The Supreme Court has ruled that plant and machinery used to assist cooling should not be valued for ratings purposes.
National non-domestic rates, or business rates as they are commonly known, are a tax on business properties. The amount of tax to be collected in respect of a property is determined by its 'rateable value'. This value is usually reviewed by the valuation office agency every five years. Occupiers can challenge the proposed rateable value, which is what Iceland Foods Ltd did in relation to retail premises in Liverpool.
In Iceland Foods Ltd v Berry (valuation officer), Iceland leased a small retail warehouse on a retail development site in Liverpool. It took the property as a shell and fitted it out to run as a store selling refrigerated products. The products were stored and displayed in around 80 refrigerated cabinets arranged on the sales floor.
79 of the cabinets were 'integral' units, meaning they used refrigeration equipment and condensers within the body of the cabinet to expel heat to the surrounding area in order to keep the contents of the cabinet cool. Due to the large number of integral cabinets, Iceland installed an air handling system to keep the property cool; both for its products and the comfort of its customers. The air handling unit was located outside to the rear of the building. It occupied its own fenced compound and was the same size and shape of a very large refuse skip.
The issue in dispute was whether this unit and related equipment formed part of the premises for rating valuation purposes
The issue explained
Paragraph 2(1) of Schedule 6 to the Local Government Finance Act 1988 provides that the rateable value of a non-domestic property is "an amount equal to the rent at which it is estimated the hereditament might reasonably be expected to let from year to year" on certain specified assumptions."
Under the Valuation for Rating (Plant and Machinery) Regulations 2000, where there is plant or machinery of a certain class on a property, it is assumed that such plant or machinery will be valued as part of the property.
The relevant class - Class 2 - includes plant and machinery used in connection with heating, cooling and other services to the property. The specific wording is:
"Plant and machinery. which is used or intended to be used in connection with services to the hereditament [i.e. the property] 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"
The fact that the air handling system was "used in connection with services to the hereditament" was not in dispute. But the parties disagreed over whether it was "used in connection with services mainly or exclusively as part of manufacturing operations or trade processes".
Complex arguments were brought as to the meaning of these words and discussion centred around whether the air handling system was there simply to display or store the frozen goods being sold, or whether it played some part in a 'trade process'.
At first instance, the valuation tribunal decided in favour of Iceland: that the air handling system should not be valued. This finding was reversed by the upper tribunal, whose decision was upheld by the Court of Appeal. Iceland appealed to the Supreme Court.
The Supreme Court found that:
- The classes in the schedule to the regulations are exceptions to the general rule of non-rateability. The wording of Class 2 brought some items of plant back into the scope of rating valuation and the 'proviso' (in bold above) took them back out again. The court ruled that although the air handling system might provide a service to the building, it also provided a service to the activities of Iceland as trader within the building, and that was its main function. It should therefore be better considered as a 'tool of the trade' and so should not be rateable;
- A trade process is simply a process carried out for the purposes of a trade; it does not have to imply anything more, such as bringing about a transition or change in materials subject to the process;
- In the context of Iceland's trade, the word 'process' is apt to cover the "continuous freezing or refrigeration of goods to preserve them in an artificial condition". Since the services provided by the air handling plant were used 'mainly or exclusively' as part of that trade process, they should be left out of account for rating purposes.
Had the case been differently decided, it would have increased the rating burden on Iceland and, potentially, have made the property harder to let in the future.
This decision is therefore to be welcomed by both tenants and landlords as providing a common sense approach to ratings valuation, particularly in a climate where many tenants are struggling to pay business rates.