Supreme Court rejects taxpayers' appeals and denies enterprise zone allowances

In R (ota of Cobalt Data Centre 2 LLP and another) v HMRC [2024] UKSC 40, the Supreme Court dismissed the taxpayers' appeals concerning capital allowances on enterprise zone expenditure and confirmed the correct interpretation of section 298, Capital Allowances Act 2001.

Background

This case concerned the eligibility of capital allowances under the Enterprise Zone Allowances (EZA) regime. The key issue was whether expenditure incurred more than ten years after the enterprise zone designation, but under a pre-existing contract, qualified for EZA relief.

In 1996, an Order was made (by statutory instrument) to include the Cobalt Business Park within an enterprise zone in North Tyneside during the period 19 February 1996 to 18 February 2006 (the Site). The Site was acquired by Atmel group in 2006 and, realising that the enterprise zone would soon be coming to an end, it took steps to preserve the ability to claim EZAs in respect of future construction work at the Site. It incorporated Highbridge North Tyneside Developer One Ltd (the Developer) and Highbridge North Tyneside Contractor One Ltd (the Contractor) as special purpose vehicles, with a view to achieving this. 

On 17 February 2006, two days before the expiry of the Order, the Developer and the Contractor entered into a contract for the construction of a building at the Site (the Golden Contract). This was done with the intention of ensuring that the Developer would be able to  claim EZAs in relation to the construction costs, pursuant to section 298(1)(b), Capital Allowances Act 2001 (CAA).

The Golden Contract gave the Developer the right of selection of one out of six specified projects. It also gave the Developer a right to change the design, quality or quantity of the projects subject to a requirement that the Contractor consent to any such change. At various times, the Developer purported to exercise both the right to select and the right to change. The Developer and the Contractor also purported to vary the Golden Contract so as, inter alia, to enable the Developer to select more than one of the specified projects. Thereafter, the Contractor built and the Developer and Cobalt Data Centre 2 LLP and Cobalt Data Centre 3 LLP (the Appellants) paid for three buildings. 

The Appellants acquired, among other assets, an assignment of rights under the Golden Contract and subsequently claimed EZAs. HMRC refused their claim and issued closure notices accordingly. 

The Appellants' position was that EZAs were available on the basis that the relevant expenditure was all incurred under the Golden Contract and hence fell within the scope of section 298, CAA, because it was commissioned by the unilateral exercise by the Developer of the right to select, and the right to change, conferred by the Golden Contract in its original form. In the alternative, they argued that if the relevant expenditure was incurred as the result of a new agreement, it was one that varied, rather than replaced, the Golden Contract, so that it was still incurred 'under' the Golden Contract. 

HMRC argued that on the true construction of the Golden Contract, the rights it conferred were insufficiently wide to enable the Developer to require the Contractor to build all three projects, which could only be contracted for by a new agreement made after the expiry of the Order and therefore outside the time limit in section 298. Further, HMRC contended that, on its true construction, section 298 did not permit expenditure required or allowed by the variation to be treated as expenditure incurred 'under' the earlier contract and that the contractual alterations amounted to a replacement of the Golden Contract, rather than a variation of it.

The Appellants appealed to the First-tier Tribunal against HMRC’s closure notices. The Appellants also considered that, in denying the allowances that had been claimed, HMRC was acting contrary to its published practice which gave them a legitimate expectation that EZAs would be available and they therefore also instituted judicial review proceedings.

The substantive appeals against HMRC’s closure notices and the judicial review claim were transferred to the Upper Tribunal (UT) and the UT directed that the appeal and the judicial review claim be heard together. 

The UT allowed the appeals and judicial review in part.

HMRC appealed to the Court of Appeal and the Appellants cross-appealed. The Court of Appeal allowed HMRC's appeal and adjourned the Appellants' cross-appeal.

The Appellants appealed to the Supreme Court (SC).

SC judgment

The appeals were dismissed.

The SC unanimously dismissed the appeals, finding that section 298(1)(b), CAA, only permits capital allowances under the EZA regime to be claimed for expenditure where, on the tenth anniversary of the site being included in the enterprise zone, there was a contractual relationship under which the expenditure had either been agreed upon in terms, or where it arose from building work on that site which the developer had, at that time, a contractual right to require. 

The SC noted that the construction of statutes, and taxing statutes in particular, requires close attention to the purpose of the provision in issue, and a realistic view of the transaction or other matter to which it is claimed to apply. In terms of EZAs, the SC observed that the time limits imposed by section 298(1) represent a central part of the whole regime, and the Appellants' construction of section 298(1) failed to recognise the statutory purpose of the 10-year time limit set out therein.

The SC concluded that the right of change under the Golden Contract did not extend to changing from one already selected project to another, such that the change orders between the Developer and the Contractor were not validly issued under the Golden Contract. Rather, the basic structure of the Golden Contract was to give the Developer a right to select one of six different projects. Once selected, the Golden Contract then became a much more standard type of building contract for the construction of the particular project, but with the usual right of the Developer to require changes in design, quality and quantity, attributable to that project.

Comment

Although the same point is unlikely to arise in other cases, this is an important decision as the SC has confirmed the importance of a purposive construction to tax legislation. Although EZAs are now an historic allowance, the decision may still be relevant for other taxpayers in relation to similar reliefs.  

The judgment can be viewed here.