R (on the application of Cobalt Data Centre 2 LLP and Another) v R & C Commissioners

JurisdictionUK Non-devolved
Judgment Date15 November 2019
Neutral Citation[2019] UKUT 342 (TCC)
Date15 November 2019
CourtUpper Tribunal (Tax and Chancery Chamber)

[2019] UKUT 342 (TCC)

Upper Tribunal (Tax and Chancery Chamber)

Mr Justice Zacaroli, Judge Jonathan Richards

R (on the application of Cobalt Data Centre 2 LLP & Anor)
R & C Commrs

Adrian Williamson QC, Nicola Shaw QC and Michael Jones, instructed by Macfarlanes LLP appeared for the claimants/appellants

Aparna Nathan QC, Stephen Kosmin, Edward Waldegrave, Emma Pearce and Laura Ruxandu, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents

Income tax – Whether appellants entitled to enterprise zone allowances – Yes CAA 2001, s. 298 – CA 2001, s. 296 – Whether appellants carrying on a business with a view to profit – Yes – ITTOIA 2005, s. 863 Whether appellants had a legitimate expectation that HMRC would apply practice set out in correspondence – Yes.

The Upper Tribunal (UT) decided that two LLPs were entitled to enterprise zone allowances on an apportioned amount of the payment made to acquire rights from the developer despite HMRC's argument that the payments were not “for” the relevant interest or “under” the contract that was originally entered into. The UT also allowed a claim for judicial review based on previous HMRC correspondence approving of similar arrangements and the claimants' legitimate expectation that this could be relied upon.


Cobalt Data Centre 2 LLP and Cobalt Data Centre 3 LLP (the appellants) had brought appeals against HMRC closure notices and also a claim for judicial review. These connected cases had been transferred to the Upper Tribunal (UT) and heard together.

On 4 and 5 April 2011, the appellants received an assignment of rights relating to two data centres under a construction contract (the “Golden Contract”). The Golden Contract related to construction works to be undertaken within a building site that had been within an enterprise zone (EZ) until February 2006.

The Golden Contract had been amended on 1 April 2011 and “change orders” issued by the developer and contractor. The developer made substantial advance payments to the contractor.

From these arrangements, three key issues arose that the UT considered:

  • Was the advance payment incurred under a contract entered into within the 10-year period after the site was included in the zone?
  • Were the appellants carrying on a business with a view to profit when they acquired the relevant interest?
  • Whether the capital sums paid for the relevant interest was qualifying expenditure for EZ allowance purposes?

On the first issue, HMRC argued that the sums paid to the contractor by the developer were not paid under the Golden Contract for the purposes of CAA 2001, s. 298. Instead, the contract had been rescinded or was not sufficiently certain for the expenditure to be incurred under it. Either way, it was a different contract that the expenditure was incurred under.

HMRC identified a number of differences between the Golden Contract and what occurred under the change orders.

However, the UT considered that these were no inconsistent with the parties having a common intention in amending the contract as opposed to rescinding it. Furthermore, it rejected HMRC's argument that as the Golden Contract was merely “an agreement to agree” that a contract came into being at a later date. Instead, it referred to the wording of the legislation and held that the Golden Contract met the condition of being a contract entered into within 10 years of the area becoming an EZ.

On the second issue, HMRC and the appellants were in substantial agreement over the legal test for determining whether the business was being carried on with a view to profit. Both parties agreed that the test referred to the time that the appellants acquired the relevant interests and that it was a subjective test. The UT referred the decision in Ingenious Games LLP v R & C Commrs [2019] BTC 521 which endorsed that approach. The subjective view being tested was that of the controlling minds behind the two LLPs and there was no need for the view to profit to be the primary motive.

There was disagreement over whether the concept of commerciality was also relevant, with HMRC citing Samarkand Film Partnership No 3 v R & C Commrs [2017] BTC 4 as a relevant precedent and arguing that the “commercial basis” test had a bearing on the profit view.

The UT interpreted that question as having no direct relevance but accepted that were a business being carried on in an uncommercial way, that would provide evidence towards there being no view to a profit. The UT said that while the LLPs had been formed to receive the benefit of EZAs, this was not inconsistent with conducting business with a view to a profit and referred again to Ingenious Games LLP v R & C Commrs [2019] BTC 521 which considered this at para. 333.

The appellants provided evidence of valuations produced at the time of the acquisitions. These had been prepared on a “rent and yield” basis, showing projections of profit and without including any relief for the EZAs. HMRC contended that there was ample evidence that the LLPs were not being run with a view to a profit, including the assumptions included in the calculations, the initial loss realised by the LLPs and the capital value of the data centres.

The UT considered these points but ultimately found that the LLPs were being run with a genuine belief that the prospect of making a profit was reasonable. It therefore determined that both the appellants were carrying on a business with a view to a profit.

The UT then considered the third key issue of whether the payments were qualifying expenditure. Cobalt Data Centre 2 and 3 claimed that the whole amounts paid by them (approximately £154m and £110m respectively) were qualifying expenditure for the purposes of EZAs, as set out in CAA 2001, s. 296. In support of this, they argued that were the required approach to ascribe value to every right and benefit acquired then CA 2001, ss. 356 and 357 would be rendered redundant. These sections pertain to “apportionment of sums partly referable to non-qualifying assets” and “arrangements having an artificial effect on pricing” respectively.

However, the UT rejected the idea that this were the only route to apportioning the payments. Instead, the legislation already recognised that payment for a relevant interest could be partly attributable Whilst the UT had not been referred to any authorities regarding this legislation, both parties had agreed that Barclays Mercantile Business Finance Ltd v Mawson (HMIT) [2004] BTC 414 (BMBF) and Barclays Mercantile Business Finance Ltd v Mawson (HMIT) [2004] BTC 414 were relevant for the purposes of general interpretation of the legislation.

The LLPs argued that BMBF meant that focus should be on the acts and purpose of the entity claiming the allowances. Also, they argued that their case could be distinguished from Tower MCashback as the key features, circularity of funds and an excessive price, were not present.

However, the UT considered that these authorities provided little assistance. Instead, they provided the UT with the principle of construing the statutory provisions purposively, analysing the contractual arrangements and only considering matter such as circularity of funds or inflation of prices in that context.

Given this, the UT stated that the overarching purpose of the legislation was to restrict EXAs to expenditure of a type intended by CAA 2001, Pt. 3. Therefore, the UT ultimately decided that the price paid by the LLPs needed to be apportioned between qualifying expenditure and non-qualifying expenditure.

To this end, the UT identified additional rights included in the price, over and above those under the Golden Contract, which included expenses support arrangements, rental support arrangements, capital repayment support arrangements and the discharge of the arranger's fee. It concluded ultimately EZAs should be granted on the value of the relevant interest and expenses support arrangements, but not capital repayment support arrangements or the arranger's fee.

Finally, the UT considered the LLPs' claim for judicial review. This related to the expenses support arrangements and also rental support arrangements (which the UT found to be part of the relevant interest).

The LLPs contended that they had relied upon HMRC's practice set out in correspondence it had with the Enterprise Zone Property Unit Trust Association (EZPUTA). Following applicable principles set out in United Policyholders Group v Attorney General of Trinidad and Tobago [2016] 1 WLR 3383, the LLPs claimed that the correspondence was “clear, unambiguous and devoid of relevant qualification”, that they were entitled to act to their detriment in reliance on HMRC's statements and that HMRC had shown no reason to resile from their practice.

HMRC argued against this on several points, including that they should be permitted to resile from the statement on public policy grounds and that the practice did not apply due to unreasonable valuations of ground rent.

Ultimately the UT allowed the LLPs' claim for judicial review, agreeing that the correspondence met the criteria laid down in United Policyholders Group. Furthermore, it dismissed HMRC's argument that the guidance given was wrong in law, stating that HMRC were using their “managerial discretion” in a situation where Parliament had not clearly legislated that EZAs would not be allowed.


This decision covers several points of interest, with the UT broadly accepting the appeal and claim for judicial review in favour of the LLPs. With

Of direct importance is the relevance of this case to other developers. With significant amount of tax relief at stake, property developers seeking to utilise similar structures will be able to take some comfort from this decision. It is also a useful guide to see how HMRC might view a similar transaction, and what contemporaneous evidence to produce in order to ensure that businesses are seen to be operating with a view to a...

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6 cases
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    ...[2019] UKUT 0342 (TCC) Appeal number: UT/2018/0007 UT/2018/0008 UTJR/2017/003 INCOME TAX– Whether appellants entitled to enterprise zone allowances – whether appellants carrying on a business with a view to profit – whether appellants had a legitimate expectation that HMRC would apply pract......
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    ...those principles, we agree with the analysis of the Upper Tribunal in R (on the application of Cobalt Data Centre 2 LLP) v R & C Commrs [2019] BTC 529 (“Cobalt”), where the issue was the extent to which sums were paid “for” a relevant interest so as to qualify for Enterprise Zone Allowances......
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