The relevant building site was within an enterprise zone between February 1996 and 18 February 2006. In 2006 the developer and the contractor, both limited companies, were established as special purpose vehicles, with a view to further development of land within the enterprise zone; and to ensure that the ability to claim enterprise zone allowances (“EZAs”) on future development of the site would not cease. Under section 298 of the Capital Allowances Act 2001, EZAs were only allowable if the expenditure was incurred during a particular time frame, which was (a) ten years after the site was first included in the zone, or (b) if the expenditure was incurred under a contract entered into within those ten years, 20 years after the site was first included in the zone. On 17 February 2006, the day before the enterprise zone at the site expired, the contractor and developer executed a contract (“the golden contract”) which contained a number of different works options and defined “the works” as “the design, construction and commissioning the Employer wishes to obtain for the Works Option stated in the Notice to Proceed...”. In February and April 2009, the parties effected two variations to the golden contract which permitted the employer to submit notices to proceed in respect of combinations of specified works options. On 20 November 2009 and 1 April 2011, the developer’s agent issued two works orders, which referenced the works options under the golden contract and required the contractor to undertake the design and construction of two data centres within a specified area. In January and March 2011 two limited liability partnerships (“the taxpayers”) were incorporated. In April 2011, the developer paid the contractor the sums due in respect of the construction of the data centres. Pursuant to a separate sale and development agreement, the developer entered into a deed of assignment under which it assigned the benefit of its rights under the golden contract in respect of the two data centres to the taxpayers. The arrangements under which the taxpayers acquired their interests in the data centres were notified to the revenue under the disclosure of tax avoidance schemes legislation. The revenue opened enquiries into the partnership tax returns and, following completion of their enquiries, issued closure notices concluding that the taxpayers were not entitled to the allowances claimed. The taxpayers appealed to the First-tier Tribunal (Tax Chamber) against the revenue’s closure notices and the appeals were transferred to the Upper Tribunal (Tax and Chancery Chamber). The Upper Tribunal allowed the appeals in part, concluding that, whilst neither of the taxpayers was, in the tax year ended 5 April 2011, entitled to EZAs on the basis of the whole of the price paid by them for their respective data centre, each of them was entitled to EZAs on some part of the price paid. It found that the works orders made by the developer’s agent involved a contract to construct a materially different building on a wholly different site, at a substantially different price, but held that none of the differences was inconsistent with the parties having a common intention that the golden contract should be amended, as opposed to rescinded. The revenue appealed, contending that the taxpayers had no entitlement to EZAs at all, because (i) until such time as a notice to proceed had been issued the golden contract was not a contract of the kind contemplated by section 298 of the Capital Allowances Act 2001. It was no more than an option given to the developer; and it could not be said that any expenditure on the construction of a building would be incurred at all, let alone on what kind of building. (ii) The changes made to the contract by the two works orders issued by the developer’s agent were of such magnitude that they amounted in law to a new contract which was made outside the ten-year period. Accordingly, any expenditure was not incurred under a contract made within the ten-year period. The question of whether alterations to a contract amounted to a rescission and substitution was a question of law to be decided by a comparison between the original obligations and the new ones, it was not a question of the intention of the parties.
On the revenue’s appeal—
Held, appeal allowed. (1) The questions to be answered under section 298 of the Capital Allowances Act 2001 were: (i) Had expenditure been incurred? (ii) If yes, had it been incurred on the construction of a building? (iii) If yes, was the building on a site in an enterprise zone? (iv) If yes, was the expenditure incurred under a contract entered into within ten years after the site was first included in the zone? (v) If yes, was the expenditure incurred within 20 years after the site was first included in the zone? The legislation did not mandate any particular kind of contract; and the exercise of answering those questions was a retrospective one, looking back from the time that the expenditure was incurred. The drafter of the Act was alive to the question whether expenditure had been incurred, as shown by section 5(1). By contrast, section 298 was not concerned with whether expenditure had been incurred within the ten-year period (as opposed to the 20-year period), but only whether a contract had been entered into within the shorter period. The contract under which the expenditure was incurred had to be the same contract as that which was entered into within the first ten-year period. It could not, for example, have been Parliament’s intention that parties could enter into a contract within the ten-year period to construct a building in an enterprise zone, complete construction within that period and then nine years later purport to vary that contract so as to agree to construct a second building (paras 45–46).
(2) The extent of a contractual power of variation had to be a question of interpretation of the contract in question. In regards to the issue of whether alterations to a contract amounted to a rescission, the question of intention was not at large; still less was it to be equated with a desire to achieve a particular result. That approach was not confined to the application of legislation. The parties’ objective intention had to be deduced from what they said and did. That was not to say that the expressed intention of the parties was irrelevant, but that expressed intention was no more than one of the objective facts that the court had to take into account. In marginal cases, it might be an important one. It followed that, in taking as their starting point the inference that the parties’ desire was to retain the ability to claim EZAs, equating that desire with the parties’ objectively ascertained intention, and then asking whether the facts were inconsistent with that desire, the Upper Tribunal erred in principle. The Upper Tribunal was wrong to reject the submission that, where the differences or inconsistencies between the later agreement and the existing agreement were so fundamental as to go to the root of the contract, then that was sufficient to constitute an implied rescission. The revenue commissioners were correct in their contention that a contract to construct a materially different building on a wholly different site and at a substantially different price satisfied whatever was the right test to result in a new contract rather than a variation. Whether that also resulted in a rescission did not matter. All those features led inexorably to the conclusion that the data centres were not constructed under a contract entered into within the ten-year period. If, therefore, the parties did not rescind the golden contract (in the sense of abrogating it) the result of what they said or did was the making of a new contract. Accordingly, the taxpayers were not entitled to any of the allowances that they claimed, and the question whether the Upper Tribunal was right or wrong to apportion the expenditure became academic (paras 52–53, 114, 115–118, 120–121, 124, 125, 134, 147, 155–156).
Adrian Williamson KC, Nicola Shaw KC and Michael Jones KC (instructed by Macfarlanes LLP) for the taxpayers.
David Ewart KC, Stephen Kosmin, Edward Waldegrave and Laura Ruxandu (instructed by Solicitor Revenue and Customs) for the revenue.