R (on the application of Cobalt Data Centre 2 LLP and another) v Commissioners for HMRC

The appeal concerns the availability of 100% initial capital allowances under the Capital Allowances Act 2001 for expenditure on buildings in an enterprise zone, and in particular the operation of the time-limits in section 298. The court held that section 298(1)(b) requires that expenditure incurred in the second ten-year period must be shown, on a substantive and realistic assessment, to have been incurred under a contractual commitment which existed by the tenth anniversary (the end of the first period). The Golden Contract’s clause 12 (the JCT change clause relied on) did not empower the developer, by unilateral exercise, to require construction of DC2 or DC3, and the taxpayers’ alternative arguments about variations and replacements of the contract failed. Accordingly the Relevant Expenditure was not incurred under a contract entered into within the first ten years and the 100% allowances were not available.

This case arose from claims for enhanced capital allowances (EZAs) by purchasers of two data-centre developments (DC2 and DC3) on a site designated an enterprise zone. The taxpayers (successors to the developer’s rights) claimed that their expenditure qualified for 100% allowances under the Capital Allowances Act 2001 because the expenditure was incurred under a contract entered into within the first ten years after designation, thereby activating the extended 20-year period in section 298(1)(b).

Key factual points:

• The Tyne Riverside Enterprise Zone was designated on 19 February 1996.
• A Golden Contract (a JCT Standard Form amended to give the employer a choice between six detailed alternative "Works Options") was made on 17 February 2006, two days before the first-period cut-off.
• The Golden Contract gave a right to select one of six Works Options and included clause 12 (a conventional changes clause) giving the employer limited rights to require changes to the Employer’s Requirements.
• Subsequent instruments in 2009 and 2011 (variations and Change Orders) led to construction of DC1, DC2 and DC3 and to the assignment of the development projects to the taxpayers.

Procedural history:

• The taxpayers’ EZA claims were denied by HMRC and appealed; the matter (together with a judicial-review claim on legitimate expectation) went to the Upper Tribunal which allowed the taxpayers’ appeals on the view that the Relevant Expenditure had been incurred under the Golden Contract as varied.
• HMRC appealed to the Court of Appeal ([2022] EWCA Civ 1422) which disagreed with parts of the Upper Tribunal and held the taxpayers’ primary and alternative cases to fail.
• The taxpayers appealed to the Supreme Court and the appeal was heard in January 2024; judgment was given 20 November 2024.

Relief sought:

• The taxpayers sought declarations and allowances under the Capital Allowances Act 2001 (section 296 read with section 298), and raised a judicial review claim based on an asserted legitimate expectation regarding HMRC practice.

Issues before the Supreme Court:

1. Whether the Relevant Expenditure was incurred by exercise of the unilateral rights to select and to change conferred by clause 12 of the Golden Contract (the Clause 12 Issue).
2. Whether section 298(1)(b) on its proper construction treats expenditure arising from a variation made during the second period to a contract entered into in the first period as expenditure "incurred under" the original contract (the section 298 Issue).
3. If section 298 permitted such treatment, whether the post‑cut-off alterations constituted a variation or a replacement of the Golden Contract (the Variation Issue).

Court’s reasoning and conclusions:

• On statutory construction the court adopted a purposive and realistic approach: section 298(1)(b) must be read to require, for second-period expenditure to qualify, that by the tenth anniversary there was a contractual relationship including the substantive commitment to the relevant expenditure (whether because the contract already contained rights that could be unilaterally exercised later, or because the contractual commitment had already been made by that date).
• The court rejected the taxpayers’ broad textual reading that any second-period variation of a contract made in the first period would be treated as if the original contract authorised the expenditure; such a reading would subvert the clear purpose of the ten-year time limit and make the regime dependent on parties’ choice of drafting mechanism (variation v replacement).
• On clause 12 the court agreed with the tribunals below that the clause, properly construed in context, authorised changes only to the design/quality/quantity of the selected Works Option (i.e. changes within the same substantive building project) and did not empower the developer unilaterally to require construction of DC2 or DC3 as those works stood; the "including the addition, omission or substitution of any work" language did not convert the clause into an unlimited power to change the subject matter or site of the works.
• Given those conclusions, and applying the statutory test, the Relevant Expenditure was not incurred under a contract entered into within the first ten years and the taxpayers’ EZA claims failed. The court therefore dismissed the taxpayers’ appeal. The Variation Issue was treated as largely academic but discussed: the common law gives parties wide scope to determine whether an alteration is a variation or replacement but that freedom is not absolute and, in any event, does not answer the section 298 question on its own.

The court also dealt with a procedural point and held that HMRC were entitled to raise the section 298 construction point on appeal.

This appellate appeal is dismissed. The Supreme Court held that (1) section 298(1)(b) must be read purposively: second-period expenditure qualifies only if, by the tenth anniversary, there was a contractual commitment in substance to incur that expenditure (either because the original contract already gave rights that could be unilaterally exercised later or because the commitment had already been made by then); (2) clause 12 of the Golden Contract did not authorise the unilateral imposition of the obligations to construct DC2 or DC3; and (3) on that construction of the 2001 Act the Relevant Expenditure was not incurred under a contract entered into within the first ten years, so the 100% allowances were not available.

Upper Tribunal allowed the taxpayers’ appeals (finding the Relevant Expenditure was incurred under the Golden Contract as varied). HMRC appealed to the Court of Appeal [2022] EWCA Civ 1422 which reversed aspects of the Upper Tribunal and ruled against the taxpayers on the principal and alternative arguments. The taxpayers appealed to the Supreme Court, which dismissed the appeal in [2024] UKSC 40.