The Supreme Court held that the specialised air handling system in an Iceland store, used mainly to keep its refrigerated cabinets operating, formed part of a trade process. It therefore had to be ignored when calculating the store’s rateable value under the Valuation for Rating (Plant and Machinery) (England) Regulations 2000. The Court allowed Iceland’s appeal and restored the Valuation Tribunal’s decision on that issue.
Iceland specialises in the sale of refrigerated food. At 4 Penketh Drive, Liverpool, a small retail warehouse occupied from May 2007, roughly 80 refrigerated cabinets stored and displayed products which accounted for about 80 per cent of sales by value. All but one were integral cabinets. Unlike remote cabinets, these expel heat into the surrounding air and are designed to operate below a stated ambient temperature. Iceland installed a large air handling system, operating day and night, to ventilate, heat and cool the store. During trading it targeted 21ºC, within the comfortable range for staff and customers and below the cabinets’ design limit. The cabinets were by far the largest source of heat; without them a much smaller system would have sufficed. It was common ground that the cabinets themselves were left out of account for rating.
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The statutory test
Under Schedule 6 to the Local Government Finance Act 1988, rateable value is the rent at which the hereditament might reasonably be expected to let from year to year. The 2000 Regulations, reflecting the Wood Report, provide that plant and machinery generally has no effect on that estimate. Specified classes are exceptions and are assumed to form part of the hereditament. Class 2 covers plant used in connection with services to the hereditament, including heating, cooling and ventilating. It excludes plant used or intended to be used in connection with services mainly or exclusively as part of manufacturing operations or trade processes. The system fell within the relevant equipment list and was used in connection with services to the hereditament. The sole issue was whether that exclusion applied.
The decisions below
The Valuation Tribunal decided the issue for Iceland. The Upper Tribunal reversed that decision. It treated the conjunction with manufacturing operations, and the provision’s character as an exception, as calling for a narrower reading. It accepted that the defining characteristic was activity bringing about a transition from one state or condition to another. Mere display or storage, or the creation of a suitable environment, was not a trade process, and Iceland’s need for more powerful equipment did not alter that conclusion. Had a trade process been established, the tribunal would have accepted that the system was used mainly to maintain an environment in which the cabinets could operate. That alternative finding was not challenged.
The Court of Appeal upheld the Upper Tribunal. The Chancellor found little assistance in the authorities or legislative history and applied ordinary construction. He considered that manufacturing operations and trade processes normally bring about a transition, including creation, completion, repair or improvement. He treated the words as an exception rather than a proviso and construed them narrowly. Display for retail sale was, in his view, the antithesis of a trade process: freezing chickens might qualify, but merely keeping them frozen for sale did not. More substantial equipment than usual did not convert the use into a trade process.
Why the Supreme Court disagreed
Lord Carnwath, with whom Lord Kerr, Lord Reed, Lord Hughes and Lady Black agreed, first rejected the Valuation Officer’s broader argument that the exclusion covered only productive industrial activity and not retail. Had that limitation been intended, the regulations could have said so. The addition of trade processes to manufacturing operations widens the provision, and trade naturally includes Iceland’s retail business. The Wood Report, an appropriate aid to construction, emphasised fairness between ratepayers and a tools-of-the-trade exemption without limiting the kind of trade. Its proposed rules and worked examples, including retail distribution, were inconsistent with confining the exclusion to industry.
The Court also rejected the narrow construction adopted below. The specified classes are themselves exceptions to the general rule that plant and machinery does not affect rateable value. The Class 2 exclusion is therefore an exception to an exception: although the plant serves the building, its main or exclusive function is to serve the trader’s activities, so it is more fairly treated as a tool of the trade and disregarded. The Wood Report showed an intention to retain the existing law while improving the drafting, not to narrow it by changing proviso to exception. The key distinction is whether the services are used mainly in connection with the hereditament or with the processes carried on within it.
Process does not itself require a transition or change. Authorities concerning goods subjected to a process in an industrial-building context were coloured by that different statutory language. In its wider sense, a trade process is simply a process carried on for the purposes of a trade. Iceland’s continuous freezing or refrigeration of goods, preserving them in an artificial condition without which they would be worthless, was such a process. Because the system’s services had been held to be used mainly or exclusively as part of that process, they had to be left out of account.
Verdict: The Court unanimously allowed Iceland’s appeal and restored the Valuation Tribunal’s decision on the air handling system. Its use mainly for the refrigeration process meant that it was to be left out of the rating valuation.
