Taxation – Capital allowances – Enterprise zone – Two buildings being constructed within enterprise zone – Appellants claiming enterprise zone allowances on expenditure incurred – Respondent commissioners refusing allowances and issuing closure notices – Court of Appeal upholding respondents’ decision – Appellants appealing – Whether expenditure incurred “under a contract” entered into within first 10-year period within section 298(1)(b) of Capital Allowances Act 2001 – Appeal dismissed
The appellants purchased the benefit of a “golden contract” for the construction of two buildings within an enterprise zone. The contract included a variation clause which permitted the developer unilaterally to vary it in certain respects.
Section 298(1) of the Capital Allowances Act 2001 provided that the time limit for expenditure on the construction of a building was “(a) 10 years after the site was first included in the zone, or (b) if the expenditure is incurred under a contract entered into within those 10 years, 20 years after the site was first included in the zone”. The contract here was entered into during the first 10-year period but, during the second 10-year period, variations was made pursuant to which expenditure was incurred.
The appellants argued that the requirements of section 298(1)(b) of the 2001 Act were met so that the whole of the price they had paid to acquire the benefit of the contract qualified for initial 100% enterprise zone capital allowances (EZAs). The respondent commissioners refused their application, finding that the requirements of section 298(1)(b) had not been met and no EZAs were payable.
The Upper Tribunal agreed that the requirements of section 298(1)(b) had been met: [2019] UKUT 342 (TCC). The Court of Appeal allowed the respondents’ appeal: [2022] EWCA Civ 1422. The appellants appealed to the Supreme Court. The issue was whether the expenditure was incurred “under a contract” entered into during the first 10-year period.
Held: The appeal was dismissed.
(1) Section 298 imposed a formulaic statutory time limit within which steps had to be taken to gain EZAs. Identifying the relevant purpose required an understanding of why that time limit was imposed. In the present context, the question was 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.
The court was required first to identify the expenditure, the incurring of which gave rise to the claimed initial allowances. That expenditure was necessarily “on” the construction of a building on a site in an enterprise zone. The date upon which the expenditure was incurred had to be ascertained. If the date fell within the first period, the 10-year time limit in section 298(1)(a) was satisfied. If the expenditure was incurred outside the 20-year period, it failed the 20-year time limit in section 298(1)(b). If the expenditure was incurred during the second period, it was necessary to ask “under” what contract it was incurred and whether that contract was made during the first period.
(2) The object of the section 298 regime was to incentivise certain behaviour in relation to the enterprise zone within the specified first 10-year period with a view to achieving a commitment to the construction of buildings within the zone which would promote the economic revitalisation of the area. The behaviour to be incentivised in the first period was whatever was required for a sufficient commitment to pay the capital expenditure to arise in that period, which might be the construction of a relevant building or by entering into an unconditional obligation to pay the construction costs in advance, or the making of a contractual commitment to construct such a building at a later stage (section 298(1)(b)).
On a proper reading of the words “under a contract” in that context, the relevant contractual commitment need not be unconditional, but it had to be one which bound both the developer and the contractor. The developer had to have accepted an obligation by the 10th anniversary date to proceed with some form of relevant development, even if it had a right to select which one.
(3) Section 298(1)(b) required the court to look back to the end of the first period: ie the 10th anniversary of the date when the site upon the development of which the relevant expenditure was actually incurred was first included within an enterprise zone, and ask whether, by the 10th anniversary, there was a contractual relationship under which the relevant expenditure had either been agreed upon in terms, or which arose from building work on that site which, as at the 10th anniversary, the developer had a contractual right to require and/or the right to change. Only if the answer to that question was “yes” was the expenditure incurred “under a contract entered into within those 10 years” as required by section 298(1)(b).
On the other hand, the intended practical result of the regime was the construction of buildings in the enterprise zone. Major construction projects often needed to adapt to unforeseen circumstances as they proceeded. Construction contracts were usually drafted to accommodate that to some extent, but further adaptation might be required by variation beyond those contractual parameters while still directed to completion of what was in substance the same building.
If the valuable EZAs available in relation to the building were lost by reason of such 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 would defeat the purpose of the regime. So it was 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 was incurred in the enterprise zone was in substance the same as under the original contract.
(4) In a practical regime of this kind, the 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 building project contemplated by the contractual arrangements in place at that anniversary was justified because the substance of the building project and the substance of the financial commitments in relation to it would be closely aligned.
In the present case, on the proper interpretation of the 2001 Act, the relevant expenditure was not incurred under a contract made before the end of the first 10-year period, as required by section 298(1).
Laurence Rabinowitz KC and Niranjan Venkatesan (instructed by Macfarlanes LLP) appeared for the appellant; David Ewart KC, Stephen Kosmin, Edward Waldegrave and Laura Ruxandu (instructed by HMRC Solicitors) appeared for the respondent.
Eileen O’Grady, barrister
