Cobalt Data Centre 2 LLP and Cobalt Data Centre 3 LLP v The Commissioners for HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judge | Mr Justice Zacaroli,Judge Richards |
| Neutral Citation | [2019] UKUT 0342 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
| Subject Matter | Tax,15 November 2019 |
| Date | 15 November 2019 |
| Published date | 15 November 2019 |
[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 practice set
out in correspondence
UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
THE QUEEN (on the application of COBALT DATA CENTRE 2
LLP and COBALT DATA CENTRE 3 LLP)
COBALT DATA CENTRE 2 LLP
COBALT DATA CENTRE 3 LLP
Claimants/Appellants
-and-
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS
Respondents
Sitting in public at The Rolls Building, Fetter Lane, London from 22 May 2019 to 18 June
2019
Adrian Williamson QC, Nicola Shaw QC and Michael Jones, instructed by Macfarlanes
LLP 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,
for the Respondents © CROWN COPYRIGHT 2019
TRIBUNAL
MR JUSTICE ZACAROLI
JUDGE JONATHAN RICHARDS
2
DECISION
Introduction
1. The appellants (“CDC2” and “CDC3” separately and, together, the “LLPs”) are
two limited liability partnerships formed under the Limited Liability Partnerships Act
2000. On 4 April 2011, they acquired, among other assets, an assignment of rights under
a construction contract (the “Golden Contract”) entered into between, among others,
Highbridge North Tyneside Developer One Limited (the “Developer”) and Highbridge
North Tyneside Contractor One Limited (the “Contractor”). The Golden Contract
related to construction works to be undertaken at the Cobalt Business Park (the “Site”)
that was, from February 1996 to 18 February 2006, within an enterprise zone. As
consideration the LLPs paid consideration (the “Price”) of £153,709,750 in the case of
CDC2 and £109,754,500 in the case of CDC3.
2. Before the appellants acquired their rights under the Golden Contract, that contract
was amended and “change orders” issued by the Developer to the Contractor. On 1
April 2011 and 4 April 2011, the Developer made substantial advance payments to the
Contractor. The appellants consider that these payments were made under the Golden
Contract as advance payment for construction works to be undertaken, but HMRC
dispute this. In due course, two data centres (“DC2” and “DC3” respectively and,
collectively, “Data Centres”) were constructed on the Site with DC2 being completed
to shell and core on 28 January 2013 and DC3 being completed to shell and core on 17
December 2012. However, efforts to find a tenant for the Data Centres have been
unsuccessful. At no point since the appellants acquired their interests in the Data
Centres have those Data Centres been let.
3. The appellants contend that, by virtue of s863 of the Income Tax (Trading and Other
Income) Act 2005 (“ITTOIA”), they are to be treated for income tax purposes as if they
were partnerships. As a consequence, they submitted partnership tax returns pursuant
to s12AA of the Taxes Management Act 1970 for the tax year 2010-11. In those tax
returns, they claimed enterprise zone allowances (“EZAs”) which they contend arose
on the expenditure they incurred acquiring rights under the Golden Contracts.
4. The arrangements under which the appellants acquired their interests in the Data
Centres were notified to HMRC under the disclosure of tax avoidance schemes
legislation set out in Finance Act 2004, although neither party suggested that this was
relevant to the question whether EZAs are available or not. HMRC opened enquiries
into the partnership tax returns. Following completion of their enquiries, HMRC issued
closure notices concluding that the appellants were not entitled to the allowances
claimed. The appellants appealed to the First-tier Tribunal (Tax Chamber) against
HMRC’s closure notices. The appellants also considered that, in denying the
allowances that had been claimed, HMRC were acting contrary to their published
practice which gave the appellants a legitimate expectation that EZAs would be
available and they therefore also instituted judicial review proceedings.
5. The appellants’ substantive appeals against HMRC’s closure notices have been
transferred to the Upper Tribunal (Tax and Chancery Chamber) pursuant to Rule 28 of
3
the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 (the “FTT
Rules”). The appellants’ claim for judicial review was also transferred to the Upper
Tribunal by order of Ben Emmerson QC, sitting as a judge of the High Court, on 18
August 2017. The Upper Tribunal has directed that the appeal against the closure
notices and the judicial review claims are to be heard together.
The relevant parties to the transaction and their roles
6. The principal parties to the transaction were as follows.
The LLPs
7. The LLPs were incorporated on 19 January 2011 and 15 March 2011 respectively.
The LLPs obtained funds from a combination of investors’ subscriptions for
membership interests and from loan finance (“Bank Winter Loans”) provided by Bank
Winter & Co Aktiengesellschaft (“Bank Winter”). The LLPs used those funds to
acquire interests in DC2 and DC3 from the Developer. The hope and expectation, both
of the LLPs and investors, was that, since DC2 and DC3 were located on the Site that,
until 18 February 2006, was part of an enterprise zone, the expenditure incurred on
acquiring the “relevant interests” in DC2 and DC3 would qualify for EZAs under s296
of the Capital Allowances Act 2001 (“CAA 2001”). Moreover, it was hoped and
expected that, because the LLPs would by virtue of s863 of ITTOIA be treated for
income tax purposes like partnerships, members of the LLPs (as distinct from the LLPs
themselves) would be able to benefit from the EZAs by setting them against other tax
liabilities that they had.
The Developer, the Contractor and Highbridge
8. The Developer and the Contractor were both formed as special purpose companies
within the Atmel group. Atmel subsequently sold those companies to the Highbridge
group. Highbridge was, and is, an experienced commercial property developer which
had a track record of developing properties situated in enterprise zones. Highbridge had
experience of the construction and development of data centres on the Site since it had
been involved in the development of the first data centre on the Site (“DC1”) which
achieved practical completion in 2011.
Harcourt Capital LLP, Taurus Asset Finance Limited and CDC Administration LLP
9. Harcourt Capital LLP (“Harcourt Capital”) is a “structured finance house” which
was formed in 2009. It, and its partners, have considerable experience in raising
financing to fund investments and administering those investments once made. By
November 2010 Taurus Asset Finance Limited (“Taurus”) had been approached by
Highbridge to help to secure funding for what was to become DC2. Taurus, however,
considered that it did not have the capacity to take on that task single-handed and
approached Harcourt Capital to help. At the time, Harcourt Capital had no previous
experience of enterprise zone investments or property investments more generally (and
had not been involved in the financing of DC1). Taurus and Harcourt formed a joint
venture (CDC Administration LLP) to organise and administer the Cobalt investments.
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