R (on the application of Cobalt Data Centre 2 LLP and another) v Commissioners for His Majesty’s Revenue and Customs [2024] UKSC 40

Data centre developers claimed enterprise zone capital allowances for construction expenditure incurred in the second 10-year period under a 'golden contract' made within the first period. The Supreme Court dismissed the appeal, holding that section 298 requires contractual commitment to the specific expenditure by the tenth anniversary, not merely that expenditure occurs under a varied version of the original contract.

Facts

The appellants, Cobalt Data Centre 2 LLP and Cobalt Data Centre 3 LLP, claimed 100% enterprise zone capital allowances under the Capital Allowances Act 2001 for expenditure on constructing data centres DC2 and DC3 in the Tyne Riverside Enterprise Zone. The expenditure was incurred more than 10 years but less than 20 years after the site was included in the zone. To qualify under section 298(1)(b), the expenditure had to be incurred under a contract entered into within the first 10 years. The taxpayers relied on the ‘Golden Contract’ made on 17 February 2006, two days before the 10-year deadline, which provided for selection between six alternative building projects. During the second period, variations were agreed permitting multiple selections, and Change Orders were issued purportedly under clause 12 of the contract for DC2 and DC3, which differed substantially from the original Works Options.

The Golden Contract

The Golden Contract was a design-and-build contract incorporating the JCT Standard Form with amendments. It gave the Developer the right and obligation to select one of six specified Works Options, each describing a different building project on different sites within the enterprise zone. Clause 12 provided a right to change the design, quality or quantity of ‘the Works’ subject to contractor consent for design changes.

Issues

Three main issues arose: (1) The Clause 12 Issue: whether the expenditure was triggered by the Developer’s unilateral rights under clause 12 of the Golden Contract in its original form; (2) The section 298 Issue: whether section 298 permits expenditure incurred under a variation made in the second period of a contract made in the first period to qualify; (3) The Variation Issue: whether alterations amounted to variation or replacement of the Golden Contract.

Judgment

The Section 298 Issue

The Supreme Court held that section 298 requires the court to examine whether there was a contractual commitment to the relevant expenditure by the tenth anniversary. Lord Briggs and Lord Sales stated:

“We consider that section 298(1)(b) requires the court to look back to the end of the first period… and ask this question: Was there by the tenth anniversary 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 tenth anniversary, the developer by then had a contractual right… to require?”

The Court rejected the taxpayers’ construction that expenditure under a contractual variation made in the second period qualifies as expenditure under the original contract:

“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…”

The Clause 12 Issue

The Court held that clause 12 did not permit the Developer to require construction of DC2 or DC3. The right to change was expressly limited to alterations or modifications of the design, quality or quantity of ‘the Works’ as defined, meaning the particular Works Option selected. The Court stated:

“The right to require a Change plainly did not extend to changing from one (already selected) building to that specified in a different Works Option, still less to choosing, by way of a supposed Change, some completely different type of building, on a different site, outwith the confines of any of the six Works Options.”

The Variation Issue

Though not determinative, the Court addressed the common law distinction between variation and replacement. The Court confirmed that parties generally have freedom to choose between these mechanisms, but noted limits exist at the margins. Lord Sumption’s statement in Plevin was cited that the parties’ description would not be conclusive if the variation substituted a different subject matter.

Implications

This judgment clarifies the operation of enterprise zone capital allowance time limits under section 298 of the Capital Allowances Act 2001. It establishes that the statutory purpose requires genuine contractual commitment to qualifying expenditure by the first 10-year anniversary, not merely formal maintenance of an original contract through variation. The decision limits the effectiveness of ‘golden contracts’ designed to preserve flexibility while claiming allowances for expenditure not contemplated at the relevant date. It also provides guidance on the common law distinction between contractual variation and replacement, confirming the primacy of party intention within certain limits.

Verdict: Appeal dismissed. The Supreme Court held that 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) of the Capital Allowances Act 2001, albeit for different reasons than those given by the Court of Appeal.

Source: R (on the application of Cobalt Data Centre 2 LLP and another) v Commissioners for His Majesty's Revenue and Customs [2024] UKSC 40