Melluish (Inspector of Taxes) v BMI (No 3) Ltd [1996] AC 454
Fixtures, equipment leasing and the distinction between contractual rights and ownership for capital allowances.
Facts
Five companies in the Barclays Mercantile group financed equipment used by local authorities. The equipment included central heating for council homes, lifts, boilers and cremators. It was installed in buildings owned by the authorities and became part of the land.
The arrangements used a master equipment lease, with a separate schedule identifying each transaction. The authorities ordered and installed the equipment before the relevant schedules were completed. They then obtained reimbursement from the finance companies. An agency purchase facility also contemplated purchases by an authority on a company’s behalf.
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The leases stated that the equipment would remain movable property owned by the finance companies despite being attached to land. They required its return when the lease ended and allowed repossession following specified defaults. The companies claimed capital allowances for their expenditure. The Revenue disputed whether equipment which had become fixtures could belong to them for tax purposes.
Issues
Could the lease terms preserve ownership of equipment which had become fixtures? If not, did the companies’ contractual and equitable rights nevertheless satisfy the requirement in section 44 of the Finance Act 1971 that the equipment belong to them?
The House of Lords also considered the separate fixtures regime introduced by the Finance Act 1985. This raised questions about elections by equipment lessors and lessees, the local authorities’ tax exemption, and when expenditure had been incurred.
Decision
The companies failed on their argument that the fixtures belonged to them under section 44. However, qualifying claims could succeed under paragraph 3 of Schedule 17 to the 1985 Act. The local authorities’ tax exemption did not prevent that provision from applying.
The House set aside the Court of Appeal’s declaration about when liability had been incurred and remitted that issue to the special commissioners for findings on individual transactions. The appeals were otherwise dismissed. The result therefore did not reject every claim to an allowance.
Reasoning
Contractual intention did not prevent the equipment becoming fixtures
Lord Browne-Wilkinson gave the principal speech, with which the other members of the House agreed. Whether an object had become a fixture depended on the degree and purpose of its attachment to the land. The parties’ agreement about who should own it could not change that legal classification.
The equipment had become fixtures before completion of the lease schedules and belonged in law to the local authorities as landowners. A clause describing it as the finance companies’ movable property could regulate the parties’ contractual rights, including removal, but could not prevent it becoming part of the land while it remained attached.
The House also rejected an attempt to infer a sale and leaseback of the relevant parts of the land. The documents disclosed no intention to make such a transaction. The parties’ mistaken assumption about ownership did not justify inventing one.
A right concerning equipment was not ownership of the equipment
The companies had rights to receive rent and, in specified circumstances, recover the equipment. Their removal rights could also have an equitable effect against some later acquirers of the land. But those limited rights did not make them the absolute owners, either legally or beneficially.
Until default or expiry without renewal, they had no immediate right to possess the equipment or direct its use. Their contingent right to obtain ownership later was insufficient for section 44. The distinction was between owning rights relating to equipment and owning the equipment itself.
The statutory fixtures scheme offered a separate route
The House treated section 59 and Schedule 17 of the 1985 Act as a comprehensive code for allowances on UK fixtures within its scope. The companies could not satisfy its provisions requiring an interest in the land merely through their rights to enter and remove equipment.
Paragraph 3 nevertheless specifically addressed equipment lessors. Where its conditions, including the necessary election, were met, it could treat a fixture as belonging to the lessor. Identifying ownership for that statutory purpose did not require the local authority itself to be liable to tax.
Timing remained important because the new regime applied to expenditure after 11 July 1984, subject to an exception for sums payable under earlier contracts. Liability might arise before the formal lease schedule was signed if the company had unconditionally approved an agency purchase and finally agreed the lease terms. That required findings for each transaction.
Parliamentary statements had to address the disputed point
The Revenue also sought to rely on ministerial statements about a different statutory provision and problem. The House rejected that use of Pepper v Hart: the relevant statements had to address clearly the particular issue of interpretation, rather than provide indirect support through further inference.
Source: House of Lords report, [1996] AC 454.
