Iceland Foods Ltd v Berry (Valuation Officer) (Rev 1) [2018] UKSC 15

Iceland Foods installed a specialised air handling system to maintain temperatures suitable for its integral refrigerated cabinets displaying frozen and chilled goods. The Supreme Court held the system was used as part of a 'trade process' and thus excluded from rateable value calculations.

Facts

Iceland Foods Ltd, a supermarket specialising in refrigerated foods (approximately 80% of sales), occupied a retail warehouse at Penketh Drive, Liverpool. The store used around 80 refrigerated cabinets, almost all of which were ‘integral’ units (containing their own refrigeration equipment and expelling heat into the surrounding environment) rather than ‘remote’ units. Because the integral cabinets generated substantial heat and were designed to operate below 25ºC ambient temperature, Iceland installed a large, specialised air handling system with approximately 85 kW cooling capacity, considerably larger than would otherwise be necessary for a retail unit of that size. The system operated continuously to maintain store temperatures suitable both for cabinet functionality and staff/customer comfort.

The Valuation Tribunal held the air handling system fell to be disregarded for rating purposes. The Upper Tribunal reversed that decision, and the Court of Appeal upheld the Upper Tribunal. Iceland appealed to the Supreme Court.

Issues

The central issue was the construction of the Class 2 proviso in the Schedule to the Valuation for Rating (Plant and Machinery) (England) Regulations 2000: namely, whether the air handling system was plant and machinery used in connection with services to the hereditament ‘mainly or exclusively as part of manufacturing operations or trade processes’. If so, it fell to be ignored in calculating rateable value.

Two sub-issues arose: (i) whether the proviso was confined to productive/industrial activity or extended to retail trade; and (ii) whether ‘process’ required a transition from one state or condition to another.

Arguments

Appellant (Iceland)

Mr Kolinsky QC argued the Court of Appeal adopted an unduly restrictive reading. Iceland’s trade process was ‘the continuous freezing or refrigeration of goods to preserve them in an artificial condition without which they would be worthless’. Neither ordinary language nor authority required a transition between states. He relied on Union Cold Storage cases, BP Oil Grangemouth, Hays Business Services and Leda Properties, and on the Wood Report’s treatment of air-conditioning for computer suites.

Respondent (Valuation Officer)

Mr Morshead QC submitted the proviso was an exception to be narrowly construed, that the composite phrase ‘manufacturing operations or trade processes’ required activity bringing about a transition from one state to another, and more broadly that the proviso applied only to productive industrial activity, not retail. He drew analogy with capital allowances authorities including Bestway (Holdings) Ltd v Luff and Kilmarnock Equitable.

Judgment

Lord Carnwath, with whom the other Justices agreed, allowed the appeal and restored the Valuation Tribunal’s decision.

Scope of the proviso

The Court rejected the Valuation Officer’s broader submission that the proviso was confined to industrial activity. The inclusion of ‘trade processes’ as an alternative to ‘manufacturing operations’ was clearly intended to widen the scope beyond industry. The word ‘trade’ naturally extends to retail activities. The Wood Report, which the 2000 Regulations were designed to reflect, emphasised fairness between ratepayers without limitation by trade type, and Annex L’s worked examples expressly covered ‘retail distribution’. Valuation Office practice from 1986 (Hays) to 2009 (Leda Properties) had taken a wider view consistent with this interpretation.

Meaning of ‘process’

The Court held there is nothing in the word ‘process’ itself implying transition or change. Capital allowances authorities were coloured by the statutory context requiring goods to be ‘subjected’ to a process in ‘industrial’ buildings. Adopting Lord Guthrie’s recognition in Kilmarnock that ‘process’ has various meanings including ‘the widest significance of anything done to the goods or materials’, Lord Carnwath held a ‘trade process’ is simply a process in that wide sense carried on for the purposes of a trade.

Structure of the Regulations

The courts below erred in treating the proviso as a narrow exception. It is in fact an exception to an exception: the Schedule Classes themselves are exceptions to the general rule that plant and machinery value has no effect on rateable value. The proviso brings items back within the general rule of non-rateability because, although they service the building, they mainly service the trader’s activities and are properly regarded as ‘tools of the trade’. The critical distinction lies in the main use of the services.

Application

The continuous freezing or refrigeration of goods to preserve them in an artificial condition constitutes a trade process. As it had already been found (and not challenged) that the air handling system was used ‘mainly or exclusively’ as part of that trade process, it fell to be left out of account for rating purposes.

Implications

The decision clarifies the operation of Class 2 of the 2000 Regulations in three significant respects. First, the ‘manufacturing operations or trade processes’ exception is not confined to industrial activity but extends to commercial trades including retail. Second, ‘process’ bears a wide meaning and does not require transformation or transition from one state to another; it embraces activities such as the continuous preservation of goods in an artificial condition. Third, the proviso should not be narrowly construed as an exception to a general rule because, within the scheme of the Regulations, it operates as an exception to an exception restoring the general rule of non-rateability for ‘tools of the trade’.

The judgment provides important guidance for valuers, rating practitioners, and retail and storage businesses whose operations depend on specialised environmental plant. It confirms that plant installed predominantly to serve the trader’s commercial activities (rather than the building itself) will typically be excluded from rateable value, even where those activities consist in preserving stock rather than transforming it. The Court’s endorsement of prior Valuation Office practice (such as the treatment of air-conditioning in computer suites) lends stability to existing valuation approaches. The decision is grounded in the specific language of the 2000 Regulations and the Wood Report, and the boundaries of what constitutes a ‘trade process’ in other factual contexts will remain a question of fact and degree.

Verdict: Appeal allowed. The Supreme Court restored the decision of the Valuation Tribunal, holding that Iceland’s air handling system was used mainly or exclusively as part of a trade process (the continuous freezing or refrigeration of goods) and therefore fell to be disregarded in calculating the rateable value of the premises.

Source: Iceland Foods Ltd v Berry (Valuation Officer) (Rev 1) [2018] UKSC 15