The Supreme Court sets new precedent on Enhanced Capital Allowance claims in enterprise zones.
Background:
The Tyne Riverside Enterprise Zone, which included the Cobalt Business Park, was established for the period 19 February 1996 to 18 February 2006. In early 2006, the site’s owner, Atmel took steps to preserve the ability to claim Enhanced Capital Allowances (ECAs) in respect of future construction work at the site. Amtel therefore incorporated two wholly owned and controlled special purpose companies: Highbridge North Tyneside Developer One Ltd and Highbridge North Tyneside Contractor One Ltd.
On 17 February 2006, two days before the deadline specified in Section 298(1) of the Capital Allowances Act 2001 (CAA 2001), the two companies entered into a type of building contract known as a golden contract. The feature of the contract was that, rather than prescribing one or more construction projects, it sets out a range of alternative construction projects. Three buildings were built although these differed in significant respects from the subject matter of the works options set out in the golden contract.
In April 2011, the taxpayers purchased the benefit of the golden contract in relation to DC2 and DC3. In their tax returns for the year 2010-2011, the taxpayers claimed capital allowances under the ECA regime pursuant to Section 298(1)(b) of the CAA 2001 Act, arguing they had incurred expenditure under the golden contract in respect of DC2 and DC3. Using DC2 as an illustration, the second appellant claimed capital allowances in the sum of £153 million. By notices issued on 28 July 2016, HMRC denied the taxpayers’ ECA claims.
The Upper Tribunal (UT) sided with the appellants although HMRC appealed and the Court of Appeal (CoA) upheld the UT’s decision, but ruled that the expenditures did not satisfy the requirements of Section 298(1) as they had not been incurred under a valid contract. The taxpayers appealed to the Supreme Court.
Decision:
The Supreme Court unanimously dismisses the appeal. The Supreme Court did not agree with the Court of Appeal's reasoning when it rejected the taxpayers’ claim for ECAs due to contractual variations. Instead, the Court noted that Section 298(1)(b) only allows capital allowances under the ECA regime to be claimed for expenditure where, on the tenth anniversary of the site being included in the enterprise zone, there is a contractual relationship under which the expenditure had either been agreed upon in terms, or else it arose from building work on that site which the developer by then had a contractual right to require. In this case, the relevant expenditure does not meet this test.
The Court reached this conclusion by relying on the purposive interpretation of Section 298(1) and the intent behind the 10-year limit. This limit was introduced to ensure timely and significant investments within enterprise zones.
While the parties were entitled to alter contracts, such alterations could not change the 10-year limit. The unilateral rights to change were deemed insufficient to bridge the temporal divide imposed by Section 298(1)(b). Moreover, the Court engaged in a discussion regarding the distinction between contractual variations and replacements. It concluded that any substantial alterations after the 10-year period would actually amount to a new contract and would, therefore, not qualify for ECAs.
Implications:
The Supreme Court issued a landmark judgement setting out the conditions under which capital allowance is available for expenditure incurred within enterprise zones. This has far-reaching implications for developers and contractors alike operating in enterprise zones. It makes it clear that any alteration of contractual terms after the 10-year limit would not alter the 10-year limit but could result in the alterations being regarded as a new contract. This decision clearly shows a strict adherence to the time limits for such investment.