Neutral Citation Number: [2006] EWHC 1832 (Ch)
Case No: CH/2005/APP/0888
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 19/07/2006

Before :

MR JUSTICE PATTEN 
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Between :

	COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS	Appellant	
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	MACO DOOR AND WINDOW HARDWARE (UK) LTD	Respondent	

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Mr Timothy Brennan Q.C (instructed by HMRC Solicitors) for the Appellant
Mr Giles Goodfellow Q.C (instructed by Gregory Rowcliffe & Milners) for the Respondent

Hearing dates: 3rd and 4th May 2006
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Judgment

Mr Justice Patten : 
Introduction
1.	Since 1945 it has been possible to write down against the profits of a business for the purposes of calculating its liability to tax the capital expenditure which it has incurred on buildings or structures in use for the purposes of certain specified trades and undertakings.  The current legislation is contained in the Capital Allowances Act 2001, but on this appeal I am concerned with the provisions of the Capital Allowances Act 1990 (“the 1990 Act”).
2.	HMRC appeal against a decision of a single Special Commissioner (Dr John Avery Jones) released on 25 October 2005 who allowed the appeal of the taxpayer, Maco Door & Window Hardware (UK) Limited (“Maco”) against the refusal of its claim for industrial buildings allowances in respect of a warehouse with office and lecture room facilities at Eurolink Business Centre, Sittingbourne, Kent.  The allowances were claimed in respect of the accounting periods ended 31 December 1999 and 31 December 2000.
3.	This appeal lies of course only on a point of law and I can take the facts found by the Special Commissioner as set out in paragraph 2 of his decision:
“(1) The Building comprises 4,445 square metres of which 855 square metres is a high-bay warehouse allowing storage of products on 15 levels, and 1,497 square metres is a distribution building also containing storage for items too large to fit on standard size pallets. The Building can hold 5,500 pallets. In addition there are offices and a lecture theatre, and an area with equipment for testing products.
(2) The Appellant's business is that of importing products manufactured by its Austrian parent company, Mayer & Co Beschlage GmbH ("Mayer"), promoting and selling them in the UK. The products are hardware for the PVC window and door market, such as locks, handles, espagnolettes, hinges and strikers. There is a substantial number of different shapes, sizes and styles for each product required to fit a large number of different sized and styled windows and doors. The products are compatible with 70 different types of window extrusions. For example, the sales literature showed four different types of door lock and 9 colours of handles. There are regular changes in design necessitated by changes in design by the window and door fabricators. The Appellant currently holds 2,300 different items of stock. 
(3) Mayer mainly manufactures for the mainland European market for which the products are standard. The UK market, on the other hand, has different products because tilt and turn window fittings are different in the UK. Normally in the rest of Europe, at the first position of the handle (at right angles to the closed position) the window opens inwards, and at the second position (opposite the closed position) it tilts. In the UK, in the first position the window tilts and in the second it opens but outward, which reduces the risk if a child opens the window to the first position. A tilt and turn window requires about 21 different fittings sold by the Appellant and completely different designs of most of these are required for the UK market. Of the products held by the Appellant 85 to 90 per cent are made solely for the UK market. The UK market represents 13 to 14 per cent of Mayer's total market.
(4) Because UK products have to be manufactured separately by Mayer, the standard ordering time is six weeks. Mayer's factory is set up to produce products in large batches. Products can be ordered and supplied in a shorter time than 6 weeks if Mayer can fit the order into their production, but Mayer might say this is not possible for a particular order. Manufacturing products for the UK market alone requires the machines to be re-tooled, a process that takes three hours and therefore interrupts the larger production for the mainland European market, which is uneconomic to do for small orders. Accordingly Mayer requires the Appellant to place orders for minimum quantities. The Appellant cannot obtain products for the UK market from any of Mayer's other subsidiaries because they will not hold products manufactured for the UK market. By way of example of the time taken, a purchase order made on 21 February 2005 was for three items with a required delivery date of 25 February 2005, a further three items for 14 March 2005 and 35 items for despatch on 4 April 2005 (6 weeks). Despatch was on 31 dates between 23 February 2005 and 1 June 2005 (more than 14 weeks) with arrival about 3 days later, 19 of which were up to 4 April 2005 and 12 after that date. The largest item ordered for 4 April 2005 was despatched in 8 parts between 15 March and 29 March 2005. I infer from this that the 6 weeks is a standard time requested by Mayer and production is fitted into Mayer's schedule resulting in some products being despatched more quickly and some more slowly than the 6 weeks, so that the Appellant cannot rely on despatch within 6 weeks. Mayer does not store any products manufactured for the UK market. If it produces more than is ordered for the UK market the excess is sent to the Appellant. 
(5) The Appellant's customers are primarily wholesalers ("distributors") who sell the products in smaller quantities to window and door fabricators. A few large fabricators are direct customers. Customers, whether distributors or fabricators, do not hold large stocks and expect orders to be delivered within 7 to 10 working days. The Appellant can deliver in 3 to 5 working days, or overnight in emergencies. In some cases customers make forward orders roughly corresponding to the Appellant's six weeks ordering time from Mayer. During January to June 2005 these forward orders amounted to 11 per cent of items, 17 per cent of quantity, 18 per cent of value and 7 per cent of order quantities, which is considered to be representative of the period under appeal. Even when customers have ordered in advance it may be commercially necessary to use part of a delivery to satisfy short-term orders. 
(6) It is important to the Appellant's business that it holds sufficient stock to satisfy orders otherwise fabricators will be forced to use the Appellant's competitors' products completely; parts of different manufacturers are not interchangeable. I saw letters from two of the largest customers saying that since the Building opened problems of obtaining supplies of Maco products had greatly reduced which had resulted in increased ordering of them. The Appellant's speed of delivery and stock levels are understood to be better than many of its competitors.
(7) Products are sold by the Appellant with a ten-year guarantee corresponding to the guarantee that fabricators offer to their customers. This requires the holding of products that are no longer manufactured (and for which further manufacture by Mayer is not possible as the tooling is not retained when manufacturing ceases) in case the Appellant needs to replace these, which is more cost-effective than repairing them. About 2.5 per cent of the stock held in the Building is of obsolete products. Such stock is available for sale.
(8) The high-bay part of the Building contains the most hi tech equipment available enabling orders to be picked, packed and despatched quickly. A crane is moved on rails automatically to the place where the product is found and takes a pallet which is then automatically loaded onto a conveyor belt for despatch. Many of the customers' orders are for a whole pallet of a particular product, but smaller quantities can be retrieved easily. The equipment can move quickly from one product area to another enabling the processing of smaller quantity orders of a range of items.
(9) Eight employees work on the receiving, breaking down bulk deliveries, storing, retrieving, packaging and despatching products.
(10) In the year to 31 December 1998 before the Building was opened the closing stock was £1.1m with a turnover of £12.1m corresponding to 5 weeks of sales. In the year to 31 December 2000, the first full year with the Building closing stock was £2.2m and turnover £14.3m, corresponding to 11.9 weeks of sales. 
(11) Sales and ordering are dealt with in the office part of the Building. Customers do not visit the Building in connection with ordering. Eight salesmen are working away from the Building virtually all the time, visiting customers and potential customers, such as architects and local authorities to encourage them to specify Maco products. The salesmen do not take orders.”

4.	The relevant legislation is contained in s.18 of the 1990 Act which provides as follows:
"(1) Subject to the provisions of this section, in this Part "industrial building or structure" means a building or structure in use—
…
(e) for the purpose of a trade which consists in the manufacture of goods or materials or the subjection of goods or materials to any process; or 
(f) for the purposes of a trade which consists in the storage— 
(i) of goods or materials which are to be used in the manufacture of other goods or materials; or 
(ii) of goods or materials which are to be subjected, in the course of a trade, to any process; or
(iii) of goods or materials, which, having been manufactured or produced or subjected, in the course of a trade, to any process, have not yet been delivered to any purchaser; or ….
(2) The provisions of subsection (1) above shall apply in relation to a part of a trade or undertaking as they apply in relation to a trade or undertaking except that where part only of a trade or undertaking complies with the conditions set out in subsection (1), a building or structure shall not by virtue of this subsection be an industrial building or structure unless it is in use for the purposes of that part of that trade or undertaking.
…
(4) Notwithstanding anything in subsections (1) to (3) above, but subject to subsections (5) and (7) below, 'industrial building or structure' does not include any building or structure in use as, or as part of, a dwelling-house, retail shop, showroom, hotel or office of for any purpose ancillary to the purposes of a dwelling-house, retail shop, showroom, hotel or office.
…
(7) Where part of the whole of a building or structure is, and part of it is not, an industrial building or structure, and the capital expenditure which has been incurred on the construction of the second mentioned part is not more than one-quarter of the total capital expenditure which has been incurred on the whole building or structure, the whole building or structure and every part of it shall be treated as an industrial building or structure.”
5.	It was common ground before the Special Commissioner that Maco uses the warehouse for the purposes of its trade and that the products stored in the warehouse are goods or materials which are to be used in the manufacture of other goods and materials within the meaning of s.18(1)(f)(i).  It was also accepted that although the use of the office and lecture theatre was not a qualifying use for the purpose of s.18 the expenditure on these parts of the building was less than 25% of the capital expenditure on the building as a whole.  Section 18(7) therefore applies so as to treat these parts as part of an industrial building or structure for the purposes of s.18(1) assuming that the other qualifying conditions are met.  The only issue therefore on this appeal (as identified by the Special Commissioner) is whether Maco’s use of the building was “for the purposes of a trade which consists in the storage” of what are admittedly qualifying goods.
6.	The argument for HMRC both on this appeal and before the Special Commissioner was that Maco’s use of the building does not satisfy the statutory conditions set out in s.18(1)(f)(i) because its trade does not consist in the storage of the products imported from its Austrian parent.  Its trade consists of the importation and sale of these products to customers in the UK and the storage of the products is carried out simply to facilitate that trade.  Section 18(2) applies the provisions of s.18(1) to a part of a trade but only in the same way that they apply to the trade or undertaking itself.  Maco, they say, must therefore be able to show that the storage of the products in the warehouse was in itself a part of Maco’s trade.  It must therefore be possible to identify a separate part of a trade consisting in storage alone.  The storage of the goods has to be either the trade of the taxpayer or one of the parts of that trade.  Section 18(2) does not allow storage which is merely ancillary to some other trade to qualify under s.18(2).
7.	Mr Brennan Q.C for HMRC took me to a decision of the High Court of Northern Ireland, which he said emphasised the need to show that the warehouse premises were in use for storage as a trade in itself.  In Dale (HM Inspector of Taxes) v Johnson Brothers 32 TC 487 (a decision on s.8 of the Income Tax Act 1945) Sheil J rejected a claim for an industrial buildings allowance based on the use of two thirds of a warehouse to store finished products for delivery to purchasers.  The taxpayers were the sole selling agents for various manufacturers and were obliged under the agreement with them to store sufficient products to enable prompt delivery to be made to customers.  They relied on s.8(1)(d)(iii) of the 1945 Act (which is in the same terms as s.18(1)(f)(iii) of the 1990 Act).  The judge rejected the claim because the trade carried on at the warehouse was not, he said, storage alone, but also the disposal of the goods as selling agents.  At p.494 he said this:
“That Section, so far as it is invoked here, contemplates that the use of the building must be for a trade and that trade, so far as the use is concerned, must be a storage trade. It will not do that the trade is storage plus something else or something else plus storage. It must be simply a keeping or custody. When one considers the use of the two-thirds of this building it cannot be said that there was simply a keeping or custody in that part of it. The agreements required a constant active movement of the goods by the Respondents, a disposal of them by the Respondents ”
Mr Brennan relies particularly on the reference to the building being used for a “storage trade”.
8.	No reliance was placed on s.8(2) of the 1945 Act in that case.  It is also important to note that the decision turned on the nature of the trade and not on whether the warehouse was used exclusively for the purposes of that trade.  The House of Lords made it clear in Saxone Lilley & Skinner (Holdings) Ltd v CIR 44 TC 122 that what is now s.18(1) of the 1990 Act does not require that the qualifying use should be the sole or exclusive use made of the premises.  The decision in Saxone is also relevant to what constitutes part of a trade and I shall return to it later in that context.
9.	Much of this line of argument is not disputed by Maco.  Mr Goodfellow Q.C on behalf of the company accepts that the words “consists in” in s.18(1)(f) mean “is” rather than “includes” so that to qualify under s.18(1)(f) itself storage would have to be a trade carried on as such in its own right in the building.  That test is obviously not satisfied in this case.  The sale of the products to UK customers is on any view the substantial part of Maco’s trade or business and storage is not carried on as a trade in itself at all.  But he relies on s.18(2) on the basis that the storage of the products is a part of Maco’s trade and that the warehouse is in use for the purposes of that part of its trade whatever else it may be used for.
10.	The real issue therefore is what is meant by “a part of a trade” and whether storage of the kind carried on by Maco in the warehouse qualifies.  The decision in Dale v Johnson Brothers does not provide an answer to that question because the point did not arise in that case.  But in Bestway (Holdings) Limited v Luff 70 TC 512 Lightman J did express views which Mr Brennan relies upon as indicating that “storage” in s.18(1)(f) (and by extension in s.18(2)) is to be given a very limited meaning.
11.	In that case the taxpayer company operated a wholesale cash and carry business from a number of self-service supermarkets.  The stores sold groceries, household goods, tobacco, confectionery and various kinds of alcohol.  Although the buildings were not open to the public the customers who were mainly retail traders and caterers had access to most parts of the store except for a bonded warehouse and were able physically to remove the goods they wanted to buy from the shelves.  The premises operated much like a retail supermarket.  Goods were paid for at a checkout and most customers removed their purchases in their own transport.  The company contended that its use of the stores fell within both s.7(1)(f) and s.7(1)(e) of the Capital Allowances Act 1968 as extended by s.7(2).  These provisions are equivalent to s.18(1)(f)(ii), s.18(1)(e) and s.18(2) of the 1990 Act.
12.	The Special Commissioners rejected the argument that the goods and materials were subjected to a process within the meaning of s.7(1)(e) and this finding was therefore conclusive of the appeal because the same condition requires to be satisfied for the case to fall within s.7(1)(f)(ii).  Lightman J upheld their decision on this point.  Mr Goodfellow submits that I should therefore treat the remainder of his judgment as obiter where he deals with the question of what constitutes use of the premises for the purposes of a trade (or part of a trade) which consists in the storage of qualifying goods or materials.  I do not intend to base my approach to Lightman J’s decision on whether his analysis of these questions was or was not part of the ratio of his decision.  He gave equal consideration to the arguments under s.7(1)(e) and s.7(1)(f) and gave a fully reasoned and considered judgment on both points.  I would feel obliged to follow his decision unless I came to the conclusion that it was clearly wrong.
13.	Lightman J analysed what is meant by “a trade which consists in the storage” of qualifying goods and materials by examining what he refers to as the statutory context of the phrase in terms of nine propositions which refer to the history of the legislation and some of the earlier authorities.  Of these, I need only, I think, set out propositions (3) – (8) which explain the judge’s approach to the construction of the surrounding provisions in which the key phrase “a trade which consists in the storage” appears:
      	“(3) A building may be in use for the purposes of a trade which  qualifies it for allowances though it is in use at the same time (and indeed more intensively) for another non-qualifying trade. The use of a building for dual purposes, one qualifying and one not, may qualify the building for allowances so long as the use for the qualifying purpose is not small or insignificant and such that it could not reasonably be brought within the Act: see Saxone, Lilley & Skinner (Holdings) Ltd. v. Commissioners of Inland Revenue 44 TC 122, at 140 (“Saxone”). 

2
(4)	A building in use for a purpose which does not of itself qualify it for allowances under s 7(1)(e) or (f), may nonetheless qualify if the use is ancillary to a use which does qualify: see Sarsfield v. Dixons Group plc [1997] STC 283, at 298. Thus a building may be in use for the purposes of a trade consisting in a “mill, factory or other similar premises” or of a trade carried on of the manufacture or processing of goods or materials, if the building is used for the storage of goods or raw materials to be used in, or of the product of, that trade. 

 

(5)	The conditions which s 7(1)(e) and (f) require to be complied with are strict: the use is to be of a building (and not a part or parts of a building) and the trade is to consist in (and not merely involve or include) the specified activity. The strictness in respect of both elements is, however, relaxed by subsequent provisions. Section 87(4) provides that a part of a building may constitute an industrial building if the statutory conditions are satisfied in respect of that part. Section 7(2) provides that, if part only of the trade carried on satisfies the statutory conditions, a building or part of a building in use for that part of the trade may qualify as an industrial building. I shall later in this judgment have to consider what constitutes a part of a trade. 

(6)	The extended ambit of s 7(1) (to which I have referred to in (4) above) and the relaxations (to which I have referred to in (5) above) are reflected in s 7(4). This subsection is designed to disqualify from entitlement to allowances buildings used for the purposes there specified (which include a showroom or shop). The draftsman recognised that it was necessary to spell out that the disqualification extended to buildings or parts of buildings used for any of these specified purposes or for any purpose ancillary to these purposes. 

	
(7)	Section 7(1)(f) in terms strictly limits use which qualifies thereunder for allowances to use for a trade which does not merely involve or include storage, but which consists in storage of the specified goods. Storage must be the (and not merely a) constituent of the trade. But s 7(2) relaxes this restriction and provides that, where storage is not the trade carried on, but is part of the trade carried on, a building or part of a building used for this purpose qualifies for the allowances. 

(8)	Whilst s 7(4) expressly disqualifies from entitlement to allowances a building or part of a building used for the trade of a retail shop or showroom (and accordingly a retail supermarket) and for storage ancillary to such use, it is common ground that (perhaps because they were not yet thought of in 1945) there is no such disqualification of a building or part of a building used for the trade of a wholesale supermarket or use ancillary to such trade. Accordingly if and so far as a building is in use for the purpose of storage of the specified goods and such use is part of the trade of a wholesale supermarket, by virtue of s 7(2) the building may attract the allowances.” 

14.	Against this background Lightman J set out his conclusions in the following passage (at pp.536-7) of his judgment:

“The authorities make clear that there may be “storage” where

goods are kept or held for a limited period and indeed for  shorter periods than the 6–8 week period during which Bestway’s goods are in the building. In Saxone the shoes were held to be stored in a warehouse though they remained there for 10–13 weeks or less. In Crusabridge Investments Ltd. v. Casings International Ltd. 54 TC 246 (“Crusabridge”) a building was held to qualify: (a) under s 7(1)(f)(ii) because tyres were “stored” though often for no more than 7 days awaiting removal for processing (i.e. remoulding) by remoulders; and (b) under s 7(1)(f)(iii) because the processed (i.e. remoulded) tyres still owned by the re-moulder were stored there pending delivery to a purchaser. But the length of time during which goods are kept or held can only be one, and not the decisive factor or the factor of first importance, in determining whether they are stored: the determining factor must be the purpose for which the goods are kept or held. If goods are delivered for safe keeping to a depository (e.g. a bank providing a safe deposit), so long as the goods remain in the possession of the depository they may be described, as “stored”; but this would not be the apt description of goods handed over in the course of his business to a repairer or pawnbroker. 

In this case what is critical is the nature of the enterprise intended to be carried on and actually carried on by Bestway at the buildings and the role played by the stock in that enterprise. For a building is only used for storage if the purpose of keeping goods there is their storage as an end in itself: there is no such use for storage if the goods are kept there for some other purpose: consider Kay v. Burrows & Others [1931] AC 454. All the stock in the present case is kept in the buildings, not for storage, but for sale. No goods are reserved or withheld for future use: they are all likewise available for sale and intended to be sold as soon as the turnover allows. For practical reasons only part of the stock can be made physically available for self-service by customers; but that does not alter the fact that the back-up stock is intended to be made immediately available as soon as required to meet demand. In short, as it seems to me, “storage” in s 7(1)(f) means keeping in storage as a purpose and end in itself, and does not extend to such storage as is merely a necessary and transitory incident of the conduct of the business of a wholesale supermarket. The goods enter the buildings upon their final journey to the customers. The 6–8 weeks of stock at any time in the buildings may be likened to stock on an extension to the open shelves or on a conveyor belt to the open shelves. Far from being kept in reserve, the stock is in the process or in the course of being made available to purchasers at the buildings. 

It is submitted by Bestway that this conclusion is inconsistent with the decision in Crusabridge. The decision in Crusabridge may be explained on its own facts, namely that there was in that case a finding that the collection and storage of tyres was “an essential part” of the business: see pages 248C–249G. But in any event I do not think that that decision should stand in the way of what is clearly the correct answer in this case.”
15.	Mr Brennan (whose arguments were accepted in Bestway) relies on the “end in itself” test and contends that it is not satisfied in this case.  As in Bestway, Maco’s imported goods are kept in the warehouse only to enable them to be sold in the quantities demanded by its customers.  They are kept there only for as long as it takes them to be sold.  It is clear, he says, from the passage quoted that Lightman J did not consider that storage of this kind amounted to an end or purpose in itself.
16.	Mr Goodfellow does not accept even this part of Lightman J’s reasoning.  He criticises the judge’s apparent reliance on Kay v Burrows [1931] AC 454 which was a decision under s.3(1) of the Rating and Valuation (Apportionment) Act 1928 as to whether premises (the greater part of which was used for the storage of rags awaiting processing, sorting or subsequent despatch) fell within the proviso to s.3(1) which excluded premises “primarily occupied and used [for the] purposes of storage”.  Viscount Dunedin (at p.485) said that:
“storage in s. 3, sub-s. 1 (d), means storage as a purpose and end in itself, and that such storage as is merely a necessary and transitory incident of the manufacturing process which is being carried on does not fall within the definition. Accordingly in Burrows' case I think the premises are not "primarily occupied and used for purposes of storage.”
That test is, he submits, heavily dependent on the wording of s.3 and the decision provides no authority for its application to the words of s.18(1)(f).
17.	I find it difficult to see how the question of what constitutes “storage” in s.18(1)(f) can ever really arise as a separate or relevant issue in cases (such as the present one) in which the storage relied on is at most one facet or part of the taxpayer’s overall trade or business and is not carried on as a separate trade in itself.  In cases involving a single trading entity a claim under s.18(1) for capital allowances based on the storage aspect of the business cannot succeed because the building is not in use for the purposes of a trade which is [consists in] the storage of such goods.  On any view, it is in use for a much wider and therefore different trade which in this case is the importation and sale of particular goods.  Even if storage is properly to be regarded as part of that trade the conditions set out in the opening words of s.18(1)(f) are not satisfied.  Hence the reliance in this case on s.18(2).
18.	“Storage” as a concept in itself may have many possible meanings all dependent on the context in which the word is used.  There is no issue in this case as to whether the goods imported by Maco are “stored” in its warehouse.  As a matter of ordinary language they clearly are and the same was the case in Bestway.  But that is not the issue.  The question under s.18(1) is whether the warehouse is in use for the purposes of a trade which consists in the storage of qualifying goods and materials.  This was the question which Lightman J in terms addressed (at p.534 I) in Bestway although subsequently in the passage quoted, he narrows the issue to what is meant in the Act by “storage”.  I think (with respect to the judge) that this may be too narrow a focus.  But I agree with his basic conclusion in the sense that there cannot be a trade consisting in storage within the meaning of s.18(1)(f) unless storage of the qualifying goods is the trade or is at least one of the trades) of the taxpayer company which is being carried on.  As he himself expressed it, what is critical is the nature of the enterprise carried on at the building and the role played by the stock in that enterprise.  To repeat the wording of s.18(1)(f), what qualifies is use which consists in the storage and does not merely involve or include it: see Lightman J’s proposition no. (7).  If this is all that is meant by storage needing to be an end in itself, then there is no difficulty about that formulation.  So, for example, a warehousing subsidiary whose only  business was the storage of qualifying goods in connection with the trade of an associated company would, I think, qualify under s.18(1).  In that case, its storage of the goods would qualify as an end in itself.  The determining factor, however, is the nature of the trade not the quality of the storage.
19.	One of the cases relied on by the taxpayer in Bestway which has also featured in the argument on this appeal is the decision of HH Judge Finlay Q.C in Crusabridge Investments Ltd v Casings International Limited(1979) 54 TC 246.  That was a case in which the landlord of light industrial premises sought damages from the tenant for breach of the user covenant in the lease.  This permitted the premises to be used, inter alia, as an “industrial building or structure” as defined by the Capital Allowances Act 1968.
20.	The tenant of the premises carried on the business of purchasing used tyres.  The tyres were stored and inspected in the premises to see whether they were suitable for making re-moulds.  Those thought to be suitable were then consigned to a re-moulder which would then select and purchase the tyres it wanted.  The tenant also sold re-moulded tyres on commission and provided a re-moulding service for some of its customers.  Due to the nature of its business, at any one time there would be a large number of tyres stored in the premises awaiting despatch to a re-moulder.
21.	Judge Finlay held that the storage of used tyre casings and re-moulds fell within s.7(1)(f)(ii) and (iii) of the 1968 Act.  He refers in his judgment to the decision of Shiel J in Dale v Johnson Bros  and suggests that the true ratio of that decision was that the storage in that case was no more than ancillary to the company’s trade and that Shiel J did not decide that s.7(1)(f) was only applicable if “there is a trade which consists in storage and nothing else”.  The words “which consists in” in s.7(1)(f) means he said “involves” (see p.253).
22.	On this basis the judge held that the requirements of s.7(1)(f)(ii) and (iii) were satisfied because the degree of user consisting in storage was sufficient on the evidence to constitute a “substantial use” of the premises for a considerable part of the relevant period.
23.	I take the view that Crusabridge was wrongly decided insofar as it is based on an erroneous construction of s.7(1)(f) of the 1968 Act.  As already explained, the words “consists in” cannot properly be interpreted as meaning “involves” and Mr Goodfellow accepts that.  Nor do I accept the judge’s treatment of the judgment of Shiel J in Dale v Johnson Bros.  The decision is therefore of very limited assistance in this case.  No reliance appears to have been placed on s.7(2) and it offers no help or guidance on what is the real point on this appeal.
Section 18(2)
24.	The argument of the taxpayer company which succeeded before the Special Commissioner was that the storage of the imported goods in the warehouse was carried on as part of its trade within the meaning of s.18(2) of the 1990 Act.  In reaching this decision, Dr Avery Jones followed what he regarded as part of the ratio of the House of Lords in  Saxone Lilley & Skinner (Holdings) Ltd v IRC (“Saxone”) and a decision of the Court of Session in Kilmarnock Equitable Co-operative Society Ltd v IRC 42 TC 675 (“Kilmarnock”) in preference to various passages in the judgment of Lightman J in Bestway which he regarded as obiter.
25.	Mr Brennan’s challenge to this decision includes a rejection of any inconsistency between the relevant part of the judgment in Bestway and the two earlier authorities relied on by the Special Commissioner.  But authority aside, the real issue in relation to the application of s.18(2) is whether and, if so, to what extent the characteristics of what would constitute a trade for purposes of s.18(1) are replicated in relation to what constitutes part of a trade.  No-one, I think, disputes the proposition that trade normally involves the manufacture of goods, provision of or dealing in goods or services for profit in some way: see the examples contained in s.18(1)(e), (g), (h) and (j).  All these are commercial activities designed to produce a return.  By the same token, storage as a trade in s.18(1)(f) must also mean storage conducted as a business in itself.  Section 18(2) applies the provisions of s.18(1) to a part of a trade or undertaking.  Since s.18(1) merely defines what is meant by an “industrial building or structure” the effect of s.18(2) is to include in the references to a trade or undertaking in s.18 a reference to part of that trade or undertaking.  A part of a trade must therefore also satisfy the descriptive conditions which follow in s.18(1).  In relation therefore to s.18(1)(f)(i) the building must be in use for the purposes of part of a trade which consists in the storage of the specified goods and materials.
26.	The question of what conditions need to be satisfied in order for the storage of the goods in the warehouse to be regarded as part of Maco’s trade for the purposes of s.18(2) admits of a range of at least theoretical possibilities.  These could vary from requiring storage to be carried on as a commercial activity in itself within a larger business to a case such as in Bestway in which the storage was an essential but simply an incidental activity to the wholesale trade in the goods in question.  Mr Brennan contends for the narrow construction of s.18(2) which would limit the relief to cases where storage is one of a number of commercial activities undertaken in their own right as part of  a larger composite business.  Mr Goodfellow submits that s.18(1)(f)(i)-(iv) already limits the types of storage which qualify and that there is no need to impose any further restrictions.  In particular, he takes issue with the suggestion that it is necessary under s.18(2) to identify storage as a separate profit making activity.  A part of a trade includes, he says, all the activities necessary to carry on the business even though they may not separately result in a receipt.  
27.	Lightman J dealt with what constitutes a “part of a trade” in the following passage in which he largely accepted the submissions made by Mr Brennan on behalf of Inland Revenue which have been repeated in the argument on this appeal.  He said this:
“Mr Goy for Bestway submits that, in construing the word ‘part’, regard should be had to the ordinary meaning of the word, and refers to a definition in the Shorter Oxford Dictionary (3rd edn, revised 1973), namely ‘that which with another or others make up a whole’; that for this purpose a trade can be described as an activity which normally comprises a whole series of actions taken in the course of that trade; and that each of the actions taken in the course of a trade can be said to be a part of a trade because together with other actions they make up the whole. As support for the proposition that any activity carried on in the course of a trade represents a part of that trade, reliance is placed on the decision of the Court of Justice of the European Communities in Schmidt v Spar-und Leihkasse der früheren Ämter Bordesholm, Kiel und Cronshagen (Case C-392/92) [1994] ECR I-1311. Under consideration in that case was a directive safeguarding the rights of employees on transfers of undertakings, businesses or parts of businesses. The court held that the transfer of the function of cleaning one of the bank’s branches from an employee to an independent firm constituted for the purposes of the legislation there under consideration a transfer of part of the bank’s business, though the activity in question was an ancillary activity carried on by a single employee. Reliance is also placed on the dictum of Dillon J in Vibroplant [1980] STC 671 at 677 which expressed sympathy with the view that the use of the buildings in that case, which was for servicing and repairing the plant which Vibroplant wished to hire out, was an essential part of Vibroplant’s business of plant hire operators and part of their trade. 
   Mr Brennan for the inspector emphasises the distinction between ‘a part of a trade’ and ‘an activity undertaken in the course of a trade’. He cites the well-known passage in the judgment of Rowlatt J in Graham v Green (Inspector of Taxes) [1925] 2 KB 37 at 40, 9 TC 309 at 312— 	 

   ‘… a conception of a trade … differs in its nature, in my judgment, from the
 individual acts which go to build it up, just as a bundle differs from odd sticks. You may say, I think, without an abuse of language, that there is something organic about
 the whole which does not exist in its separate parts.’ 	 
Mr Brennan submits that the statutory language is ‘part of a trade’, and not ‘any activity undertaken in the course of the trade’; and that it is not sufficient for an activity to be a component element in the trade. What is needed is (using the language of Rowlatt J) a bundle of sticks or activities which constitute a significant separate and identifiable ‘part’ of the building user’s trade. His submission seeks to reflect the commercial reality that a trade may incorporate more than one separately identifiable ‘part-trade’. Thus for example the trade of a garage proprietor may consist of two parts, a car showroom and a car repair shop. Likewise a trade may consist in making as well as selling surgical products (see J G Ingram & Son Ltd v Callaghan (Inspector of Taxes) [1969] 1 WLR 456, 45 TC 151). This is recognised in other legislation (see eg s 163(1) of the Taxation of Chargeable Gains Act 1992 (which provides retirement relief from capital gains tax on the disposal of ‘part of a business’) and reg 3(1) of the Transfer of Undertakings (Protection of Employment) Regulations 1981, SI 1981/1794 (which makes provision in the event of a ‘transfer … of an undertaking … or a part of one’). 
 The choice between these two alternative constructions must depend on a consideration of the language used in s 7(2) in the context of the legislation as a whole with attention to the statutory purpose of the legislation. On such a consideration I am satisfied that Mr Brennan’s construction is correct. The trade of a company or an individual includes all its activities ultimately directed towards making profits (see Rolls-Royce Motors Ltd v Bamford (Inspector of Taxes) [1976] STC 162 at 185 per Walton J). Its trade may be a composite one. Mr Brennan gave an apt example of the trade of a person carrying on a garage business. The use of a building for the composite trade may not qualify for allowances under s 7(1): but, if use for one of the two or more component parts does qualify, s 7(2) extends qualification for allowances to the part or parts of the building used for this qualifying purpose. I think that the primary purpose of s 7(2) is to make provision in this way for use of a building for a composite trade; and on any basis, to constitute a part of a trade within the meaning of s 7(2) and to qualify for the allowances, the activities in question must be a significant, separate and identifiable part of the trade carried on. There is no inconsistency between this view and the dictum of Dillon J in Vibroplant or the decision in Schmidt. This construction is in my judgment necessary to give effect to the statutory choice of the word ‘part’ and the purpose which the legislation is intended to achieve. It cannot sensibly have been intended that the allowance should be available wherever and to the extent that any activity of the type described in s 7 takes place, and the statutory language is not apposite for this purpose." 

28.	Two principles seem to emerge from this part of the judgment.  The first is that the trade of a company consists of all its activities which are directed towards producing a profit.  Assuming that the activity in question satisfies this condition, then it constitutes part of the trade if it is a significant, separate and identifiable part of the trade carried on.  The first of these two tests does not on its face exclude storage even if carried on simply to facilitate the sale of the goods in storage.  In Vibroplant Ltd v Holland (HM Inspector of Taxes) 54 TC 658 the servicing and repair of the plant was clearly essential in order to maintain the plant hire business and Dillon J indicated that this might be enough for it to constitute part of that trade.  Similarly in the present case, storage is essential in order to maintain the level of stocks necessary for the business.  What further element needs therefore to exist for it to be a significant, separate and identifiable part of the trade? 
29.	Lightman J reached the conclusion that the storage of goods in the wholesale supermarket in Bestway did not qualify, but he gives no real reasons for this beyond affirming the decision of the Special Commissioners that storage of goods was not a sufficiently significant part of the taxpayer’s trade.  The Special Commissioners had found in Bestway that there was a speedy turnover of stock in the supermarkets and that back-up stock was held at a minimum level.  In this case there is a separate warehouse specifically designed to allow Maco to hold much larger quantities of stock in order to take account of its parent’s production cycle and the six week delivery date.  It therefore holds stock in excess of its immediate needs.
30.	Lightman J’s statement that for an activity to be part of a trade it must be a significant, separate and identifiable part of it was clearly intended in the main as a description of what would constitute part of a composite trade which he said was the primary application of what in this case is s.18(2).  An example he gives of this is a business which both sells and repairs cars.  Another obvious example would be the manufacture and sale of a particular product.  Both are identifiable and separate parts of the overall trade or business.  But in this case, although the storage is carried out in a separate building and is in that sense physically separate from the selling of the goods, it is not a separate part of a composite business because it is not a commercial activity in its own right.  It remains an incidental (although necessary) adjunct to Maco’s wholesaling business.
31.	The decision in Rolls Royce Motors Ltd v Bamford (1976) 51 TC 319 was cited by Lightman J because of the reference by Walton J in that case to the trade of that company including “the activities whatever they were, all ultimately directed towards making profits”.  But the issue in that case was whether the new state owned company which took over some of the assets and undertaking of Rolls Royce Ltd following its insolvency was entitled to carry forward and set against its profits the losses of the old company up to the date of its liquidation.  Rolls Royce Ltd had been made up of six divisions each making different types of engines.  Four of the divisions which dealt with the manufacture of aero engines were transferred to the new state owned company while the two remaining divisions which manufactured cars were transferred to a new and separate company.  Walton J held that the state owned company did not carry on the same trade as Rolls Royce Ltd had done because it no longer manufactured cars.  He was not therefore concerned with what constituted part of a trade (although the aero-engine business was clearly part of the old company’s trade or business) and the decision is therefore of limited assistance.
32.	The decision of Dillon J in Vibroplant is of much more relevance because, although not required to decide the point, Dillon J, as I indicated earlier, did express a view as to whether the repair and servicing of the plant might constitute part of the business for the purposes of what in this case is s.18(2).  His acceptance that that activity might fall within the definition of “part of a trade” on the face of it supports the taxpayer’s argument on this appeal because (like the storage in this case) the servicing of the plant was merely a necessary but incidental part of Vibroplant’s operation.  It was not carried on as a commercial activity in itself.  Lightman J suggested towards the end of the passage I have quoted that his decision was not inconsistent with the dictum of Dillon J.  But if the relief granted by s.18(2) is limited to what he describes as composite trades, then clearly there is an inconsistency.  There is nothing in Vibroplant to indicate that the preparation of the plant in readiness for hire was a separate and identifiable part of the company’s trade in that sense.  The decision is only consistent with his “significant, separate and identifiable part” test if that was intended to apply to a potentially wider class of activities which could not in themselves fairly be described as part of a composite trade.  In Bestway itself it was not necessary for the judge to elaborate on what this might include because on the facts found by the Special Commissioners the method of storage employed by the supermarket did not qualify.  But the words “on any basis” do seem to indicate that Lightman J was not necessarily limiting the application of s.7(2) to composite trades, although that is likely to be the principal and most obvious case in which his test comes to be satisfied.
33.	The two other cases which I need to refer to are Saxone and Kilmarnock.  In Saxone the taxpayer company was the parent company of a group of subsidiaries, one of which traded as the manufacturer and retailer of shoes.  The others either manufactured or sold shoes.  The company built a warehouse which was let to a warehousing subsidiary (Jacksons Limited).  Parts of the warehouse were used to store shoes from the manufacturing and retailing company, but most of the shoes stored there were shoes which had been delivered to the retailing companies and were held by them as stock.  The holding company claimed allowances on the basis that the warehouse was used for part of the trade of Jacksons Limited consisting in the storage of shoes manufactured by the manufacturing and retailing subsidiary, but not yet delivered to a purchaser, so as to come within s.271(1)(d)(iii) of the Income Tax Act 1952: i.e. what in this case would be s.18(1)(f)(iii).
34.	The Special Commissioners accepted that on the evidence part of the trade of Jacksons Ltd did consist in the storage of shoes which qualified under s.271(d)(iii) but they rejected the contention that the whole building was used for that purpose.  The House of Lords (affirming the decision of the Court of Session) held that it was not necessary to show that the building was wholly or mainly in use for the relevant part of the company’s trade.  It could be a shared use.  It also accepted that the storage of the qualifying shoes did constitute part of Jacksons Ltd’s trade.  At p.139 Lord Reid said this:
“The shoes manufactured at Kilmarnock come within the scope of s. 271 (1)(d)(iii) because, when in this warehouse, they have not yet been delivered to any purchaser. But the other shoes in the warehouse have already been delivered to the Respondents or one of their subsidiary companies, having been purchased from other manufacturers. During the relevant period there were generally some 500,000 pairs of shoes in the warehouse at any one time, of which a third or so had come from Kilmarnock and the remaining two-thirds or so from outside manufacturers. While in the warehouse these shoes were not kept separate. They were classified so that in each part of the warehouse one would generally find some of the Kilmarnock shoes and some of the others. 

 The trade of this warehouse keeper is storing shoes from both these sources, and the contention of the Respondents is that, within the meaning of s. 271(2), storing the Kilmarnock shoes is a part of his trade. The Commissioners so found, and I think that this is clearly right. I reject the argument that there is no sufficient distinction between the ways in which the two kinds of shoes are treated to enable one to say that storing the one kind is one part of the trade and storing the other kind is another part. If a trader stores or sells or otherwise deals with two kinds of goods, A and B, I think that it is the ordinary use of language to say that dealing with A is one part of his trade and dealing with B is another part, and I see nothing in the context here to justify giving any other interpretation to "a part of a trade" in s. 271(2). The question therefore comes to be whether this warehouse is in use for the purposes of that part of the warehouseman's trade which consisted in the storing of Kilmarnock shoes. 

	
	
Again taking the ordinary use of language, it appears to me that it clearly was. Premises can be and often are in use for more than one purpose, and I think that the whole of this warehouse was in use for both parts of the warehouseman's trade, because both kinds of shoes could generally be found stored in every part of it.”
35.	The important point to note about the decision in Saxone is that it concerned the trade carried on by a warehousing subsidiary.  There was really no dispute either before the Special Commissioners or on appeal in that case that storage was the trade carried on by Jacksons Ltd.  It had no other business.  The only issue was whether the storage in a single building of different kinds of shoes could properly be regarded as constituting separate parts of its trade for purposes of s.271(2).  But on any view the storage of each kind of shoe was carried on by the company as a trading activity.  It was not incidental to any other commercial activity.
36.	The Kilmarnock case was concerned with a co-operative society which carried on business as general merchants.  Its objects included manufacturing of all kinds.  A substantial part of its business was the sale of coal in 1cwt bags and in bulk.  This coal was distributed by lorry from the society’s coal yard or depot.  It also sold coal in 28 lb paper bags through its shops as part of its retail business and to other co-operative societies as a wholesaler.  It erected a building at its coal depot specifically to house the machinery used to pre-pack the coal in the paper bags.  The issue was whether this was an industrial building or structure within the meaning of s.271 of the 1952 Act.
37.	The General Commissioners in that case found that the separation of the coal and the filling of the bags was not a process within the meaning of s.271(1)(c) (the equivalent of s.18(1)(e) ).  On appeal the Court of Session held that the bulk coal delivered to the building was subjected to a process within the meaning of s.271(1)(c) and that the building was used for part of the society’s trade so as to come within s.271(2).  At p.680 Lord Clyde said this:
“The Crown further argued that in any event the building in question was not in use for a trade or part of a trade which consisted in the subjecting of the goods to a process within the meaning of Section 271(2) of the Act. 

	
	
It was therefore disqualified from being an industrial building or structure, so the argument runs, within the meaning of the Sub-section. This contention by the Crown is also not specifically dealt with by the Commissioners, if it was presented to them. The argument was that if the Society's only trade was screening and packing of coal in paper bags then the situation might have been different, but this Society operated a trade of general merchants, and only a small part of their total operations involved paper packaging of screened coal. But the relative proportions of the Society's various activities appear to me to be quite irrelevant. The building in question houses a definitely identifiable part of their industrial operations and a quite separate activity, and that separate activity alone. This is in my view enough to satisfy the requirements of Sub-section (2).”  
Lord Guthrie (at p.681) said this:
“But in my opinion the separation of the dross from the coal is its subjection to a process, the process of selection from the mass of coal of lumps which are suitable for packing in bags. There is no doubt that at the building the Appellants carry on a trade, a business conducted with a view to profit, which consists of the subjection of the coal to this process.”
This decision therefore treated the pre-packing operation (which was not carried on elsewhere) as a separate part of the society’s trade on the basis that it was a separate commercial activity in its own right.  Mr Goodfellow submits that applying Lightman J’s test of what constitutes storage, the packaging of the coal was not an end in itself and was simply a step towards making the coal more attractive for sale to potential customers at the society’s retail stores.  But that was not the way in which the Court of Session approached the matter.  Both Lord Clyde and Lord Guthrie regarded the process as a separate commercial operation in its own right.  Lord Clyde’s words can, I think, be read as a response to the Crown’s contention that the packaging operation was not the society’s “only trade”.  Not that it was not an operation in the nature of trade at all.
The decision of the Special Commissioner
38.	The essence of the Special Commissioner’s reasoning is contained in paragraphs 20 – 21 of his decision.  In these paragraphs Dr Avery Jones sets out his reasons for concluding that the test laid down by Lightman J in Bestway is inconsistent with the earlier decisions in Saxone and  Kilmarnock: 
20.	“I agree with Mr Goodfellow that the decision on the meaning of part of the trade is part of the ratio of Saxone, and it is similar to that in Kilmarnock on another part of the same section. I doubt whether Lord Reid would have described storing each kind of shoes as a "significant, separate and identifiable part of the trade," or a "separately identifiable 'part-trade'," or whether the Court of Session would have applied these descriptions to the packaging of screened coal. Their approaches seem to me to be much closer to "an activity undertaken in the course of a trade." They are clearly different from Lightman J's approach in the passage quoted, which is in any case obiter for the reasons I have set out, that part of a trade is construed in the same way as in the context of carrying forward losses. I am therefore bound to construe the words part of a trade according to the ordinary use of language so as to include Lord Reid's example of the storage or selling of each of two kinds of goods. 
21.	The Appellant's whole trade is that of importer and buyer from a single manufacturer, for sale mainly to the wholesale market of distributors who supplied products to window and door fabricators. On whether part of the Appellant's trade consists of storage of goods which are to be used in the manufacture of other goods, I apply Lord Reid's approach of the ordinary use of language consistently with his decision that storage of manufactured goods and bought-in goods are each separate parts of the trade. Here, because of the terms on which Mayer will supply the products, it is necessary to the Appellant's trade that products have to be stored. I find that the storage here is a separate part of the Appellant's trade.”
39.	I am unable  to accept this analysis of these two decisions.  As mentioned earlier, the storage of the qualifying shoes in Saxone was necessarily part of the storage company’s trade because this was the only business it carried on.  Lord Reid rejected in terms the argument that there was no sufficient distinction between the ways in which the various types of shoes were treated and I accept Mr Brennan’s submission that it is difficult to see why Lord Reid would not have described the storage of each kind of shoe as a significant, separate and identifiable part of the trade.  Indeed, it is difficult to see how else he could have distinguished between the different parts of a similar kind of trade.  Nor is the decision in Kilmarnock any different.  Both Lord Clyde and Lord Guthrie did in terms regard the coal packaging process as a separate and identifiable part of the society’s industrial operations.
40.	I regard both these decisions as supporting a much narrower and more fundamental view of the scope of s.18(2) than that adopted by the Special Commissioner.  It seems to me that for an operation to be part of a trade within the meaning of s.18(2) it must itself be an activity in the nature of a trade.  As s.18 itself demonstrates a trade for these purposes is not limited to the selling of goods and can include both manufacturing and processing operations.  But like Lightman J, I am not persuaded that storage as a trade in s.18(1) and as part of a trade in s.18(2) involve the application of quite different tests.  Section 18(2) operates only to expand the definition contained in s.18(1) not to alter it.  Neither Saxone nor  Kilmarnock provides any support for the wider test contended for by Mr Goodfellow, which was accepted by the Special Commissioner.  On a proper analysis they are in fact supportive of the approach taken by Lightman J in Bestway, at least in so far as he held that the primary purpose of s.7(2) was to deal with composite trades.  I do not believe that the test is any wider than this and I do not accept the analysis contained in the dictum of Dillon J in Vibroplant  which was not, I think, based on the much fuller argument presented to me on this appeal.
41.	It follows that the decision of the Special Commissioner was based on a misdirection as to the correct interpretation of s.18(2) and must be set aside.  On the facts found by him there is in my judgment no distinction in substance between the operation of Maco’s warehouse and the storage in the Bestway case.  Although as indicated earlier, the storage of the qualifying goods in this case is carried out in a separate building and on a quite different scale, it is nonetheless carried out to support the company’s wholesale trading operation and not as a trading or commercial activity in itself.  On my view of s.18(2) that is not enough.  The appeal will therefore be allowed.