THE ASSESSOR FOR TAYSIDE VALUATION JOINT BOARD AGAINST OLD FASKALLY FARMING COMPANY AND OTHERS
LANDS VALUATION APPEAL COURT
[2016] CSIH 8
XA57/15
Lady Dorrian
Lord Malcolm
Lord Woolman
OPINION OF LADY DORRIAN
in the cause
by
THE ASSESSOR FOR TAYSIDE VALUATION JOINT BOARD
Appellant;
against
OLD FASKALLY FARMING COMPANY AND OTHERS
Respondents:
Act: Stuart, QC; Clyde & Co
Alt: MacIver; Davidson Chalmers LLP
3 February 2016
[1] This case involves appeals concerning the valuation of 6 “Run of the River” Hydro Electric Schemes. Appeals 1 to 5 were revaluation appeals. Appeal 6 was a running role appeal, the subjects not having existed at the tone date of 1 April 2008. The assessor contended that in the revaluation appeals the schemes should be valued on a Receipts and Expenditure (R & E) basis. By contrast, the ratepayers argued for valuation on a comparative basis, using rental evidence in relation to the subjects and adding an allowance for the rateable value of the turbine house in each case. The subjects of Appeal 6, being new, could not be valued on an R & E basis and were valued by the assessor under reference to SAA Practice Note 3, by analysing 2010 revaluation values and making a comparison with other sites producing similar volumes. The ratepayers valued these subjects on the basis of the calculation of a notional turnover at tone date, to which the percentages used in the revaluation appeals were then applied.
[2] The committee proceeded on the basis that the most appropriate method of valuation, where suitable evidence was available, was the comparative basis. All of the assessor’s witnesses considered that valuation on that basis was the preferred option. Their position was simply that insufficient comparative material existed, making it necessary to adopt an R&E valuation. At the beginning of the revaluation process, the assessor had issued a total of 35 questionnaires to independent conventional hydro operators. He received 26 returns. These were not produced, but the assessor considered that the information so provided did not establish a basis for the operation of a comparative valuation. The ratepayers produced a schedule of rental from comparable subjects in different areas of Scotland, which the committee accepted as sufficient for the purpose. In the present appeal, the assessor challenges the committee’s decision. He has lodged detailed grounds of appeal which in many cases constitute an attack on the committee’s interpretation of the evidence. I do not require to go into the detail of the nature of this attack. It is sufficient to observe that the assessor renews his argument that there was insufficient comparative information before the committee to enable it to conclude that it was properly comparing like for like.
[3] A critical aspect of the committee’s reasoning lay in its treatment of plant and machinery, which rested in turn on its interpretation of the Valuation for Rating (Plant and Machinery) (Scotland) Regulations 2000 (“the 2000 regulations”). The committee’s interpretation of the 2000 regulations meant that, in general, the plant and machinery was not rateable. In reaching that conclusion the committee rejected the assessor’s argument that all civil engineering works, including dams, intake chambers, supports, thrust blocks, ducts or chambers under a turbine and the like should all be treated as rateable for the purpose of the regulations. In consequence the committee clearly considered that it was not necessary for them to examine in detail the extent to which the appeal subjects might differ from each other or from the comparator rental subjects. The committee summarised its approach as follows:
“52. If the plant and machinery is excluded from rating, all that remains to be valued is the rent for the land and the water extraction rights and the shell structure of the turbine building.”
The committee determined that the turbine building required to be assessed as a “shell” for this purpose:
“63. The turbine building is a shell for rating purposes. Most of the plant and equipment and their accessories within the turbine building are non-rateable.”
Since it concluded that the turbine building was merely a shell, the committee accepted that its rateability should be assessed by applying a small uplift to the rental value of the subjects based on turnover. As to the remaining issue of the valuation of the right to extract water and the use of the land, the committee noted that these matters were included in the comparison evidence:
“51. In the rental comparisons provided by the respondents, all plant and machinery is excluded from value in fixing rents. The rent is for the right to extract water and for the use of the land.”
The committee considered that the comparison evidence showed a consistent average level of 9% of turnover for the value of the land and the water extraction rights. In each case they applied an upward adjustment of 10% of the rental figure to reflect the value of the turbine building.
[4] From this it will be seen that the proper approach to be taken to plant and machinery was central to the committee’s whole approach, and in particular to the questions: (a) whether the assessor’s approach should be rejected; (b) whether the comparison evidence was sufficient; and (c) whether the turbine station was effectively a shell. If its interpretation of the 2000 regulations was wrong in law, its decision cannot stand. As Appeal 6 was decided on the basis of the percentages used in the revaluation appeals, the decision in that case and the valuation in that case also stand or falls on the interpretation point.
[5] For reasons which I am about to explain, I consider that the committee did indeed err in law in its interpretation of the 2000 regulations and that the appeal must therefore succeed.
[6] The 2000 regulations prescribe classes of plant and machinery for the purposes of the definition of “lands and heritages” in section 42 of the Lands Valuation (Scotland) Act 1854. Schedule 1 to the regulations sets out four classes.
[7] Class 1 relates to:
“Plant and machinery (except to the extent that plant and machinery has microgeneration capacity and excluding excepted plant and machinery) specified in table 1 below (together with any of the appliances and structures accessory to such plant or machinery and specified in the list of accessories set out below) which is used or intended to be used mainly or exclusively in connection with a generation, storage, primary transformation of power or main transmission of power in or on the lands and heritages”.
The definition of “excepted plant and machinery” includes:
“…plant and machinery on the lands and heritages used or intended to be used for generation, storage transformation or transmission of power where …
(i) the power is mainly or exclusively for distribution for sale to consumers; …”
Table 1 identifies specific plant and equipment commonly involved in the generation of electricity, for example, cables and conductors; switchboards; distribution boards; water turbines; governor engines; penstock; and conduits.
[8] Class 2 relates to plant and machinery used or intended to be used in connection with services to the lands and heritages, or part of them, except where their use is in connection with services mainly or exclusively as part of manufacturing operations or trade processes. The exception noted in class 1 in relation to plant and machinery which has microgeneration capacity is repeated.
[9] That same exception applies in class 3, under which the prescribed items include:
“(c) cables, wires and conductors (or any system of such items) –
(i) situated in or on lands and heritages used or intended to be used in connection with the transmission, distribution, or supply of electricity, and
(ii) used or intended to be used in connection with such transmission, distribution or supply, other than such items or part of such items which are, or are comprised in equipment which is used or intended to be used mainly or exclusively for switching or transforming electricity;
(d) poles, posts, pylons, towers, pipes, ducts, conduits, meters and any associated supports and foundations, used or intended to be used in connection with any of the items included in paragraph (c) above;”
[10] In class 4 the exception in relation to microgeneration capacity is again repeated. The items which may be included in this class are set out in tables 3 and 4. They include dams; fixed cranes and gantries; conduits and ducts; foundations; supports; turbines and generators; chambers and vessels. In each case the items are excepted if they are neither a building or structure nor in the nature of a building or structure. There is also an exception in relation to items listed in table 4 where the cubic capacity does not exceed a certain amount and where the item is readily capable of being moved and re-erected in its original state without the substantial demolition of any surrounding structure.
[11] It was not disputed that for the purposes of class 1 the power generated at all the appeal subjects is mainly or exclusively for distribution for sale to consumers. The committee accepted that the plant and machinery at the appeal subjects were properly and fully covered under class 1 and constituted excepted plant and machinery for the purposes of valuation for rating. It further concluded that where an exception under one class applied it was unnecessary to consider the other classes. It therefore did not proceed to consider whether any of the plant and machinery might nevertheless be rateable for the purposes of classes 2, 3 or 4. Put short, the committee considered that where plant and machinery is excepted under one class, it is not necessary to examine any of the other classes. In doing so, the committee rejected the assessor’s argument that a sequential approach should be taken. On his approach an item of plant which might, prima facie, be excepted under class 1 could still be rateable if it fell within any of the definitions of prescribed plant under the remaining classes.
[12] I consider that the committee’s interpretation is mistaken. The “consumer exception” for plant and machinery in class 1 is introduced by the words “in this class” thereby limiting its effect to that class. Further, if that exception were to cover all the other classes, repetition elsewhere would not be required.
[13] I hold that where items of plant and machinery fall within a class 1 exception it is still necessary to go on to consider whether they fall to be treated as rateable under any of the other classes. Plant may fall outwith rateability under class 1 on the basis that it is used to generate power for onward sale to consumers, but nevertheless be rateable because, for example, it falls within class 4 and is in the nature of a building or structure.
[14] This approach does not create an internal conflict within the regulations. The general intention is that plant or machinery falling within tables 1 or 2 is rateable if used for the benefit of the subjects being valued, unless that benefit is subsidiary to a manufacturing or trade process. However, that is not an absolute rule. For example, it is also a purpose of the regulations that the exemption for commercial plant or machinery does not apply if it falls within table 3 or table 4, and is in the nature of a building or structure. If such an item is rateable under class 4, it is of no moment that it is excepted under class 1. The regulations should be viewed as a whole. It is worth observing that the point at issue is dealt with in express terms in the Valuation for Rating (Plant and Machinery) (England) Regulations 2000.
Regulation 2 states that plant or machinery is part of the hereditament for rating purposes if it “belongs to any of the classes set out in the schedule to these Regulations…”. It is hardly conceivable that there was an intention to create a different regime north of the border, thus the slightly different wording in the equivalent Scottish regulations should be seen as no more than a drafting choice.
[15] Although the wording of the legislation is slightly different, to reflect different terminology, the structure of the two pieces of legislation is the same. Each specifies four different classes with the same exceptions. This is hardly surprising. The explanatory note to both the Scottish and the English regulations explains that they were introduced with a view to updating and harmonising the rating of plant and machinery throughout the United Kingdom. They each reflect the recommendations contained in the Report of the Expert Advisory Committee to the UK Parliament chaired by Mr Derek Wood (Cm 4283). That committee considered it appropriate to introduce a “tools of the trade” exemption in relation to the electricity industry, but only up to a point:
“5.35 On the grounds of fairness, therefore, we conclude that a ‘tools of the trade’ exemption ought to be introduced in respect of generating plant and machinery belonging to power generators. However, Class 4 should continue to apply and some of the tools of the trade will be brought into rateability under that class. This would achieve equality of treatment with other industrial undertakings. Since some of these items are not specifically mentioned in Class 4, the 1994 regulations will need to be amended to incorporate them under tables 3 or 4, as appropriate”.
[16] The English courts followed a sequential approach in relation to earlier versions of the relevant regulations, which similarly categorised plant and machinery into separate classes. In Union Cold Storage Co Ltd v Assessment Committee for Metropolitan Borough of Suffolk & Anr 1932 R & I T 160 at page 164, Macnaughten J noted the exemption for plant and machinery installed for the purpose of manufacturing operations or for trade processes, and continued:
“This particular machinery in question, the cold storage plant or refrigeration plant, is admittedly plant on the hereditament for the purpose of manufacturing operations or trade processes. If there was no fourth class in the Schedule and no fourth class in the Order, it would clearly exempt from rateability. But the object, as I understand it, of Class 4 in the Schedule and Class 4 in the Order is to bring into rateability such parts of any plant or machinery which is in the nature of a building or structure, and, therefore, if these refrigerating chambers are, or in the nature of, buildings or structures, these are rightly taken into account in fixing the Rateable Value.”
[17] Similarly in BP Refinery (Kent) Ltd v Walker (1957) 2 QB 305 at page 314, Lord Evershed, MR, observed that:
“… on the face of it, a piece of plant or machinery which serves manufacturing or trade processes is not brought into rating liability by reason only of the fact that it serves also the purposes of heating, lighting, etc but it will not be excluded from liability if it also falls, as such, within the scope of Class 4 as a piece of plant or machinery identifiable by reference to the list given in the order and also being or being in the nature of, a structure or building.”
A similar point was made by Denning LJ at page 330:
“The proviso to Class 1 makes it clear that process boilers are not brought within Class 1 simply because they are also used for heating water: but it leaves it open for them or any parts of them to be brought within Class 4, if they are structures or in the nature of structures.”
[18] I consider that the same interpretation should be given to the 2000 regulations. Accordingly in my view the court should allow the appeals, quash the valuations, and remit to the committee for reconsideration.
[19] Before leaving the case it is appropriate to say something about other issues discussed at the hearing since this may be of assistance to the committee. Though the nature and value of the comparative material was criticised by the assessor, questions of this kind are very much for the committee. That said, once the 2000 regulations are approached in the correct manner, it may be necessary for the committee to have more detail upon, and make more specific findings as to, any comparators relied upon, including as to the implications, if any, of the involvement of connected parties in the lease agreements. (Of course, the committee may decide to depart altogether from the comparative approach – that will be a matter for the committee.) It may also be necessary to make more specific findings as to the facts in respect of each of the schemes under consideration, for example, as to the size, nature and use of the various turbine houses.
[20] There was specific criticism of the committee’s findings on what was covered by the description “penstock”. They were said to be “perverse” in that they covered everything from the burn to the return and thus including, for example, the turbine, any intake chamber, thrust blocks, dams, etc. When re-considering the rateability of plant and machinery in light of the proper approach to the regulations, the committee may wish to elaborate upon its reasoning in respect of “penstock” and other relevant items.
LANDS VALUATION APPEAL COURT
[2016] CSIH 8
XA57/15
Lady Dorrian
Lord Malcolm
Lord Woolman
OPINION OF LORD MALCOLM
in the cause
by
THE ASSESSOR FOR TAYSIDE VALUATION JOINT BOARD
Appellant;
against
OLD FASKALLY FARMING COMPANY AND OTHERS
Respondents:
Act: Stuart QC; Clyde & Co
Alt: MacIver; Davidson Chalmers LLP
3 February 2016
[21] I have had the advantage of reading a draft of the opinion of your Ladyship in the chair. I agree with it, and with the proposed disposals of these appeals.
LANDS VALUATION APPEAL COURT
[2016] CSIH 8
XA57/15
Lady Dorrian
Lord Malcolm
Lord Woolman
OPINION OF LORD WOOLMAN
in the cause
by
THE ASSESSOR FOR TAYSIDE VALUATION JOINT BOARD
Appellant;
against
OLD FASKALLY FARMING COMPANY AND OTHERS
Respondents:
Act: Stuart QC; Clyde & Co
Alt: MacIver; Davidson Chalmers LLP
3 February 2016
[22] I agree with the Opinion of her Ladyship in the chair and I have nothing further to add.