United Kingdom Supreme Court

“18.     … The object of any refrigerator is to maintain the internal temperature (and thus that of the goods stored in it) at the desired level by absorbing heat from within the cabinet and expelling it outside the cabinet by means of a condenser. Integral cabinets achieve this using refrigeration equipment and condensers installed within the body of the cabinet itself, and by expelling heat to the environment immediately surrounding the cabinet. Remote cabinets, in contrast, employ refrigeration equipment at a distance from the cabinets; heat is absorbed by a liquid refrigerant which is conveyed to the cabinet through pipes permanently installed in the store and is expelled remotely through condensers located outside the building.

…

20.       As integral cabinets are designed to operate below a particular ambient temperature (25ºC in the case of Iceland’s … cabinets) the heat generated by the cabinets themselves must be controlled to ensure that they perform as intended and do not malfunction. Where a large number of integral cabinets is present in a confined space, it is necessary to provide an air handling system with a correspondingly large cooling capacity. If the design parameters of the cabinets are exceeded the permitted product storage temperature within the cabinets may be breached causing a deterioration in the quality of the products stored or displayed in them.”

The advantages for Iceland of integral cabinets include flexibility, independence of operation, and lower capital cost. It is common ground that the value of the cabinets themselves is to be left out of account for rating purposes.

“12.     The air handling system provides a ventilating, heating and cooling service to the appeal property, and comprises three main elements. A large air handling unit with a mechanical cooling capacity of approximately 85 kW is located outside and to the rear of the building; this unit serves a network of ducts by which warm or cold air is supplied to and extracted from the retail area through an array of ceiling mounted diffusers and grilles. On our inspection we were able to observe the air handling unit and to contrast it with the very much smaller units on the rear walls of adjoining stores - one of which is considerably larger than the [premises]. Iceland’s equipment occupies its own fenced compound and in size and shape resembles a very large refuse skip (4.5 metres by 2.35 metres in area) from which rise two vertical supply and return air ducts, each a metre square, which enter the rear wall of the building 4 metres above the ground. A separate but linked mechanical extract system is located at the rear of the retail area, furthest from the entrance, to deal with the removal of excess heat in that area. Finally, the whole system is controlled by means of a computerised control unit located adjacent to the air handling unit. …”

The statutory provisions

“2.       For the purpose of determining the rateable value of a hereditament for any day on or after 1 April 2000, in applying the provisions of sub-paragraphs (1) to (7) of paragraph 2 of Schedule 6 to the Local Government Finance Act 1988 -

(a)       in relation to a hereditament in or on which there is plant or machinery which belongs to any of the classes set out in the Schedule to these Regulations, the prescribed assumptions are that:

(i)        any such plant or machinery is part of the hereditament; and

(ii)       the value of any other plant and machinery has no effect on the rent to be estimated as required by paragraph 2(1); and

(b)       in relation to any other hereditament, the prescribed assumption is that the value of any plant or machinery has no effect on the rent to be so estimated.”

It is important to emphasise the significance in the valuation of the Classes set out in the Schedule. Those Classes are the only categories of plant and machinery which are brought into account for valuation purposes. They are in effect exceptions to the general rule (embodied in sub-paragraphs (a)(ii) and (b)) that the value of plant and machinery has no effect on the estimation of value of the hereditament for rating purposes.

“Plant and machinery specified in Table 2 below … which is used or intended to be used in connection with services to the hereditament or part of it, other than any such plant or machinery which is in or on the hereditament and is used or intended to be used in connection with services mainly or exclusively as part of manufacturing operations or trade processes.” (emphasis added)

“Services” are defined as meaning -

“heating, cooling, ventilating, lighting, draining or supplying of water and protection from trespass, criminal damage, theft, fire or other hazard.”

The plant and machinery specified in Table 2 includes (under the heading “Heating, Cooling and Ventilating”) ten items of equipment (such as water heaters, and refrigerating machines) and associated “accessories”. It is not in issue that the disputed air handling system is covered by the Table, nor that it is used “in connection with services to the hereditament” within the meaning of Class 2. The only issue is whether it is excluded by the italicised words quoted above. For simplicity in this judgment (following earlier usage - see below), I shall refer to those words as the “Class 2 proviso” or the “proviso”. References in the judgment to the word “plant” should be read (where appropriate) as including reference also to “machinery”.

Legislative history

“When one turns to the Third Schedule of the Act, it is apparent that it enumerates that type of machinery and plant which is conveniently described in the case as motive machinery; it is the machinery without which the mill could not begin to work, as, for example, the generation of power, heating and cooling, lifts and elevators, railways, tramlines and tracks, and other things, the foundation of that which was to become the work of the mill. When the machinery and plant referred to in the Third Schedule are eliminated, what is left is the kind of machinery which is concisely described in this case as process plant and machinery, operative plant and machinery, working and manufacturing plant and machinery. By section 24(1)(b), no account is to be taken of the value of any plant or machinery of that kind …” (p 598)

He noted that under the previous law the value of plant in a mill, though not rated as such, was taken into account as “enhancing the value of the hereditament to be rated” (p 599). The effect of the Act, intended as “beneficial to those interested in the carrying on of industry”, was “to get rid of all the doctrine of enhanced value”, and to lay it down that “process” plant must henceforth be disregarded when ascertaining the rateable value of the hereditament (pp 602-603). The decision was upheld by the House of Lords, where can be found statements to similar effect (see [1937] AC 419, pp 428-429 per Lord Russell of Killowen).

“… mainly or exclusively in connection with -

(a)       …

(b)       the heating, cooling, ventilating, lighting, draining, or supplying of water to the land or buildings of which the hereditament consists, or the protecting of the hereditament from fire:

Provided that, in the case of machinery or plant which is in or on the hereditament for the purpose of manufacturing operations or trade processes, the fact that it is used in connection with those operations or processes for the purpose of heating, cooling, ventilating, lighting, supplying water, or protecting from fire shall not cause it to be treated as falling within the classes of machinery or plant specified in this Schedule.” (emphasis added)

The other classes were (in very broad terms) similar in scope to what became the classes in the 2000 Regulations (see para 9 above).

“where, for instance, a man is polishing at a buff, and there is a fan drawing off the dust so that it shall not go down his throat, that is to be treated as part of the machinery, and not as part of the heating or ventilating plant which is run.”

The Wood Report

“8.8     What we have said so far relates to plant and machinery which is used for the purpose of a trade or industrial process. There is also the problem of plant and machinery which is introduced for the purpose of providing services for the premises, or which forms part of its infrastructure. This type of equipment has never given rise to any difficulty as a matter of principle. In the letting market landlords typically provide the services and infrastructure, and it has been taken for granted that such items should always be deemed to form part of the hereditament, even in the case of property which is not normally found in that market.

8.9       The difficulty arises in the practical application of the principle, again as our predecessors have found, because it is extremely unusual, in the case of large-scale industrial property, to find plant and machinery which is installed exclusively for the purpose of providing general services, such as light, heat and ventilation, and is not also closely bound up with the trade process. In the existing regulations in each of the countries of the United Kingdom it has therefore proved necessary to draw some fairly arbitrary line in order to indicate the point up to which such plant and equipment can fairly be rated, by analogy with commercial hereditaments generally, and beyond which rateability should cease, because at that stage it is impossible in practical terms to disentangle the service from the process function. We have looked at the boundaries which have been drawn in the past, and have re-drawn them in order to simplify the task of valuers, assessors and agents and to reflect some of the technical changes which have taken place in industry since they were last reviewed.”

“Rateability should continue, in our opinion, to be determined in accordance with the following rules:

(1)  that the land and everything which forms part of it and is attached to it should be assessed;

(2)  that process plant and machinery which can fairly be described as ‘tools of the trade’ should be exempt within certain limits;

(3)  that process plant or machinery (in certain cases exceeding a stated size) which is or is in the nature of a building or structure or performs the function of a building or structure should, however, be deemed to be part of the hereditament or subject;

(4)  that service plant and machinery, and items forming part of the infrastructure of the property should be rated; and

(5)  that, in the case of plant and machinery which performs both a service and a process function sensible lines have to be drawn which will indicate exactly how much falls to be rated and how much does not.”

“But many services in non-domestic property, which might be found whatever the use of the property, are also used incidentally for manufacturing operations in some instances.”

The definition in Class 1B was “not … free from ambiguity” and had given rise to disputes as to when plant should be treated as falling within it. As an example of the problem, they referred to the treatment of an air-conditioning plant, which may have been installed “to facilitate a particular process - for instance computer suites or clean rooms”, or to “enhance the working conditions of employees”, but it was impossible to distinguish between the two purposes. They concluded:

“9.14  We have considered whether the current definition should be amended or dropped altogether. For example, we discussed whether it might be preferable to exclude from rateability only that service plant which ‘solely’ supports a process function. However to treat plant as process plant only if it was wholly for process purposes would increase the rateability of this type of plant and machinery. Such plant is rarely met in practice. As an alternative, we considered whether it would be possible to apportion the value of the plant between Classes 1B and 4 reflecting the relative use for service and process activity. But this would run contrary to our desire for cost-effectiveness of valuation effort and could create new opportunities for dispute.

9.15    We therefore conclude that notwithstanding the difficulties which have been encountered in deciding the degree to which plant is used for process purposes the law as we understand it in both England and Scotland should remain unaltered but that the draftsmanship should be improved to eliminate the difficulties inherent in the English Regulations.”

Although the committee did not include their own draft, these paragraphs can be taken as a useful indication of the thinking behind the Class 2 proviso in its current form.

The decisions below and the submissions in the appeal

The decisions

“… the common defining characteristic of manufacturing operations and trade processes is activity bringing about a transition from one state or condition to another, including by the creation, completion, repair or improvement of the subject matter of that activity.”

They did not think that the display or storage of goods in itself, nor the creation of an environment conducive to the display or storage of goods, could properly be regarded as involving a trade process. The requirement of a particular retailer for more substantial or powerful equipment than is normally found in retail premises did not create a relevant distinction. They added:

“66.     All retail warehouses require heating, cooling and ventilation to a greater or lesser extent. We do not consider that the plant and machinery installed to provide those services can properly be regarded as being used or intended to be used as part of manufacturing operations or trade processes. We appreciate that the scale of Iceland’s particular air handling system is dictated by the presence in its store of substantial numbers of integral cabinets, each of which creates heat, and which collectively are essential to Iceland’s preferred style of trading. A serious malfunction of the air handling system would therefore put its stock at risk. That feature distinguishes Iceland’s air handling needs from those of other retailers, but we do not regard that difference as critical. Although the particular needs of Iceland create a greater need for those services than the norm, we do not agree that they make its air handling system an exception to the general rule that such plant and machinery is to be assumed to be part of the hereditament and therefore to be rateable.”

The tribunal went on to consider whether, assuming the air handling system was used as part of a trade process, it was “mainly” so used. They would have answered this question in favour of Iceland. They accepted Iceland’s evidence that “the main technical and operational reason for Iceland’s selection of this air handling system is its suitability for the maintenance of an environment in which integral cabinets can operate successfully” (para 78). This part of their decision has not been challenged.

The submissions

i)                   Union Cold Storage Co Ltd v Southwark Assessment Committee (1932) 16 R & IT 160, relating to the application of the precursor of Class 4 of the 2000 Regulations to cooling chambers in a warehouse used for storing food. The case proceeded on the basis (recorded at p 164) that the chambers were “admittedly plant on the hereditament for the purpose of manufacturing operations or trade processes”.

ii)                Union Cold Storage Co Ltd v Bancroft [1931] AC 446, where the issue was whether, for the purposes of industrial derating, certain refrigeration equipment was for storage purposes or for the purposes of altering or adapting goods for sale. Viscount Dunedin described the plant as used as part of an “elaborate process involving the use of machinery … for the preservation of goods during storage” (pp 492-493).

iii)              Assessor for Lothian Region v BP Oil Grangemouth Refinery Ltd (1985) SLT 453, where the Lands Valuation Appeal Court proceeded on the basis that a marine terminal at a petrochemical works, used solely for the purpose of loading refined oil, was premises “used in an industrial or trade process” (p 459, per Lord Ross).

“Even if it were to be found that this could only be done by the protection of the building and therefore that that was the main use of the equipment, it would nevertheless not be included within the schedule because it was there expressly for the purpose of the trade process being carried on.” (p 228E)

To similar effect, Mr Kolinsky relied also on the Wood Report, which proceeded on the assumption that an air-conditioning plant installed “to facilitate a particular process” such as a computer suite, was excepted from rating (see the passage quoted at para 23 above).

Discussion