Cobalt Data Centre 2 LLP and Another v R & C Commissioners
| Jurisdiction | England & Wales |
| Judgment Date | 31 October 2022 |
| Neutral Citation | [2022] EWCA Civ 1422 |
| Court | Court of Appeal (Civil Division) |
[2022] EWCA Civ 1422
Lord Justice Lewison, Lord Justice Newey and Lady Justice Andrews
Court of Appeal (Civil Division)
Business tax – Capital allowances – Enterprise zone allowances – Whether expenditure incurred within time limit – No – Appeal allowed.
In Cobalt Data Centre 2 LLP & Anor v R & C Commrs [2022] BTC 32, the Court of Appeal allowed HMRC’s appeal against the decision of the Upper Tribunal (Cobalt Data Centre 2 LLP v R & C Commrs [2019] BTC 529; Cobalt Data Centre 2 LLP & Anor v R & C Commrs [2021] BTC 501), finding that the expenditure was not incurred within the relevant time limit for enterprise zone allowances (EZAs).
Cobalt Data Centre 2 LLP and Cobalt Data Centre 3 LLP (the LLPs) had made claims for EZAs in respect of expenditure incurred by the LLPs in order to obtain rights under a contract (the Golden Contract) relating to the construction of buildings. The Upper Tribunal had found that the LLPs were entitled to EZAs in respect of some, but not all, of the expenditure. HMRC appealed on the basis that the LLPs had no entitlement to EZAs; and the LLPs cross-appealed on the basis that they were entitled to EZAs on the whole of their expenditure.
To qualify for EZAs, the expenditure had to be incurred within 10 years of the designation of the zone, or within 20 years if it was incurred under a contract that was entered into within 10 years of the designation. HMRC’s case was based on two separate arguments:
- the Golden Contract was no more than an option given to the developer and, at the relevant time for the claim for EZAs, it could not be said that any expenditure on the construction of a building would be incurred; and
- changes made to the Golden Contract were of such magnitude that they amounted to a new contract which was made outside the relevant period for EZAs.
The Court of Appeal allowed HMRC’s appeal, finding that the buildings were not constructed under a contract entered into with the required period for EZAs: if the parties did not rescind the Golden Contract, the “result of what they said or did was the making of a new contract”.
It was agreed that the matters covered in the LLPs’ cross-appeal did not arise for decision. The LLPs’ appeal was adjourned, with liberty to the LLPs to apply to reinstate their appeal in the event that the Court of Appeal’s decision is reversed.
EZAs were time limited and here HMRC were successful in arguing that the contractual arrangements were such that the time limit was breached. Much of the decision is given over to the consideration of authorities relevant to the distinction between rescission and variation in the context of contracts.
Comment by Stephen Relf, Deputy Content Manager – Tax at Croner-i Ltd.
Adrian Williamson KC, Nicola Shaw KC and Michael Jones KC (instructed by Macfarlanes LLP) appeared for the LLPs David
Ewart KC, Stephen Kosmin, Edward Waldegrave and Laura Ruxandu (instructed by HM Revenue and Customs) appeared for HMRC
[1] At the time of the events with which we are concerned, Parliament encouraged investment on the construction of industrial buildings in disadvantaged areas by permitting generous allowances against tax on construction expenses. The relevant disadvantaged areas were enterprise zones, and the allowances were referred to as enterprise zone allowances or EZAs. The issues that arise on these appeals are whether the taxpayers (“the LLPs”) are entitled to EZAs on the whole or part of the sums which they paid in order to obtain rights under contracts relating to the construction of such buildings at the Cobalt Business Park in the Tyne Riverside Enterprise Zone. The buildings that were eventually constructed were two data centres (“DC2” and “DC3”). The Upper Tribunal (Zacaroli J and Judge Jonathan Richards) held that they were entitled to EZAs on some, but not all, of their expenditure. The principal decision of the UT is at [2019] BTC 529. In a second hearing the UT went on to determine the financial consequences of their principal decision. The second decision is at [2021] BTC 501. Both are impressive, detailed and closely reasoned. HMRC appeal on the basis that the LLPs have no entitlement to EZAs at all. The LLPs cross-appeal on the basis that they are entitled to EZAs on the whole of their expenditure.
[2] One unusual feature of the hearing before the UT was that the appeals against the closure notices were heard together with a claim for judicial review. The latter claim succeeded. There is no appeal against the UT's decision on the claim for judicial review.
[3] EZAs were a sub-set of industrial building allowances (or IBAs). Under section 294 of the Capital Allowances Act 2001 (“CAA 2001”), capital expenditure incurred on the construction of certain types of building qualified for IBAs. It provided:
If–
- capital expenditure is incurred on the construction of a building, and
- the relevant interest in the building has not been sold or, if it has been sold, it has been sold only after the first use of the building,
the capital expenditure is qualifying expenditure.
[4] By reason of section 272 expenditure on the construction of a building did not include expenditure on the acquisition of land or rights in or over land. Consequently, sums spent to acquire land, as distinct from sums spent on the construction of a building, did not attract IBAs. If the relevant building was on a site in an enterprise zone, it would be an “EZ building” within the meaning of section 298(2) of CAA 2001 and, provided the expenditure was incurred within the relevant time limit, section 299 would treat the expenditure as qualifying enterprise zone expenditure with the result that section 305 of CAA 2001 would apply to confer entitlement to the generous 100% EZAs. Section 296 of CAA 2001 extended the allowances to cases in which a person purchased an unused building from a developer. It provided:
(1) This section applies if–
- expenditure is incurred by a developer on the construction of a building, and
- the relevant interest in the building is sold by the developer in the course of the development trade before the building is first used.
(2) If–
- the sale of the relevant interest by the developer was the only sale of that interest before the building is used, and
- a capital sum is paid by the purchaser for the relevant interest,
the capital sum is qualifying expenditure.
…
(4) The qualifying expenditure is to be treated as incurred by the purchaser when the capital sum referred to in subsection (2)(b) or (3)(b) became payable.
[5] Section 286 (1) defined “the relevant interest” as:
the interest in the building to which the person who incurred the expenditure on the construction of the building was entitled when the expenditure was incurred.
[6] In the case of an enterprise zone, EZAs were only allowable if the expenditure was incurred within a particular timeframe. Thus section 298 provided:
(1) For the purposes of sections 299 to 304, the time limit for expenditure on the construction of a building on a site in an enterprise zone is–
- 10 years after the site was first included in the zone, or
- if the expenditure is incurred under a contract entered into within those 10 years, 20 years after the site was first included in the zone.
[7] Section 300 described the entitlement to EZAs:
If –
- expenditure is incurred on the construction of an EZ building, and
- all the expenditure is incurred within the time limit
any qualifying expenditure given by sections 295 and 296 in relation to that expenditure is qualifying enterprise zone expenditure.
[8] Section 356 dealt with the apportionment of sums partly referable to non-qualifying assets. It relevantly provided:
(1) If the sum paid for the sale of the relevant interest in a building is attributable–
- partly to assets representing expenditure for which an allowance can be made under this Part, and
- partly to assets representing other expenditure,
only so much of the sum as on a just and reasonable apportionment is attributable to the assets referred to in paragraph (a) is to be taken into account for the purposes of this Part.
[9] I can take the facts from the decision of the UT.
[10] The site was within the Tyne Riverside Enterprise Zone between February 1996 and 18 February 2006. In 2006 Highbridge North Tyneside Developer One Ltd (the “Developer”) and Highbridge North Tyneside Contractor One Ltd (the “Contractor”) were established as special purpose vehicles, with a view to further development of land within the enterprise zone; and to ensure that the ability to claim EZAs on future development of the site would not cease. On 17 February 2006 the Contractor and Developer (referred to as the “Owner” in the relevant contract), executed a contract (referred to as “the Golden Contract”) which incorporated the conditions of the JCT Standard Form of Building Contract with Contractor's Design 1998 Edition (the “JCT Contract”) and made modifications to that JCT Contract. The Golden Contract was, therefore, entered into the day before the enterprise zone at the site expired and formed part of arrangements that both the Developer and Contractor hoped would ensure that EZAs could still be claimed on future construction work on the Site.
[11] One significant amendment to the JCT Contract embodied in the Golden Contract was that, while the JCT Contract envisages that the Contractor would be obliged to perform, and the Employer would be obliged to pay for, a single building project, the Golden Contract contained a number of different options. Each of the options was linked to a specific part of the overall site, designated respectively as Site A, Site B and Site C (each of which was shown on a plan). The Golden Contract defined “the Works” as:
the design, construction and commissioning the Employer wishes to...
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