Hobson v Gorringe

[HOUSE OF LORDS]

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[CONSOLIDATED APPEALS]

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[CONSOLIDATED APPEALS]

Revenue - Corporation tax - Capital allowances - Capital expenditure incurred by finance companies on plant and machinery - Plant and machinery leased out for installation in local authority premises - Whether plant after installation "belonging" to finance companies - Whether finance companies entitled to writing-down allowances - "Interest in the relevant land" - Finance Act 1971 (c. 68), s. 44(1) - Finance Act 1985 (c. 54), s. 59, Sch. 17, para. 3

The taxpayer companies were members of a group of companies carrying on the trade of acquiring and hiring out plant and machinery to, inter alia, local authorities. They incurred capital expenditure on the provision of the plant and machinery for the purposes of their trade. A large part of the expenditure related to central heating equipment for installation by local authorities in council houses. Other expenditure was incurred on swimming pool equipment, replacement cremators for crematoria, alarm systems for installation in sheltered housing, lifts for installation in car parks and boiler equipment. In respect of each transaction a master equipment lease was executed between a taxpayer company and a local authority that specified in inserted schedules the equipment that was to be leased and provided that the lessee would return the equipment on the expiry of the lease and that in the event of non-payment of the rental the lease could be terminated and the equipment repossessed by the lessor. It was also provided that leased equipment would remain personal or moveable property that would continue in the ownership of the lessor notwithstanding that it might have become affixed to any land or building. In practice, the local authority ordered the equipment from the supplier and caused it to be incorporated in the premises and then submitted an invoice to the taxpayer company for the cost; the lease schedule was then executed. The inspector of taxes refused claims by the taxpayer companies for writing-down allowances under section 44(1) of the Finance Act 1971¹ on the ground that after installation the equipment had become fixtures in the premises owned by the local authorities and thus ceased to belong to the relevant taxpayer company. The special commissioners allowed appeals by the taxpayer companies. Vinelott J. allowed appeals by the Crown in respect of expenditure incurred by the taxpayer companies on equipment installed by the local authorities in houses and flats let to council tenants. The Court of Appeal allowed appeals by the Crown in respect of allowances under the provisions of section 44(1) of the Act of 1971 but allowed cross-appeals by the taxpayer companies in respect of expenditure incurred after 11 July 1984 falling within the provisions of section 59(1) of and paragraph 3 of Schedule 17 to the Finance Act 1985.²

On appeals by the Crown and the taxpayer companies: -

Held, (1) dismissing the taxpayer companies' appeals, that on the true construction of section 44(1) of the Finance Act 1971 property belonged to a person if he was the absolute owner of it in law or equity; that on being affixed to the local authorities' premises the equipment leased to them by the taxpayer companies had under the general law become part of the land and thus in law owned by the local authorities; that that consequence could not be avoided by the agreement of the parties; and that, although the master leases gave the taxpayer companies limited equitable rights in the equipment entitling them to its return and repossession in certain circumstances, equipment owned in law by the local authorities could not at the same time properly be described as belonging to the taxpayer companies within the meaning of section 44 (post, pp. 469E, 473A-B, E-F,475E-F, 476F-477C, 486A-C).

1 Finance Act 1971, s. 44(1): see post, p. 472B-C.

2 Finance Act 1985, s. 59(1): see post, p. 477D-F.

Sch. 17, para. 3: see post, p. 478A-C.

Hobson v. Gorringe [1897] 1 Ch. 182, C.A. and Stokes v. Costain Property Investments Ltd. [1984] 1 W.L.R. 763, C.A. applied.

Simmons v. Midford [1969] 2 Ch. 415 overruled in part.

(2) On the Crown's appeals, that in respect of expenditure incurred by the taxpayer companies after 11 July 1984 section 59 of and Schedule 17 to the Finance Act 1985 provided a comprehensive and exclusive code for determining the circumstances in which capital allowances could be claimed in respect of fixtures; that the taxpayer companies had no "interest in the relevant land" within the meaning of paragraphs 1(2)(d), 2(1)(c) and 4(1)(a) of Schedule 17; that if the local authorities had incurred the expenditure on the provision of the equipment it would, by virtue of paragraph 2, have been treated "for material purposes" as belonging to them within paragraph 3(1)(d) and it was thus by paragraph 3(1) to be treated for material purposes as belonging to the taxpayer companies; but that if in any case a taxpayer company had specifically given unconditional approval to a purchase of equipment by a local authority and there had then been final agreement of the terms to be included in the lease schedule the taxpayer company would have incurred the expenditure when the local authority purchased the equipment; and that, accordingly, the question in each case whether the expenditure was excluded from entitlement to allowance by section 59(2)(a) as consisting of the payment of sums payable under contracts entered into on or before 11 July 1984 required a finding of fact and the cases should be remitted to the special commissioners for determination (post, pp. 469E, 481C-D, 482B-E, F-483A, 485F-486C).

Per curiam. The relaxed rules as to reference to parliamentary materials introduced by Pepper v. Hart [1993] A.C. 593 can, if properly used, be a valuable aid to construction of legislation when Parliament has directly considered the point in issue and passed the legislation on the basis of the ministerial statement. It provides no assistance to a court and is capable of giving rise to much expense and delay if attempts are made to widen the category of materials that can be looked at. Judges should be astute to check such misuse of the new rule by making appropriate orders as to costs wasted (post, pp. 469E, 481G-482A, 486A-C).

Pepper v. Hart [1993] A.C. 593, H.L.(E.) considered.

Decisions of the Court of Appeal [1995] Ch. 90; [1994] 3 W.L.R. 1032 varied.

The following cases are referred to in the opinion of Lord Browne-Wilkinson:

Allen (Samuel) & Sons Ltd., In re [1907] 1 Ch. 575

Gough v. Wood & Co. [1894] 1 Q.B. 713, C.A.

Hobson v. Gorringe [1897] 1 Ch. 182, C.A.

Morrison, Jones & Taylor Ltd., In re; Cookes v. Morrison, Jones & Taylor Ltd. [1914] 1 Ch. 50, C.A.

Pepper v. Hart [1993] A.C. 593; [1992] 3 W.L.R. 1032; [1993] 1 All E.R. 42, H.L.(E.)

Reynolds v. Ashby & Son [1904] A.C. 466, H.L.(E.)

Simmons v. Midford [1969] 2 Ch. 415; [1969] 3 W.L.R. 168; [1969] 2 All E.R. 1269

Stokes v. Costain Property Investments Ltd. [1984] 1 W.L.R. 763; [1984] 1 All E.R. 849, C.A.

The following additional cases were cited in argument:

De Falbe, In re; Ward v. Taylor [1901] 1 Ch. 523, C.A.

Heritable Reversionary Co. Ltd. v. Millar [1892] A.C. 598, H.L.(Sc.)

Holroyd v. Marshall (1862) 10 H.L.Cas. 191, H.L.(E.)

Hopwood v. C. N. Spencer Ltd. (1964) 42 T.C. 169

Lowe v. J. W. Ashmore Ltd. [1971] Ch. 545; [1970] 3 W.L.R. 998; [1971] 1 All E.R. 1057

Lysaght v. Edwards (1876) 2 Ch.D. 499

Montague v. Long (1972) 24 P. & C.R. 240

New Zealand Government Property Corporation v. H.M. & S. Ltd. [1982] Q.B. 1145; [1982] 2 W.L.R. 837; [1982] 1 All E.R. 624, C.A.

Practice Direction (Hansard: Citation) [1995] 1 W.L.R. 192; [1995] 1 All E.R. 234

Sargaison v. Roberts [1969] 1 W.L.R. 951; [1969] 3 All E.R. 1072

Stokes v. Costain Property Investments Ltd. [1983] 1 W.L.R. 907; [1983] 2 All E.R. 681

Street v. Mountford [1985] A.C. 809; [1985] 2 W.L.R. 877; [1985] 2 All E.R. 289, H.L.(E.)

Tinsley v. Milligan [1994] 1 A.C. 340; [1993] 3 W.L.R. 126; [1993] 3 All E.R. 65, H.L.(E.)

APPEALS from the Court of Appeal.

These were consolidated appeals by the Crown and consolidated appeals by the 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., by leave of the House of Lords from the decision of the Court of Appeal (Dillon, Hoffmann and Saville L.JJ.) [1995] Ch. 90 allowing appeals by the Crown and cross-appeals by the taxpayer companies from a decision of Vinelott J. By his decision, Vinelott J. had allowed in part appeals by the Crown by cases stated from the Commissioners for the Special Purposes of the Income Tax Acts [1994] S.T.C. 315, who had allowed appeals by the taxpayer companies against assessments to corporation tax.

The Court of Appeal refused applications by the Crown and the taxpayer companies for leave to appeal from their decision, but on 5 December 1994 the Appeal Committee of the House of Lords (Lord Jauncey of Tullichettle, Lord Slynn of Hadley and Lord Nicholls of Birkenhead) allowed petitions by them for leave. The appeals of the taxpayer companies were consolidated by order of the House of Lords dated 9 January 1995 and the appeals of the Crown by order dated 30 January 1995.

Graham Aaronson Q.C., Paul Morgan Q.C. and Stephen Jourdan for the taxpayer companies. The contractual arrangements between the taxpayer companies and the local authorities constituted a sale of their fixtures by the local authorities to the taxpayer companies followed by a lease back of those fixtures to the local authorities. Since the transaction was not effected by deed it could not convey the legal title to the fixtures but operated so as to pass full beneficial title to the taxpayer companies with the local authorities retaining the bare legal title: see Lysaght v. Edwards (1876) 2 Ch.D. 499, 507. It is appropriate to regard the full

beneficial owner of property as the person to whom it "belongs:" see Heritable Reversionary Co. Ltd. v. Millar [1892] A.C. 598, 614-615, 621 and Hopwood v. C. N. Spencer Ltd. (1964) 42 T.C. 169, 181.

One reaches the same conclusion by looking at the particular rights that the taxpayer companies acquired by their contractual arrangements with the local authorities, including the right to recover the items on the expiry or earlier determination of the lease or in the event of default. Taken together, those rights gave the taxpayer companies full beneficial ownership of the items. Conversely, the local authorities' rights were limited to the bare legal title (together with the right to use the assets solely in the capacity of lessees, paying a full consideration therefor).

For cases in which the courts have described persons in a position analogous to that of the taxpayer companies as being the "owners" of items or the persons to whom the items "belong," see Hobson v. Gorringe [1897] 1 Ch. 182, 188; Gough v. Wood & Co. [1894] 1 Q.B. 713, 718, 720 and New Zealand Government Property Corporation v. H.M. & S. Ltd. [1982] Q.B. 1145, 1156E, 1161H, 1164G, 1165A.

On the hypothesis that the taxpayer companies acquired their interests in the assets before completion of the lease schedules and payment of the purchase price, either of two alternative analyses would be correct. (a) On payment of the full purchase price the local authorities became mere trustees of the fixtures, with full beneficial ownership being vested in the taxpayer companies. (b) If clause 3.10 of the master equipment lease is effective in law to prevent the equipment from becoming part of the realty (as its terms provided), the taxpayer companies would have remained the legal as well as the full beneficial owners even after the items had become affixed to the local authorities' buildings. There are dicta implying that the chattel status of items can be preserved by express agreement between the parties: see Hobson v. Gorringe [1897] 1 Ch. 182, 191, 193; Reynolds v. Ashby & Son [1904] A.C. 466, 470; Simmons v. Midford [1969] 2 Ch. 415, 420A, 421E; Montague v. Long (1972) 24 P. & C.R. 240, 245; Lowe v. J. W. Ashmore Ltd. [1971] Ch. 545, 559-561 and Tinsley v. Milligan [1994] 1 A.C. 340.

Dillon L.J. [1995] Ch. 90, 115-116 regarded the taxpayer companies' right to receive rent as a personal right, as contrasted with a right in rem, and took the view that the only in rem right that the taxpayer companies did have, a right to remove the asset on expiry of the lease or on default, was insufficient to make the assets "owned" by the taxpayer companies. He erred in four respects. First, he failed to recognise that a purchaser who pays full consideration for an interest in land acquires a full beneficial interest in the land, even if legal title does not pass because of the absence of a deed: see Tinsley v. Milligan, at p. 371B. Secondly, he failed to give sufficient weight to the entirety of the rights that the taxpayer companies enjoyed. Thirdly, he thought that Gough v. Wood & Co. turned on the fact that the equipment had been removed by the relevant time, whereas the very question in issue was whether the hire-purchase company had had the right to remove the fixture. Fourthly, he failed to give weight to the consideration that taxation consequences ordinarily follow the form of the transaction adopted by the parties. Here, the parties entered into a transaction under which the taxpayer companies bought the items and the

local authorities took them on lease. Just as the purchase prices paid by the taxpayer companies for the items were treated for tax purposes as capital payments on the acquisition of assets, and the rental payments received by the taxpayer companies were fully taxed as such (and not treated as part repayment of capital in the manner appropriate to loan arrangements), so the acquisition of the assets and the lease of them should likewise be recognised for the purposes of capital allowances.

The existence of a limited interest (i.e., a weekly tenancy) vested in a council tenant does not affect the ownership of the plant. Even if the weekly tenant has a legal estate, that legal estate gives him simply exclusive possession of the land for so long as the tenancy subsists. Granting a lease, allowing the lessee to grant a sub-lease and so on is one of the means by which ownership is enjoyed and asserted: Stokes v. Costain Property Investments Ltd. [1984] 1 W.L.R. 763. The existence of the tenancy might prevent a taxpayer company from reclaiming its assets on the expiry, or breach, of the head lease granted to the local authority, but all that this means is that the right to repossession would be postponed until the weekly tenancy came to an end. The existence of the weekly tenant does not change the position of the local authority as bare legal owner. Since the equipment does not belong to the weekly tenant or to the local authority it must belong either to the taxpayer company or to nobody.

If the existence of the weekly tenancies does affect the ownership of the items, then curious consequences would follow. If plant were installed in untenanted property it would at that stage "belong" to the taxpayer company; if subsequently a weekly tenant went into possession, then the taxpayer company would be regarded as making a disposal of the items for the purposes of both capital allowances (giving rise to a balancing charge) and capital gains tax. On the expiry of a weekly tenancy, the taxpayer company would be regarded as re-acquiring the assets for both purposes, but without any corresponding consideration being attributed to the re-acquisition.

As to whether the occupiers of sheltered accommodation had tenancies of that accommodation, the revenue failed to adduce any evidence to show that the occupiers were tenants and accordingly the special commissioners were entitled to assume that the occupiers did not have tenancies.

Parliament in section 44 has striven to use a non-technical expression, so a non-technical approach to its construction should be adopted: compare Sargaison v. Roberts [1969] 1 W.L.R. 951, 958. So one should look at what the taxpayer has and ask whether it "belongs" to the taxpayer. One is dealing here with a tax code that operates on basic principles. Having regard to the rights vested in the taxpayer companies, they were full beneficial owners of the articles; it does not matter how (by agency, etc.) those rights were acquired. It is no part of the taxpayer companies' case that Stokes v. Costain Property Investments Ltd. was wrongly decided. [Reference was also made to Heritable Reversionary Co. Ltd. v. Millar [1892] A.C. 598.]

The provisions in Schedule 17 to the Finance Act 1985 were introduced in order to deal with the problem highlighted by Stokes v. Costain

Property Investments Ltd. The taxpayer companies satisfy the conditions of both paragraph 3 (which requires an election) and paragraph 4 (which does not). They acquired the equitable fee simple in that part of the land constituted by the fixture. It is appropriate in the present context to regard the equitable interest in a freehold as being in existence before it was split from the legal estate. Tax is normally exigible by reference to beneficial interests and without concern for the bare legal title. In the courts below, the revenue argued that the definition of "interest in land" in paragraph 1(2) necessarily excluded beneficial interests because of the explicit references to "agreements to acquire" various interests. This is wrong, because the inclusion of "agreements to acquire" interests has the purpose of extending the definition beyond legal and beneficial interests: for example, an "agreement to acquire" a freehold would not create a beneficial interest until (say, on the fulfilment of certain conditions) the contract became capable of specific performance.

The revenue's argument that the use of the expression "for material purposes" in paragraph 3(1)(d) means that the lessee would need to be someone entitled to capital allowances, and hence someone subject to United Kingdom income tax or corporation tax, is wrong for the following reasons. (a) Where the provisions of Schedule 17 require a person to be entitled to an allowance, they say so expressly: see paragraphs 4(1), 5(1)(b), 6(c) and 9(2). Paragraph 1(4) defined what is meant by "being entitled to an allowance" precisely for this purpose. (b) It is a familiar feature of capital allowance legislation that explicit statements are made where it is or is not necessary for the person referred to to be able to claim allowances or otherwise to be subject to U.K. tax: see section 64(2)(a), (5)(a) and (7) of the Finance Act 1980; section 70 of the Finance Act 1982; and section 92 of the Finance Act 1988. (c) The whole purpose of Schedule 17 to the Act of 1985 is to determine the person to whom an item (which is a fixture) belongs at any given time. This may be necessary either to trace "belonging" through a chain of transactions, or to deal with a case where a person is not at one point of time subject to United Kingdom tax but may thereafter become so subject: see, e.g. sections 108, 246 and 360 of the Income and Corporation Taxes Act 1970. (d) The exclusion of non-taxpayers from consideration in paragraph 3 of Schedule 17 would deprive equipment lessors of the capital allowances to which they would have been entitled pre-Stokes v. Costain Property Investments Ltd. The decision in Stokes was the "mischief" at which the new provisions were aimed. (e) If "for material purposes" is construed so as to require the lessee to be a person who is subject to tax and entitled to claim an allowance, the consequence would be bizarre: the taxpayer companies would be entitled to capital allowances for equipment leased to local authorities if the equipment did not become a fixture but would not be if it did.

It is understandable that the draftsman, when introducing Schedule 17 into the Act by means of section 59, should indicate in that section the purpose of the Schedule. Having established the purpose of the Schedule, it was appropriate, in setting out the detailed rules in the Schedule, to make it perfectly clear that those rules did not apply to any other tax context (e.g. industrial buildings allowances, pre-1971 plant allowances

and capital gains tax). Hence the repeated use of the phrase "for material purposes" in Schedule 17.

In order to apply the provisions of section 59(2) to the agreements in dispute it is necessary to know when the taxpayer companies and the local authorities reached agreement relating to the plant items in question. The conclusion of the special commissioners that no agreement was made until the terms of the lease schedule had been agreed and signed was essentially one of fact, and their decision was entirely sensible. Complex litigation involving hundreds of similar agreements would be virtually unmanageable, and certainly extremely expensive, if all the points in issue are not dealt with by reference to the specimen leases that the parties have agreed should be taken as representing all the others and as raising all relevant points. Although the special commissioners were asked to give a decision in principle, their decision was based on the evidence. Accordingly, it would be wrong to allow the revenue to reopen this issue otherwise than on the ground that the commissioners' decision was unreasonable.

Even if the taxpayer companies acquired their interest in the plant before it was installed as a fixture (i.e., they acquired it under the agency purchase arrangements before the installation of the equipment), the equipment should be deemed to belong to them under paragraph 2(1)(c) of Schedule 17. They did have an interest in land at the relevant time, on either of two bases. (a) They had the beneficial freehold interest in the land comprising the fixtures as from the moment of affixation. The beneficial interest in that part of the air space constituted by the plant pre-existed the acquisition of the plant. (b) They had a "servitude" within the provisions of sub-paragraph 1(2)(d). The draftsman used the expression as a wider term to cover situations analogous to easements and profits � prendre: see Halsbury's Laws of England, 4th ed., vol. 14 (1975) p. 4, para. 3. "Servitude" as an expression in Scots law is equivalent to an easement in English law but it was not in that sense that the draftsman used it. As can be seen from paragraphs 1(2)(b) and (c), Scots expressions when used as such are identified as such.

Morgan Q.C. following. The contract of sale consisted of the invoice, the payment of the purchase price and the schedule.

A contract for sale of a fixture, which is real property, has the consequence that the beneficial ownership of it vests in the purchaser. On severance of the fixture, the equitable interest in the fixture turns into a legal interest in the chattel. A contract to sell real property creates an equitable interest in that real property while it is real property. Holroyd v. Marshall (1862) 10 H.L.Cas. 191 establishes that a contract for sale of plant would be regarded as specifically enforceable, so it does not matter whether it is real property or a chattel. [Reference was also made to In re Morrison, Jones & Taylor Ltd.; Cookes v. Morrison, Jones & Taylor Ltd. [1914] 1 Ch. 50, 58.]

James Munby Q.C. and Timothy Brennan for the Crown. Apart from the purported retention of title under clauses 2.7 and 3.10, the only rights of the taxpayer companies under the equipment lease (apart from the right to the rental income stream) are to require the local authority to return the equipment on the expirty or earlier determination of the lease (clause 3.7) and to repossess the equipment in the event of default (clause

3.8). In particular, they have no express contractual right to enter to repossess the equipment if the local authority fails to pay the leasing charges. Even if such a right is properly to be implied, which it is not, it gives the taxpayer companies only a right of entry: In re Morrison, Jones & Taylor Ltd.; Cookes v. Morrison, Jones & Taylor Ltd. [1914] 1 Ch. 50, 58. A right of entry is not an easement and is not registrable. Thus, while it binds all later takers other than a bona fide purchaser of a legal estate for value without notice, for example, a subsequent equitable mortgagee of the land (In re Samuel Allen & Sons Ltd. [1907] 1 Ch. 575 and In re Morrison, Jones & Taylor Ltd.), a right of entry is defeated by a subsequent legal estate, for example, a legal mortgage: Hobson v. Gorringe [1897] 1 Ch. 182; Reynolds v. Ashby & Son [1904] A.C. 466. [Reference was also made to Gough v. Wood & Co. [1894] 1 Q.B. 713.]

The concept of a fixture remaining personal or moveable property is a contradiction in terms and impossibility in law. "Belonging" in section 44(1) of the Act of 1971 means absolute beneficial ownership; limited interests short of absolute ownership are not enough: see Stokes v. Costain Property Investments Ltd. [1984] 1 W.L.R. 763, 768H, 769E-F, 771H and Heritable Reversionary Co. Ltd. v. Millar [1892] A.C. 598, 604. The equipment does not "belong" to the taxpayer companies because (a) notwithstanding the provisions of the equipment lease the equipment has ceased to be a chattel and has become a fixture on the land of the local authority; no contractual agreement to the contrary can prevent this; (b) so long as it remains affixed to the land the equipment is part of, and belongs to the local authority as the owner of the land; the taxpayer companies have no estate or interest in that land and therefore no legal title or proprietary right to the equipment. [Reference was made to Simmons v. Midford [1969] 2 Ch. 415, 420B, 421-422.] In construing "belongs" in section 44 one cannot jettison ordinary legal thinking. Section 46(2) shows that the parliamentary draftsman had classic legal property analysis in mind, that one cannot answer the question without such analysis and that ownership means full ownership. The draftsman was indicating that the interest of a lessee was not connoted by "belonging." Schedule 17 to the Act of 1985 is also expressed in strict legal terms. So one cannot forget legal analysis and just ask the man in the street "does the equipment belong to the taxpayer company?" One cannot answer the question in Schedule 17 without meticulous property law analysis.

The equipment, having been affixed to the land before the completion of the equipment lease schedule, had become a fixture (and thus ceased to be a chattel) prior to the taxpayer companies acquiring any rights under the equipment lease. The object and purpose of the annexation have to be ascertained by reference to the external physical circumstances affecting the article and not by inquiry into the "motives" or "intentions" of the parties: see Hobson v. Gorringe, pp. 192-195; In re De Falbe; Ward v. Taylor [1901] 1 Ch. 523, 535 and Montague v. Long, 24 P. & C.R. 240, 242-246. In Simmons v. Midford [1969] 2 Ch. 415 Hobson v. Gorringe and In re De Falbe were not cited and the decision may therefore be regarded as having been reached per incuriam.

The question whether an article is a fixture or a chattel is quite distinct from the question whether, if it is a fixture, it is nevertheless removable.

Thus, the presence of a retention of title clause, and even the existence of a right to enter and remove an article that has been fixed to land, does not prevent that article being a fixture and not a chattel. Clause 3.10 of the equipment lease is thus ineffective to prevent the equipment becoming part of the land: Street v. Mountford [1985] A.C. 809, 819. The contract does not estop the local authority. The taxpayer companies are necessarily claiming an equitable interest in the airspace occupied by the equipment, and that is inconsistent with the terms of the contract.

So far as concerns the tenanted houses, flats and secure accommodation, the rights of the tenants under their tenancies (and a fortiori the rights of the former tenants who have exercised their rights under the "right to buy" legislation and acquired either the freehold or a long lease) take priority to the taxpayer companies' rights under the equipment lease. The taxpayer companies are thus unable to repossess the equipment, even in the event of default. Any rights of entry that the taxpayer companies may have cannot bind a bona fide purchaser for value of a legal estate without notice. The local authority's tenants, albeit that they have only weekly or monthly tenancies, each have a legal estate in the land: Law of Property Act 1925, sections 1(1)(b), 52(2)(d), 54(2), 205(1)(xxvii). They are bona fide purchasers for value without notice of the taxpayer companies' rights and therefore take free of those rights. None of the rights of entry that the local authority, qua landlord, has against its tenants, can justify entering for the purpose of giving effect to the taxpayer companies' rights under the equipment lease. Any such entry would involve the local authority in a derogation from its own grant, a breach of the express or implied covenants for quiet enjoyment and a breach of its statutory covenants under the Housing Act 1961, section 32, now the Landlord and Tenant Act 1985, section 11. The special commissioners have found (or justifiably assumed) that occupants of sheltered housing would be in no different position from council tenants.

Those items of equipment that were installed in dwellings let to tenants could not possibly belong to the taxpayer companies after installation. The same conclusion must follow in relation to any items installed in the common parts of the local authority's building. Each tenant had rights, as an incident of the lease, to the benefit of the common parts and facilities of the building. The local authority was not entitled to derogate from those rights by taking away, or by permitting the taxpayer companies to repossess, parts of the alarm and entry systems in such a way as to render the remainder of the system less effective or ineffective.

As to whether the taxpayer companies may rely on the provisions of section 59 of and paragraph 3 of Schedule 17 to the Act of 1985 notwithstanding that the local authorities are exempt from any charge to tax, Vinelott J. was right and the Court of Appeal was wrong. No election is available unless both parties are taxpayers. Where a tax-exempt body incurs expenditure on the provision of plant and machinery there is no occasion for deeming that equipment to belong to that body for the purposes of the legislation concerning capital allowances. Such a body is outside the charge to tax and the system of capital allowances cannot have any application. No such allowance would have been available to the local authority, so none can be made available to the finance lessor by virtue of

a joint election under paragraph 3. Paragraph 2 could not apply to expenditure by such a body, and it follows that the joint election under paragraph 3 does not apply either. As Vinelott J. [1995] Ch. 90, 109D-E said, the purpose of the election is to provide for lessor and lessee to agree that the lessor should have the benefit of an allowance that would otherwise have been available to the lessee. The remark of Dillon L.J. at p. 119C, concerning "two price lists" is nothing to the point. It is an inevitable feature of the system of tax allowances that the effective price of goods or services to a taxpayer who is entitled to a tax allowance is lower than the price paid by a non-taxpayer, who cannot take advantage of such an allowance.

The taxpayer companies submitted below that a wide construction of Schedule 17 was appropriate to give effect to what they contend is the underlying purpose of the legislation: to encourage expenditure on machinery and plant. Such an approach requires, in substance, an assumption that the local authorities should be treated as if they are traders and taxpayers when they are neither. There is no warrant for assuming that Parliament wished through tax allowances to encourage tax-exempt local authorities to invest in plant, and to do so by way of leasing only, rather than by direct capital expenditure, where no such allowance would be available and investment by local authorities was subjected to well known constraints. Paragraph 5 of Schedule 17 shows that, where Parliament intended the terms of Schedule 17 to apply to the position of non-taxpayers express provision was made to that effect.

As to whether the transaction between a taxpayer company and a local authority involved the company acquiring an "interest in land" within paragraphs 1(2), 2(1)(c) and 4(1)(a) of Schedule 17, the crucial question is whether the rights conferred on the company by the equipment lease constitute an "interest in land" as that expression is defined in paragraph 1(2). Even on the taxpayer companies' own view of the equipment lease, the company plainly does not have a fee simple estate (whether legal or equitable), or an agreement to acquire such an estate, within the meaning of paragraph 1(2)(a), a leasehold estate, or an agreement to acquire such an estate, within the meaning of paragraph 1(2)(c), or a "licence to occupy land" within the meaning of paragraph 1(2)(e). It has, at most, a licence to enter the land in certain future events. Accordingly, the only question is whether the taxpayer company has "an estate or servitude or any agreement to acquire an easement or servitude" within the meaning of paragraph 1(2)(d). It does not.

"Servitude" is used in paragraph 1(2)(d) as a term of art in Scottish law, "easement" as the analogous or corresponding term of art in English law. Both words refer to essentially the same thing. "Servitude" is not used in paragraph 1(2)(d) as a collective noun referring to those rights in English law that correspond to the servitudes of the civil law, i.e. easements and profits � prendre. Whether "servitude" is used in the technical Scottish sense or in the non-technical English sense, the taxpayer company does not have anything that can properly be described either as an "easement" or as a "servitude" since it has no dominant tenement. Even if "easement" is properly to be understood as including a profit � prendre (which does not require a dominant tenement and can therefore

exist in gross), the taxpayer company's rights are incapable of existing as a profit � prendre. There can be no profit � prendre to remove machinery or equipment deposited on or attached to land by human agency.

As a matter of jurisprudence or comparative law, although all are members of the genus "iura in re aliena" easements and servitudes are not members of the same species as the taxpayer companies' rights, which are in the nature of "securities," i.e. holding another's land as security for a debt.

As to whether the relevant date for the entry into the contract referred to in section 59(2)(a) of the Act of 1985 is the date of completion of the lease schedule in each case or some earlier date, being the date (if any) on which the taxpayer company may have approved a local authority's proposal to purchase equipment that would later be acquired by the taxpayer company and leased to the local authority, the special commissioners' conclusion, as part of the "essential facts," that the equipment lessors acquired chattels that they thereon owned is consistent only with binding contracts having been entered into by the relevant equipment lessor, necessarily through the agency of the relevant local authority, before the completion of the lease schedule. No conclusion other than that the purchases were affected through the agency purchase arrangements would have achieved what the parties clearly intended to achieve: that the goods should not pass into the ownership of the local authority. The commissioners ought, therefore, to have concluded as a matter of principle that the relevant contract date was, in each case, the date of approval by the equipment lessor of the local authority's proposal to purchase equipment for leasing and that, in so far as that approval pre-dated the execution of the lease schedule, that date rather than that of the lease schedule is the relevant date. The taxpayer companies contend that the commissioners' conclusion on the issue of the date of the contracts is a finding of fact with which the courts ought not to interfere, but that approach is inappropriate where, as here, questions applicable to large numbers of contracts are litigated as matters of principle rather than decided as matters of fact. The burden was on the taxpayers to establish, in relation to each equipment lease, that the relevant contract date was not on or before 11 July 1984. For the revenue to have insisted that the taxpayers call evidence to establish the relevant date in respect of each of the leases would have imposed an intolerable and oppressive burden on the parties and the commissioners. For that reason, the matter was litigated as a question of principle by reference only to a small number of sample leases. In those circumstances, the House of Lords ought not to readily to accede to an argument that matters of principle applicable to all the leases in issue are to be regarded as matters of fact determined by reference to the facts (rather than principles) applicable to the sample leases. No agreement was reached that these should be test cases. Once the points of principle are decided, further consideration of the case may be required by the commissioners in order to apply those points of principle to the leases the details of which have not been litigated before them.

Schedule 17 is a complete code for matters arising after 11 July 1984. Section 44 of the Act of 1971 does not come into it.

Aaronson Q.C. It has never been suggested before that anyone but the taxpayer company could be identified as the owner under the Schedule 17 test. The taxpayer companies should not be exposed to this new point at this stage. There cannot be many leases left under the old regime.

Munby Q.C. It is a pure point of law.

[LORD GOFF OF CHIEVELEY. Their Lordships are minded to hear argument on the new point.]

Aaronson Q.C. in reply. As to paragraph 4 of Schedule 17, an equitable interest in this plant existed as from 1985 or 1986. The local authority had the legal and the equitable interest; when the lease took effect the equitable interest passed to the taxpayer company. On the main point under section 44 as to "belonging," one should look at the transaction, analyse its consequences under general law and then decide how the taxing provisions apply: see Gough v. Wood & Co. [1894] 1 Q.B. 713. [Reference was made to section 45 of the Capital Allowances Act 1968.]

[The hearing was adjourned.]

May 11. Munby Q.C. In relation to expenditure to which section 59 of and Schedule 17 to the Act of 1985 apply, those provisions constitute an exhaustive code for determining to whom a fixture belongs for the purposes of entitlement to an allowance under Chapter I of Part III of the Act of 1971.

Schedule 17 was enacted in order to address the difficulties perceived to arise from the decision of the Court of Appeal in Stokes v. Costain Property Investments Ltd. [1984] 1 W.L.R. 768. It would be surprising if Parliament had, while addressing the question of "belonging" expressly by reference to technical property law concepts, nonetheless left open the possibility that a fixture could "belong" under the old principles to someone other than a person to whom it was deemed to belong by virtue of Schedule 17. Such an approach would have been productive of unnecessary uncertainty.

A person claiming capital allowances in respect of expenditure to which section 59 applies must satisfy the requirements of Schedule 17: see section 59(1) and (2). Subject to the provision as to the date, which is the application of the principle that legislation should not be retrospective, Schedule 17 determines the entitlement. Section 59(5), by the amendment made to section 46(2) of the Act of 1971 indicates that Parliament was alert to the need to ensure a result that was consistent with the approach taken in Schedule 17 wherever chattels became affixed so as to become part of land. Such consistency would not be achieved if affixation might or might not be relevant and if "belonging" might sometimes be established without Schedule 17 being satisfied.

Both in paragraph 4(1) of Schedule 17 and in section 44 of the Act of 1971 the relevant statutory material ultimately reduces to "belonging." That was the test under the old law and gave rise to the problems highlighted in Stokes v. Costain Property Investments Ltd. The problems were answered in detail in Schedule 17: see paragraph 1(2). If the taxpayer companies are right, and one goes to Schedule 17 and then back to section 44, the criteria in Schedule 17 do not really matter because "if you trip up on Schedule 17, section 44 will save you."

The purpose of the words in the second part of section 59(1) of the Act of 1985 is to spell out, beyond the possibility of contrary argument, that, however this legislation operates, one can only ever have one person entitled to the allowance. Looked at in that sense, they cannot sensibly be treated as cutting down the opening words. On the taxpayer companies' argument, there is in fact an apparent conflict between the opening words of section 59(1) and those in the second part. The opening words are on their own quite clearly consistent only with the view that Schedule 17 provides an exclusive answer to the question of who is entitled. On the taxpayer companies' case, however, the effect of the concluding words is that Schedule 17 does not have that effect at all. The answer is (i) that as a matter of ordinary construction the court should always strive to avoid a conclusion that recognises or acknowledges different meanings of the same words in the same clause, and (ii) that if there be some conflict between the opening and the final words of section 59(1) it is a classic case of ambiguity entitling the court to look at the parliamentary material: Pepper v. Hart [1993] A.C. 593.

As to the taxpayer companies' reliance on section 59(8), Schedule 17 applies only to machinery or plant that becomes a fixture. Also, it applies only when the question arises after 11 July 1984. On or before that date, or when the machinery or plant remains a chattel, it continues to be regulated by section 44, so it is not surprising that it was necessary for the draftsman in section 59(8) to refer to "belonging" in the different contexts in which the question might arise. All that he has done is to identify the different governing regimes. The taxpayer companies' argument is essentially founded on section 59(7), but all that it demonstrates is that the Crown ought to be saying "Schedule 17 and such parts of section 44 as Schedule 17 brings into play."

If the House of Lords takes the view that section 59 and Schedule 17 are ambiguous, obscure or such as to give rise to an absurdity, then it is appropriate to look to the Parliamentary history of the provisions: Pepper v. Hart [1993] A.C. 593, 650. The legislative history provides a clear answer in favour of the Crown. The view was expressed that the draft provisions had exhaustive effect, which is inconsistent with the contention that someone other than a person identified under Schedule 17 should be treated as the person to whom the property belongs. The parliamentary material establishes expressly that the purpose of enacting section 59 and Schedule 17 was to address the problems raised by Stokes v. Costain Property Investments Ltd. to the exclusion of other rules on "belonging" and that there was no other purpose. It also establishes the correct answer to the question whether Schedule 17 has the effect of permitting an election under paragraph 3 so as to transfer the benefit of a capital allowance from a non-taxpayer to a taxpayer. It was no purpose of this legislation to permit non-taxpayers and taxpayers to transfer capital allowances between them to their mutual benefit.

Aaronson Q.C. The Schedule 17 rules are the primary rules to be applied to see whether they designate someone as a person to whom the item belongs; if they do not, then one applies the ordinary meaning of "belongs" as it is used in section 44 of the Act of 1971. This contention

was accepted by the special commissioners, Vinelott J. and the Court of Appeal.

It is clear that the mischief that Schedule 17 was intended to deal with was that there were gaps in the existing legislation that could prevent capital allowances being available to anyone even though capital expenditure had been incurred on plant. This mischief is addressed if the Schedule 17 rules are construed as operating so as to designate someone as the person to whom an item belongs when their operation achieves that result and allowing the existing law to provide the answer when Schedule 17 does not do so.

The explicit prohibition of any other person's entitlement to an allowance if, and so long as, Schedule 17 produces a designated person carries with it the implicit assumption that other rules co-exist that may identify someone as a person to whom the item belongs. There is nothing anywhere in section 59 or Schedule 17 that prohibits the application of these co-existing rules where Schedule 17 does not designate anyone as a person to whom the item belongs.

The taxpayer companies are not inviting the House of Lords to decide this issue in their favour by adopting a so-called "strict construction" of the statutory language. The plain meaning of the language used precisely reflects the most appropriate policy for ordering the priority of rules in this area of the capital allowance code and also represents the best way of tackling the mischief that Parliament was addressing.

Section 59(8), in preserving the operation of the "contribution" route to capital allowances, expressly recognises that Schedule 17 does not lay down a complete code in relation to "belonging," since it requires the importation of the rules in section 85 of the Act of 1968. Those rules, after amendment by section 59(8), explicitly recognise the distinction between the case where an item "belongs" (actually) to a person (see section 44 of the Act of 1971) and that where it is statutorily treated ("deemed") to belong to a person (see sections 45(1) and 46(2)). Another place in the 1985 code where the general law on "belonging" is explicity imported is in paragraph 7 of Schedule 17: see sub-paragraph (1). One of the most important circumstances in which a disposal value falls to be brought into account under section 44 is in subsection (5)(c)(i). This reference is not merely accidental or superfluous: the application of the general "belonging" concept in the context of paragraph 7 of Schedule 17 is necessary to ensure that the balancing rules operate effectively.

That section 59 recognises the co-existence of the general test of "belonging" for the purposes of Chapter I of Part III of the Act of 1971, and therefore for the specific purposes of section 44 of that Act, is demonstrated even more strikingly in the context of plant situated overseas. The concept of "fixtures" originates from Roman law and is therefore likely to be a feature of many legal systems that are themselves based on Roman law. It would be surprising if the concepts of land tenure that have been developed in all such jurisdictions corresponded to the estates and interests set out in paragraph 1(2) of Schedule 17. Where the concepts do not correspond, the Schedule 17 rules would not be effective in identifying the person to whom plant which is a fixture is deemed to belong. In such cases, it would be necessary to apply the normal test of

"belonging" as it appears in section 44 of the Act of 1971. The availability of plant allowances to U.K. residents who carry on trade overseas is an important feature of the whole scheme of capital allowances. Since such plant may well be fixtures under the applicable domestic law, it follows that the Schedule 17 rules cannot by themselves constitute a comprehensive code governing fixtures for capital allowance purposes. Accordingly (indeed, a fortiori) the Schedule 17 rules cannot constitute an exclusive code.

It cannot sensibly be contended that the application of the Schedule 17 rules results in the plant belonging to anyone other than the taxpayer company; nor, indeed, has the revenue at any stage so contended.

As to the use of Parliamentary materials, it is important to know what can be looked at. It would be wrong to look at the Parliamentary debates in this case: the criteria in Pepper v. Hart [1993] A.C. 593 are not satisfied. The words of section 59(1) are not ambiguous or obscure; the words after the semicolon are plain and do not lead to absurdity. [Reference was also made to Practice Direction (Hansard: Citation) [1995] 1 W.L.R. 192.]

As to the basis of election in paragraph 3(1) of Schedule 17 to the Act of 1985, it may be that in those circumstances the draftsman wanted to ensure that the equipment lessee was conscious of and agreeable to giving up his rights.

Munby Q.C. in reply. As to paragraph 3(1) of Schedule 17 to the Act of 1985, see paragraph 3(3). As to the taxpayer companies' point on paragraph 7 of Schedule 17, the whole of Schedule 17 proceeds on the assumption that as a matter of law the equipment becomes part of the land. That is dealt with in paragraph 7(7).

Their Lordships took time for consideration.

12 October. LORD GOFF OF CHIEVELEY. My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Browne-Wilkinson, and for the reasons which he has given I, too, would dismiss the appeals.

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

The facts

The full facts are set out in the decision of the special commissioners [1994] S.T.C. 315 and the judgment of Vinelott J. [1995] Ch. 90. For

present purposes it is unnecessary to set them out again in full and I will seek only to summarise them from the facts agreed between the parties to this appeal.

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

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

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

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

The relevant terms of the master lease (including the relevant schedule) were: (a) the local authority agreed to take the equipment on lease for a term, typically, of ten years, renewable on a year to year basis thereafter, the hirer agreeing to pay a rent annually in advance to the taxpayer company for the use of the equipment. (b) The local authority agreed to use the equipment properly and to allow the taxpayer company access to inspect the equipment: clauses 2.2 and 2.6. (c) The local authority agreed to keep the equipment properly repaired and maintained: clause 2.5.

(d) The local authority agreed to allow the taxpayer company to indicate its ownership on the equipment being leased: clause 2.7. (e) The local authority agreed to keep the equipment in its sole possession and not to sell, assign, mortgage, charge or sublet the equipment: clause 2.8. (f) The local authority agreed to insure the equipment for the benefit of the taxpayer company: clause 2.9. (g) The local authority agreed to return the equipment to the taxpayer company on the expiry or sooner determination of the lease: clause 3.7. (h) The taxpayer company was given the right to repossess the equipment on the happening of certain specified events including the non-payment of rent and other breaches of the provisions of the agreement by the local authority, or the insolvency of the local authority: clause 3.8. (i) Clause 3.10 of the master lease provided:

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

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

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

Different legislation applies to claims for capital allowances for fixtures depending upon the date upon which the relevant expenditure was incurred. If it was incurred up to 11 July 1984, the position is regulated by section 44 of the Finance Act 1971; if incurred thereafter the position

is regulated by section 44 as fundamentally modified and expanded by the Finance Act 1985, section 59 and Schedule 17. I will deal separately with these two periods.

Section 44 of the Act of 1971

Section 44(1) 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, and (c) the machinery or plant is or has been in use for the purposes of the trade, allowances and charges shall be made to and on him in accordance with the following provisions of this section."

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

The special commissioners [1994] S.T.C. 315 held that each taxpayer company had acquired "chattels" which it then owned; the subsequent leasing of those chattels on the terms of the master lease and the fixing of the chattels to the land did not lead to the conclusion that they ceased to "belong" to the taxpayer company. Vinelott J. [1995] Ch. 90 rightly held that the special commissioners had misdirected themselves: since the chattels had been acquired and fixed to the land before the relevant lease schedule was completed, the taxpayer company never became the owner in law of the chattels. At all relevant times the "chattels" had become part of the land owned by the local authority and were therefore themselves owned in law by the local authority.

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

The Court of Appeal (Dillon, Hoffmann and Saville L.JJ.) [1995] Ch. 90 unanimously allowed an appeal against the decision of Vinelott J.

in relation to the plant fixed to the property of which the local authority retained possession. They held that the concept of a fixture which remains personal or removable property was a contradiction in terms and an impossibility in law. The future right to remove equipment at the expiry of the term or in the event of a default by the local authority did not mean that the equipment "belongs" to the taxpayer company so long as it remains attached to the realty.

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

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

Before your Lordships (but not so far as I can detect before the courts below) the taxpayer companies sought to distinguish between the legal and the equitable ownership of the fixtures. This argument, whilst accepting that the legal title to the fixtures was vested in the local authority, sought to establish that in equity the beneficial ownership has at all times been vested in the taxpayer companies. The argument, as I understand it, is as follows. At the date a lease schedule was completed, the local authority in law owned the affixed chattels. The master lease and the schedule proceed on the basis that the chattels were owned by the taxpayer companies. Therefore, it is said, the completion of the lease

schedule must have given rise to an agreement by the local authority to sell to the taxpayer company that part of the "land" occupied by the former chattels and a lease back of that part of the "land" by the taxpayer company to the local authority. Such contract of sale, being specifically enforceable in equity, constituted the local authority a trustee for the taxpayer company of that part of the "land." Therefore, it was submitted, in equity the taxpayer company was the sole beneficial owner of the affixed chattel which accordingly "belongs" to it for the purposes of section 44.

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

The final argument of the taxpayer company on this issue was that, even if under the general law the local authority was the owner of the fixtures, those fixtures "belong" to the taxpayer companies for the purposes of section 4. They relied on the fact that they had paid for the equipment and were in receipt of a rent for its use. They further relied on the provisions of the master lease permitting the labelling of the equipment (clause 2.7), requiring its insurance for their benefit (clause 2.9) and prohibiting alienation of the equipment: clause 2.8. They relied in particular on the right of the taxpayer company to the return of the equipment on the determination of the lease (clause 3.7) and the right, in the event of default by the local authority, to remove the equipment: clause 3.8. All those provisions, coupled with the express provision in clause 3.10 that, as between the taxpayer companies and the local authorities, the former are to be treated as the owners of the equipment, it was said justify a conclusion that the equipment "belongs" to the taxpayer companies.

In support of this argument reliance was placed upon cases where the rights of a third party who has supplied equipment to be fixed to land (reserving a right to re-enter, sever and repossess it) have been held to prevail over the rights of a mortgagee of the land. The general rule is that, as between mortgagor and mortgagee, the mortgagee is entitled to all

fixtures on the mortgaged land. However, it is said that Gough v. Wood & Co. [1894] 1 Q.B. 713 shows that the general rule does not apply where, as in that case, the equipment which had become a fixture had been supplied on terms which reserved to the supplier the title in the equipment until it had been fully paid for. It was held that where, before the mortgagee took possession, the supplier had severed it and repossessed the equipment, he was not liable to the mortgagee for so doing. But, as explained in Hobson v. Gorringe [1897] 1 Ch. 182, the decision in that case depended upon the finding that, since the mortgagor was a nurseryman, the mortgagee had impliedly licensed the mortgagor to sever and remove trade fixtures in the course of his trade and that accordingly the mortgagee's rights had not been infringed by the severance and removal of the fixtures: see per Lindley L.J., at p. 720, and Kay L.J., at p. 722. If the mortgagee had taken possession (thereby terminating the authority of the mortgagor to sever the trade fixtures) and subsequently the supplier had sought to recover the equipment, the supplier's claim would have failed: see Hobson v. Gorringe. In my judgment Gough v. Wood & Co. provides no support for the contention of the taxpayer companies.

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

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

it indicates that there are rights relating to the equipment which belong to the taxpayer company, not that the equipment itself belongs to them.

It is important to bear in mind that the question whether the equipment "belongs" to the taxpayer company does not fall to be answered once and for all at one particular date. The question has to be answered in relation to each chargeable period; moreover, in calculating the disposal value which has to be brought into account for the purpose of the balancing charge, it is necessary to determine whether and when the equipment has ceased "to belong to" the taxpayer: section 44(5)(c). Therefore in construing the word "belongs" as used in section 44 one would expect, first, that the question whether equipment belongs or has ceased to belong to the taxpayer would be capable of a ready answer and, second, that the taxpayer could control, or at least be aware of, circumstances which caused the property to cease to belong to him. Yet if the taxpayer companies' submission is correct, equipment which belongs to them could at any time "cease to belong," thereby giving rise to a balancing charge, without the taxpayer companies knowing anything about it. Vinelott J. [1995] Ch. 90 held (in my view rightly) that even if otherwise the equipment belonged to the local authority, as soon as it granted a tenancy of a council house the equipment in the house could not thereafter be said to belong to the taxpayer company so long as the tenancy continued. The tenant would be a purchaser for value of a legal estate without notice and would take free of the contractual and equitable rights of the taxpayer company under the master lease. The right to enter the house and remove the central heating would not be exercisable against the tenant. Similarly, a sale or mortgage of the house or other property to which equipment was affixed would in the ordinary case leave the taxpayer company without any rights over such equipment. Yet the grant of such tenancy or the sale or charge by the local authority would normally take place without the knowledge or consent of the taxpayer company. True, such tenancy, sale or charge would constitute a breach of clause 2.8 of the master lease but that would make no difference to the fact that the taxpayer company would enjoy no rights of any kind against the person acquiring the fixtures. In my judgment, Parliament cannot have intended the word "belongs" to produce such a result.

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

purposes of section 44, "belong" to the developers as lessees. Fox L.J. said, at p. 769:

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

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

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

The Act of 1985, section 59 and Schedule 17

Section 59 provides:

"(1) The provisions of Schedule 17 to this Act apply to determine entitlement to an allowance under Chapter I of Part III of the Finance Act 1971 in respect of expenditure on the provision of machinery or plant which is so installed or otherwise fixed in or to a building or any other description of land as to become, in law, part of that building or other land; and at any time when, by virtue of that Schedule, any machinery or plant is treated as belonging to any person, no other person shall be entitled to such an allowance in respect of it. (2) Schedule 17 to this Act applies to expenditure incurred after 11 July 1984, unless that expenditure - (a) consists of the payment of sums payable under a contract entered into on or before that date; . . ."

Schedule 17 contains a very detailed system for determining who is entitled to claim capital allowances. The provisions which are directly relevant are:

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

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

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

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

(A)Do section 59 and Schedule 17 provide an exclusive code?

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

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

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

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

Next Mr. Aaronson places reliance on the second sentence of section 59(1):

"and at any time when, by virtue of that Schedule, any machinery or plant is treated as belonging to any person, no other person shall be entitled to such an allowance in respect of it."

He submits that, if apart from the Schedule nobody could be entitled to an allowance, this sentence is unnecessary. Its presence indicates that the contrary proposition is equally true, viz. if at any time when, under the Schedule, any machinery or plant is not treated as belonging to any person, some other person may be entitled to an allowance under the unrepealed section 44(1). This is a more formidable argument but not one that is decisive. If Mr. Aaronson's argument is correct, in respect of expenditure incurred after 11 July 1984 there would be a conflict between the first and second sentences of section 59(1): if an allowance can be claimed for such expenditure under some other statutory provision, the entitlement to such allowance will not have been "determined" in accordance with the Schedule. In order to avoid such conflict, in my judgment the second sentence can, and should, be construed as being addressed to timing alone, i.e. the words "at any time when" cover the period from 11 July 1984 to the passing of the Act of 1985, the Act being to that extent retrospective. The words are introduced to ensure that claims relating to expenditure incurred between 11 July 1984 and the passing of the Act cannot be established on the grounds that, under the general law as it stood during the intervening period, the fixture "belonged" to the person incurring the expenditure.

Mr. Aaronson next relied on Schedule 17, paragraph 7(1) as showing that the Schedule did not provide an exclusive code. Paragraph 7 deals with the circumstances under which fixtures are to be treated as ceasing to belong to a person. Subparagraph (1) provides that it is

"without prejudice to any other circumstances in which the disposal value of a fixture falls to be brought into account in accordance with section 44 of the Finance Act 1971."

I attach no weight to this argument. Under section 44 there are circumstances, other than the property ceasing to belong to the taxpayer, which give rise to a balancing charge, e.g. cesser of the trade or cesser of the use of the equipment in the trade. Therefore the reference in paragraph 7 to section 44 is explicable as being required in order to ensure that these other circumstances giving rise to a balancing charge are not excluded.

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

I find this last argument most persuasive. But ultimately I cannot regard the inability to apply Schedule 17 to overseas fixtures as being

determinative. It appears that the legislature must either have overlooked them or taken the view that whilst Schedule 17 was to "determine" the right to allowances for fixtures regulated by the law of the United Kingdom the Schedule did not apply to foreign fixtures. In my judgment this fact is not sufficient to outweigh, in relation to United Kingdom fixtures, the words of section 59(1) ("to determine entitlement") or the anomalous results which would follow if Mr. Aaronson's argument were correct.

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

(B)Pepper v. Hart

On the last point which I have been considering, the revenue sought to introduce statements made by ministers in the course of the progress through Parliament of the 1985 Finance Bill. I accept that the language of section 59 and Schedule 17 is ambiguous and obscure and that in consequence it would be helpful to refer to parliamentary materials which clearly indicate Parliament's intention in using the language it did. But, as the speeches in Pepper v. Hart [1993] A.C. 593 sought to make clear, the only materials which can properly be introduced are clear statements made by a minister or other promoter of the Bill directed to the very point in question in the litigation: see per Lord Bridge of Harwich, at p. 617B; Lord Oliver of Aylmerton, at p. 620D; myself, at pp. 635A and 640C.

The parliamentary materials sought to be introduced by the revenue in the present case were not directed to the specific statutory provision under consideration or to the problem raised by the litigation but to another provision and another problem. The revenue sought to derive from the ministerial statements on that other provision and other problem guidance on the point your Lordships have to consider. Such process involves the interpretation of the ministerial statement and the question whether anything said in relation to the other provision can have any bearing on the provision before the court. In my view this is an improper use of the relaxed rule introduced by Pepper v. Hart which, if properly used, can be a valuable aid to construction when Parliament has directly considered the point in issue and passed the legislation on the basis of the ministerial statement. It provides no assistance to a court and is capable of giving rise to much expense and delay if attempts are made to widen the category

of materials that can be looked at as the revenue sought to do in the present case. Judges should be astute to check such misuse of the new rule by making appropriate orders as to costs wasted. In the present case, if it were otherwise appropriate to order the taxpayers to pay the costs of this issue, I would advise your Lordships to disallow any costs incurred by the revenue in the improper attempt to introduce this irrelevant parliamentary material.

(C)Schedule 17, paragraphs 2 and 4

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

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

(D)Schedule 17, paragraph 3

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

The taxpayer companies contend that, if the local authorities had incurred the expenditure for the purchase of the equipment, the equipment would, by virtue of paragraph 2 of Schedule 17, have been treated for material purposes as belonging to the local authority. Under paragraph 2, the local authority would have incurred the expenditure on the plant which became a fixture at the time when the local authority owned the land. Therefore, contend the taxpayer companies, they are entitled to the allowances under paragraph 3. The revenue, on the other hand, contends that if the local authority had incurred the relevant expenditure the fixture would not by virtue of paragraph 2 have been treated for material purposes as belonging to the local authority. The phrase "material purposes" is defined in paragraph 1(1) of Schedule 17 as meaning "the purposes of

Chapter I of Part III of the Finance Act 1971," which part includes sections 41 and 44 of the Act of 1971. The revenue contends that, if the local authority had incurred the expenditure on the fixtures, it would not have been treated "for material purposes" as belonging to the local authority since the local authority is exempt from all liability to tax and would not therefore have been entitled to claim any allowances. Vinelott J. upheld the revenue's argument but on appeal the Court of Appeal reversed his decision. The revenue appeals to your Lordships on this issue.

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

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

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

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

(E)When was the liability incurred?

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

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

"Agency Purchase Facility. We authorise you to purchase goods on our behalf subject to the following conditions: 1. Your agency extends only to the purchase of the goods which we may from time to time agree to purchase and let to you . . . on lease. . . . 2. When you require such goods you will first obtain our approval of the proposed transaction and thereafter you may order the goods from the suppliers and have them invoiced to you in your own name, without disclosing that you are acting as our agent. 3. You will pay the supplier's invoice for such goods and thereafter send it to us in support of your invoice for reimbursement of the expenditure incurred by you on our behalf. 4. You will execute . . . an appropriate lease, lease schedule . . . in respect of such goods, in our standard form or such other form as may previously have been agreed between us in writing ('the agreement'). 5. You will take delivery of the goods on our behalf, making all necessary inspections or tests before accepting them and immediately insuring them in accordance with the provisions of the agreement, whether or not the same has at that time been signed by both parties. 6. On receipt of the documents referred to in 3. and 4. above, we will pay the relevant reimbursement invoice."

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

The special commissioners rejected the revenue's claim. They held, first, that on the only case considered by them on the facts (Easington District Council) there was no unconditional "approval" by the tax company for the purposes of paragraph 2 of the facility letter, because the letter of approval disclosed that at that time there was no full agreement on the terms of the lease schedule. But, secondly, they held that because of paragraph 1 of the facility letter no agency could come into existence

until the lease schedule was completed. The Court of Appeal broadly upheld their decision.

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

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

I would therefore vary the order of the Court of Appeal by setting aside the declaration made on this issue and remitting the cases to the special commissioners to determine this issue in relation to each of the

cases in accordance with your Lordships' decision. On all other issues, I would dismiss all the appeals.

LORD SLYNN OF HADLEY. My Lords, I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Browne-Wilkinson. For the reasons he gives, I, too, would dismiss the appeals.

LORD NICHOLLS OF BIRKENHEAD. My Lords, I have had the advantage of reading a draft of the speech of my noble and learned friend, Lord Browne-Wilkinson. For the reasons given by him and with which I agree, I, too, would make an order in the terms he has proposed.

LORD STEYN. My Lords, I have had the advantage of reading in draft the speech prepared by noble and learned friend, Lord Browne-Wilkinson, and for the reasons which he has given, I, too, would dismiss the appeals.

Solicitors: Denton Hall; Solicitor of Inland Revenue.

M. G.