rate to remit all cases where the date of such approval might have been on or before 11 July 1984. But it was accepted that in any such remission fresh evidence could not be adduced : See Lack v. Doggett [1970] 46 T. C. 497.
However, those were cases where there was full discovery before the hearings before the commissioners. The Crown has prepared summaries, so far as was thought appropriate, of what the documents showed - as no doubt had the companies. I would not therefore think it appropriate to grant the Crown a second opportunity to sift the material before the commissioners and see if they con do better the second time.
Beyond that, however, the fact that the parties must have 'agreed' the terms before the lease schedule could be prepared for signature, or the cheque to be paid by the company to for example, the Easington council could be drawn, does not mean that there was necessarily at the point of 'agreement' a binding contract between the parties in advance of the payment of the cheque and the signing of the lease schedule. The commissioners were, on all the material I have seen, entitled to take the view they did that these were in effect negotiations subject to contract and there was no binding contract before the lease schedules were signed.
I would therefore allow the appeals and the cross-appeals.
HOFFMANN L. J. - I agree.
SAVILLE L. J. - I also agree.
Appeals and cross-appeals allowed.
Taxpayer companies to pay half Crowns costs.
Leave to appeal refused.