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N2-1a: Interpreting tax reliefs
Parliament taken to understand the commercial realities of the situations to which the relief applies
"[102] On the other hand, the intended practical result of the regime is the construction of buildings in the enterprise zone. As is well known, and as Parliament must be taken to have been aware, major construction projects often involve the need to adapt to unforeseen circumstances as they proceed. Construction contracts are usually drafted to accommodate this to some extent, but further adaptation may be required by variation beyond those contractual parameters while still directed to completion of what is in substance the same building. If the valuable EZAs available in relation to the building were lost by reason of such adaptation by variation of the original contract, the risk would arise that the building contemplated by that contract might be abandoned and not finished, for commercial reasons. That outcome too would defeat the purpose of the regime." ​(R (oao Cobalt Data Centre 2 LLP) v. HMRC [2024] UKSC 40)
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Close attention to purpose and realistic view of transaction to which it is alleged to apply
"[70] Construction of statutes, and taxing statutes in particular, requires close attention to the purpose of the provision in issue, and a realistic view of the transaction or other matter to which it is alleged to apply. The relevant authorities were recently reviewed by this court in Rossendale Borough Council v Hurstwood Properties (A) Ltd [2021] UKSC 16; [2022] AC 690, paras 9-17." ​(R (oao Cobalt Data Centre 2 LLP) v. HMRC [2024] UKSC 40)
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Availability of relief unlikely to turn on facts that make no difference to the purpose of the relief
"[85]...But suppose that in a contract made during the first period the parties agree upon the construction of a modest industrial building in one corner of the enterprise zone, and then well into the second period agree by variation (rather than replacement) to substitute a large power station on an extensive central part of the zone, at a cost greater by several orders of magnitude than that originally contracted for. On the taxpayers' construction they would recover 100% capital allowances for the whole of that expenditure, although the parties had contractually committed to none of it by the end of the first period, but just to a small sum on something completely different.
[86] That example reveals three basic problems with the taxpayers' construction. The first is that the basic purpose of the 10 year time limit for the first period, to secure a commitment by then to incur in substance the expenditure on a qualifying development within the zone as the quid pro quo for the incentive of 100% allowances, will have been wholly undermined. Secondly, that undermining will have been achieved largely by the form by which the parties have chosen to substitute their original commitment with their new, later one. The operation of this tax regime and the generous allowances for which it provides would, on this view, be available to those parties who happen to have made a contract in the first period but not to others, even though there would be no difference in the terms of their respective commitments. It is highly unlikely that that was the purpose of the regime. Thirdly, for those parties with an existing contract at the end of the first period, the availability of the 100% capital allowances would depend on whether the parties chose to agree the new commitment by means of a variation of the contract or by means of making a completely new contract. Such a degree of taxpayer choice for no discernible reason is also highly unlikely to further the purpose of the provision. As the history of the regime for incentivisation of development within enterprise zones makes clear, it is the 10 year rather than 20 year time limit which lies at the heart of the statutory scheme." (R (oao Cobalt Data Centre 2 LLP) v. HMRC [2024] UKSC 40)
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Uncertainty of concepts used
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- Reliefs frequently depend on questions calling for evaluation of fact and law
"[90] As regards the taxpayers' second criticism, it cannot be doubted that HMRC's construction introduces questions, about what "same site" means and about what variations give rise to a different building, which the taxpayers' construction elegantly avoids. But legislation, and in particular tax legislation, frequently makes liability or relief dependent upon questions of classification which call for an evaluation of fact and law. This is the daily task of the tax tribunals, and of the courts on appeal. Those tasks are the very embodiment of the requirement to take a realistic view of the transaction to which it is said that the relevant statutory provision applies. So we do not attribute much weight to this criticism." (R (oao Cobalt Data Centre 2 LLP) v. HMRC [2024] UKSC 40)
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Interpretation of restrictions
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- General purpose of relief does not tell one purpose of restriction
"[82] We have no doubt that this is the purpose of the regime for enhanced capital allowances, viewed as a whole. But in our view that purpose is identified at too high a level of generality. Section 298 imposes a formulaic statutory time limit within which steps have to be taken in order to gain the relevant tax incentive. Identifying the relevant purpose requires an understanding why that time limit was imposed. In the present context the question is, what is the purpose of the requirement that expenditure within the 20 year period should have been incurred under a contract made within the 10 year period? In short, why should that matter?
[83] The point that emerges from the Treasury press statement is that the government conceived that the need to kick-start industrial development within enterprise zones was to be attempted by a package of measures, including both tax reliefs and reduced interference from planning and other regulatory controls, over a 10 year period.
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[92] If the purpose of the 10 year time limit in section 298 is, as we have concluded, to obtain within the first period a commitment to qualifying development, then some limitation of the developer's freedom of action during the second period seems to us to be a necessary price to pay. Of course, if the only recognisable purpose of section 298 was to incentivise development expenditure within 20 years, then a construction which imposed more limits upon the developer's freedom during the second period would be, for that reason viewed alone, less attractive than a construction which imposed fewer limits. But, as we have explained, that would be to adopt an identification of statutory purpose at too high a level of generality and one which pays no regard to the 10 year time limit imposed by section 298(1)." (R (oao Cobalt Data Centre 2 LLP) v. HMRC [2024] UKSC 40)
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- Not to be interpreted in such a way as to render the restriction devoid of rational purpose
"[107] For the reasons given above, we disagree with that conclusion. While we acknowledge that the language of section 298 will readily accommodate the interpretation placed upon it by the Court of Appeal, that interpretation wholly fails to implement the evident purpose of the 10 year time limit. Rather it renders it devoid of any rational purpose, other than a desire to encourage parties to structure alterations to their contractual relationship after the tenth anniversary date by using a particular drafting mechanism, namely variation rather than replacement. That cannot be a purpose sensibly to be attributed to the legislature. By contrast we consider that our preferred interpretation of section 298, as set out in paras 95 and 102 above, does fulfil its statutory purpose, and represents the more natural reading of the provision in its context." (R (oao Cobalt Data Centre 2 LLP) v. HMRC [2024] UKSC 40)
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- Restrictions not to be interpreted so as to defeat the purpose of the relief
"[102] On the other hand, the intended practical result of the regime is the construction of buildings in the enterprise zone. As is well known, and as Parliament must be taken to have been aware, major construction projects often involve the need to adapt to unforeseen circumstances as they proceed. Construction contracts are usually drafted to accommodate this to some extent, but further adaptation may be required by variation beyond those contractual parameters while still directed to completion of what is in substance the same building. If the valuable EZAs available in relation to the building were lost by reason of such adaptation by variation of the original contract, the risk would arise that the building contemplated by that contract might be abandoned and not finished, for commercial reasons. That outcome too would defeat the purpose of the regime. So it is reasonable to construe section 298(1)(b) as allowing EZAs to be claimed so long as, and to the extent that, the building project upon which the relevant expenditure is incurred in the enterprise zone is in substance the same as that contracted for under the original contract. In a practical regime of this kind, this minor extension of the object of section 298(1)(b) from its focus on the substance of the contractual commitments in place at the first 10 year anniversary to include a focus on the substance of the building project contemplated by the contractual arrangements in place at that anniversary is justified because the substance of the building project and the substance of the financial commitments in relation to it will be very closely aligned." (R (oao Cobalt Data Centre 2 LLP) v. HMRC [2024] UKSC 40)
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- Unlikely Parliament intended that time limit could be avoided by choice of parties to vary or replace contract
"[84] In our view, the taxpayers' construction of section 298(1) entirely fails to implement the statutory purpose of the 10 year time limit in a case such as the present, and all the more so if the taxpayers' case about the common law meaning of variation (as depending purely upon the parties' intention) is correct. If the taxpayers are right, then a developer could by a contractual variation made in the second period commit itself for the very first time to incurring expenditure on the construction of something entirely different (in terms of type, cost, quality, purpose, size and location) from anything to which the parties had committed during the first 10 year period, but still obtain 100% capital allowances for the expenditure, provided only that the parties to the original contract chose the mechanism of variation rather than replacement to make that fundamental change to their contractual relationship. That cannot be right.
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[150] We revert briefly at this point to the section 298 Issue. The difficulties and uncertainties involved in applying the general common law as regards treatment of a change in contractual relations as a variation or a replacement of an original contract are further reasons why it is not plausible to think that the legislative regime as regards what happens in the second 10 year period was supposed to operate solely by reference to common law theory. That would make this tax legislation too uncertain in its effect and would improperly elevate taxpayer choice as to how it should operate above implementation of the policy purpose behind the 10 year time limit." ​(R (oao Cobalt Data Centre 2 LLP) v. HMRC [2024] UKSC 40)
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- Post time limit flexibility achieved by exercising unilateral rights not undermining purpose of time limit
"[91] The taxpayers' third criticism that HMRC's construction hampers building development by being over-rigid and preventing alterations to meet changing conditions might have been a significant one, but for HMRC's concession (already recorded) that alterations in obligation triggered by the exercise of unilateral rights to select and to change contained in the original contract do occur "under" that contract, because they do not amount to a variation of it. Taken together those rights in the Golden Contract create a very substantial amount of choice, both as to buildings and sites, within which the developer can later decide how to deploy its expenditure within the zone. It is indeed a telling feature of this case that the Developer purported to be using no more than those unilateral rights in altering the obligations under the Golden Contract which led to the incurring of the Relevant Expenditure on DC2 and DC3. The parties to the Golden Contract chose no less than six alternative Works Options, on different sites, for different types of building and at a wide range of different prices between £183 million (Works Option 2) and £13,672,116 (Works Option 6). The Developer had a right and obligation to select any one of them during the second period. It also had a right to make further changes under clause 12 during the second period, without falling foul of section 298 (according to HMRC's construction, with that concession built into it). That flexibility does not undermine the purpose of the provision since it is the early commitment to investment on construction on the enterprise zone that, it is hoped, will spur other businesses to locate there and bring much needed new employment to the area even after the EZA regime has expired. A commitment to build a large power station, if it had been made within the 10 year period, may have prompted many more businesses to choose to locate to that zone than would the modest industrial building. The much later commitment to the bigger project does not therefore fulfil the statutory purpose and does not justify the valuable tax relief granted under the regime." (R (oao Cobalt Data Centre 2 LLP) v. HMRC [2024] UKSC 40)
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