Iceland Foods Ltd (Appellant) v Berry (Valuation Officer) (Respondent)

Hand-down Date:March 07, 2018
Cite as:[2018] UKSC 15

Hilary Term [2018] UKSC 15 On appeal from: [2016] EWCA Civ 1150


Iceland Foods Ltd (Appellant) v Berry (Valuation Officer) (Respondent) before

Lord Kerr Lord Reed Lord Carnwath Lord Hughes

Lady Black JUDGMENT GIVEN ON 7 March 2018 Heard on 25 January 2018 Appellant Respondent Daniel Kolinsky QC

Tim Morshead QC Zack Simons (Instructed by HMRC Solicitors Office) Luke Wilcox

(Instructed by TLT LLP)

LORD CARNWATH: (with whom Lord Kerr, Lord Reed, Lord Hughes and Lady Black agree)

  1. The court is asked to decide whether the services provided by a specialised air handling system, used in connection with refrigerated merchandise in the appellant's retail store, are "manufacturing operations or trade processes" for rating purposes. This turns on the construction of the Valuation for Rating (Plant and Machinery) (England) Regulations 2000 (SI 2000/540) (the "2000 Regulations"). If they are, then the air handling system falls to be ignored in calculating the rateable value of the premises. The Valuation Tribunal decided this issue in favour of the appellants. That finding was reversed by the Upper Tribunal ([2015] UKUT 0014 (LC)), whose decision was upheld by the Court of Appeal ([2016] EWCA Civ 1150; [2017] Bus LR 766).


  2. The facts (as found by the Upper Tribunal) were set out in full in the judgment of the Chancellor (with whom Gloster and Sharp LJJ agreed) in the Court of Appeal. It is sufficient here to note the main points. Iceland is a well-known supermarket operator specialising in the sale of refrigerated foods, with more than 800 stores in the UK and Ireland. The appeal property, at 4 Penketh Drive, Liverpool, is typical. It is a small retail warehouse forming part of a larger retail development known as the Speke Centre. Iceland took occupation in May 2007. The property was let in a shell condition, and the air-handling system was installed by Iceland. Its business is mainly focused on the sale of refrigerated products, which represent roughly 80% of its sales by value, divided evenly between chilled and frozen lines. At the Penketh store, frozen and chilled products are stored and displayed in about 80 refrigerated cabinets, arranged around the perimeter of the sales floor and in four aisles running from front to rear.

  3. All but one of the cabinets at the Penketh store are "integral" rather than "remote" units. The Upper Tribunal explained the difference:

    "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

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    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.


  4. 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.

  5. The air handling system was described by the Upper Tribunal as follows:

    "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

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    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. ..."

  6. The air handling system functions at all times, day and night. It is designed and programmed to maintain the store temperature during trading hours at an acceptable level for both the functioning of the refrigerated cabinets and the comfort of staff and customers. To achieve the acceptable temperature range during trading periods, Iceland's control strategy targets a temperature within the store of 21ºC which is in the middle of the recommended range of comfortable temperatures for staff and customers. For the majority of the time an acceptable temperature is maintained on the sales floor without the use of mechanical cooling, but at 21ºC mechanical cooling commences. The aim is to ensure that the maximum temperature at which the cabinets are designed to function is not exceeded. Although a substantial proportion of the heat load is generated by other sources, the cabinets are by far the largest single contributor. Without the integral cabinets, the heavy-duty air handling system installed in the store would not be required and a very much smaller system would be sufficient.

    The statutory provisions

  7. Schedule 6 to the Local Government Finance Act 1988 is headed "Non-Domestic rating: Valuation". Paragraph 2(1) provides that the rateable value of a non-domestic hereditament is taken to be "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 (none of which is now in issue). By paragraph 2(8), the Secretary of State is authorised to make regulations providing that in applying the preceding paragraphs, in relation to a hereditament of a prescribed class, "prescribed assumptions (as to the hereditament or otherwise) are to be made". The 2000 Regulations were made under that provision.

  8. The present form and content of the regulations are derived from a report by an Expert Advisory Committee under the chairmanship of Mr Derek Wood QC, Rating of Plant and Machinery (Cm 2170) ("the Wood Report"), published in March 1993. The committee was established to review the law and practice relating to the rating of plant and machinery, with a view to updating and harmonising it throughout the United Kingdom. The report was followed by the Valuation for Rating (Plant and Machinery) Regulations 1994 (SI 1994/2680), which replaced the previous law. They were in turn replaced by the 2000 Regulations (applying to England only, following devolution), but without any change to the provisions

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    material to this appeal. As indicated in the explanatory notes to both sets of regulations, they "reflected" the recommendations of the Wood Report. (Equivalent Regulations, also said to reflect the Wood recommendations, have been made by the relevant legislatures in Scotland, Wales, and Northern Ireland.) It will be necessary to refer in more detail later to parts of the Wood Report, which is clearly an appropriate aid to construction of the Regulations (see Bennion on Statutory Interpretation 7th ed (2017), para 24.9).

  9. Paragraph 2 of the 2000 Regulations is headed "Prescribed assumptions as to plant and machinery". It provides:

    "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.

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  10. The Schedule sets out the classes of plant "to be assumed to be part of the hereditament" (in the words of the title). In broad terms, Class 1 covers plant and machinery used for generation, storage or transmission of power on the hereditament. Class 2 (relevant...

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