Colbalt Data Centre 2 LLP & Anor. The Commissioners for HMRC

For expenditure incurred more than ten years after a site entered an enterprise zone to qualify for enterprise zone allowances, it must be incurred under the same contract as that entered into within the initial ten-year period. The inquiry under section 298 of the Capital Allowances Act 2001 is retrospective and does not require a contract of any prescribed kind.

A contractual power to vary building works depends upon the construction of the particular contract. Even broad language does not ordinarily authorise the employer to substitute a fundamentally different project. Where the original option had been exhausted and the later work concerned different buildings, sites and prices, the later bargain was a fresh contract. A shared desire to preserve a tax advantage could not convert it into a variation of the original contract.

Two limited liability partnerships claimed enterprise zone allowances on sums paid to acquire interests connected with the construction of two data centres. The construction arrangements were said to derive from a building contract made within ten years after the site entered an enterprise zone. The data centres were commissioned several years later through change orders issued after an earlier works option had already been exercised.

The Upper Tribunal held in [2019] UKUT 342 (TCC) that the partnerships qualified for allowances on part of their expenditure. It determined the financial consequences in [2020] UKUT 356 (TCC). HMRC appealed, contending that the data centres were constructed under fresh contracts made outside the statutory period. The partnerships cross-appealed, claiming allowances on all their expenditure.

The central question was whether the relevant expenditure was incurred under the original contract for the purposes of section 298 of the Capital Allowances Act 2001.

1. HMRC’s appeal allowed. Section 298 of the Capital Allowances Act 2001 required the court to ask retrospectively whether expenditure had been incurred on constructing a building in an enterprise zone, under a contract entered into within the first ten years, and within the extended twenty-year limit. The provision prescribed no particular kind of contract. The contract under which the expenditure was eventually incurred nevertheless had to be the same contract as that made within the initial ten-year period.

2. The scope of a contractual variation power is a question of construction. Even a widely expressed variation clause has limits. Clause 12 permitted changes to the employer’s requirements concerning how a selected works option was to be achieved. It did not permit the employer to replace a building-specific and site-specific works option with a wholly different project. The partnerships’ challenge to the Upper Tribunal’s construction of clause 12 therefore failed.

3. The original contract entitled the developer to select a limited works option. That right had already been exercised through Change Order 1 and the construction of the first data centre. The later orders concerned materially different buildings, on different sites, for substantially different prices. The original option was no longer available, and its specified project could no longer be performed on the allocated site.

4. The parties’ contractual intention had to be determined objectively from what they said and did. Their commercial desire to preserve enterprise zone allowances was not equivalent to an objectively manifested intention to vary the original contract. Tax considerations could form part of the background, but they could not overcome the absence of words or conduct establishing such a variation.

5. Lewison, Newey and Andrews LJJ agreed that the data centres were constructed under fresh contractual bargains. It was immaterial whether those bargains arose under the sale and development agreements or through acceptance of payment and performance. Nor was it necessary to decide whether the original contract had been rescinded, since a new contract could exist alongside it. The expenditure was consequently outside section 298 and no allowances were available.

6. The partnerships’ cross-appeal became academic. It was adjourned, with liberty to HMRC to seek dismissal if the decision on its appeal stood and liberty to the partnerships to seek reinstatement if that decision were reversed.

• Court of Appeal (Civil Division): In [2022] EWCA Civ 1422, allowed HMRC’s appeal and held that the partnerships had no entitlement to enterprise zone allowances. The partnerships’ cross-appeal was adjourned with liberty to apply.
• Upper Tribunal (Tax and Chancery Chamber): In [2019] UKUT 342 (TCC), held that the partnerships were entitled to allowances on part, but not all, of their expenditure. It also allowed an associated judicial review claim, which was not appealed.
• Upper Tribunal (Tax and Chancery Chamber): In [2020] UKUT 356 (TCC), determined the financial consequences of its principal decision.