In what appears to be a case confined to the application of the now expired capital allowances regime in respect of “enterprise zones”, the UK Supreme Court in Cobalt Data Centre, once again, gave an important lesson that is always worth bearing in mind for taxpayers. That lesson is that courts will interpret legislation purposively, viewing the facts realistically, and will look to materials beyond the legislation itself in carrying out that exercise. This reminder will be of particular interest in circumstances where, on its face, taxing statutes (and their effects) are legitimately unclear or, equally, produce outcomes which may appear as an oddity. 

What was Cobalt Data Centre about?

In Cobalt Data Centre, two special purpose subsidiary vehicles (of the same corporate parent) (together, the SPVs) were incorporated with a view to developing land within an “enterprise zone” (for the purposes of the Capital Allowances Act 2001) known as The Tyne Riverside Enterprise Zone. Those SPVs entered into a Golden Contract under which one of the SPVs (the Developer) leased part of that enterprise zone and the other (the Contractor) was to carry out the building works in that part of the enterprise zone. The Developer was able to select the building works to be carried out from a range of options, and also had a right to change specifications (subject to the Contractor's consent, not to be unreasonably withheld). The Developer exercised these rights and subsequently transferred the benefit of the Golden Contract (and its lease) to two LLPs via a sale and development agreement between the Developer, the Contractor and the two LLPs (the SDA). The SDA provided for a distinct set of obligations in respect of the building works and eventually three data centre buildings were built, DC1, DC2 and DC3. The two LLPs were the taxpayers in this case (having made the capital allowances claims in question). The position in relation to DC1 was not at issue; the decision concerns HMRC's challenge of the capital allowances claims in respect of the expenditure incurred on buildings DC2 and DC3.

Could the taxpayers claim capital allowances under the enterprise zone regime in respect of the expenditure incurred on buildings DC2 and DC3?

One of the key points concerned the application of the time limits in section 298 of the Capital Allowances Act 2001. The expenditure incurred on buildings DC2 and DC3 (the Expenditure) would have fallen within section 298 if either: 

1. the Expenditure was incurred within 10 years of the relevant zone being designated as an enterprise zone; or 
2. the Expenditure was incurred within 20 years of the relevant zone being so designated and it was incurred under a contract entered into within the 10-year expiry period (referred to in 1.).  

The Golden Contract was entered into two days before the end of the 10-year expiry period for The Tyne Riverside Enterprise Zone, but it was amended after the end of that period by the SDA, and the Expenditure fell within the scope of the amendment rather than the original contract.  

How did the Supreme Court carry out the purposive interpretation exercise?

It is trite to say that the construction of legislation, in particular tax legislation, requires an analysis of the purpose of the relevant legislation alongside a realistic view of the facts in question. On this point, the Supreme Court (unsurprisingly) began by citing Rossendale, which is generally considered to be the authoritative statement of the status quo of what is often referred to as the Ramsay principle. Ultimately, the external aides for that exercise will be materials such as Law Commission reports and Government White Papers. In the same vein (though, not referred to in this case) explanatory notes or policy papers will be helpful (though, not determinative) to any statutory interpretation exercise. 

In conducting that exercise, the Supreme Court started chronologically by first reviewing the Treasury's press statement which accompanied the 1980 Budget Statement (given that the enterprise zone regime was introduced in 1980, with the provisions for capital allowances included in the Finance Act 1980). It is interesting to note that the Supreme Court effectively treated that press statement as conclusive and did not review other materials which may have shed light on the purpose of the legislation. On the question of purpose, the taxpayers had submitted an argument that the general purpose of the enterprise zone regime was to encourage the development of relevant buildings within an enterprise zone by offering a tax incentive to developers and, on that basis, a reading of the legislation which enhanced that incentive should be preferred over a reading which reduced it. 

That, in the Supreme Court's view, did not wash with the Treasury statement’s focus on the 10- and 20- year time limits as a key feature of the enterprise zone regime. The fact that the Treasury statement appeared to set out a formulaic statutory time limit within which steps had to be taken to gain the relevant tax incentive suggested that a reading of the legislation along the lines of that proffered by the taxpayers was "at too high a level of generality". 

Taking that view further, the Supreme Court tested the counterfactual position - i.e., what if, notwithstanding the Supreme Court's immediate conclusions, the taxpayers’ views were indeed correct? The Supreme Court found that, on the taxpayers’ reasoning, if the parties had entered into a relevant contract during the 10-year period but then agreed a "fundamental change" to that contract by way of variation (rather than a wholesale replacement of that contract), the expenditure incurred in respect of that contract would remain within section 298. That outcome "entirely fails to implement the statutory purpose of the 10 year time limit". Take, for example, a contract which at first stipulated building a small industrial unit in an enterprise zone but which was later varied to provide for the construction of a large power station with a far greater cost. Putting aside whether that would be permissible as a matter of contract law, it could not have been intended by the legislation that the taxpayer would be entitled to make a capital allowances claim for the expenditure under the enterprise zone regime in those circumstances. That is because the purpose of the 10-year time limit is to secure a commitment from the taxpayer by the end of that period to incur relevant expenditure which would eventually qualify for a capital allowances claim. 

The reminder for taxpayers here is that the application of legislation is not necessarily limited to what the legislation states on its face, nor is it limited by common law meanings of phrases which may be used by (or relevant to the application of) a piece of legislation. Instead, a wider purposive interpretation exercise should always be contemplated. In a tax context, with regards to Finance Acts (and Bills) in particular, there is often a wealth of supporting material which will all be relevant to that exercise. 

What about the statutory language itself?

One point which seems to have gone unnoticed (perhaps because it is somewhat obvious) is where the Supreme Court stated that the purposive construction approach does not "downplay the importance of the language of the provision to be construed", citing another Supreme Court judgment in R (O) v Secretary of State for the Home Department. 

The Supreme Court considered that where expenditure was incurred between the 10- and 20-year time limits described above, that gave rise to the questions of what “contract” that expenditure was incurred under and whether that contract was made during the 10-year time limit. 

Whether that approach was permissible linguistically required an analysis of the wording of section 298 itself which refers to "expenditure incurred under a contract" and, specifically, whether that required the identification of a single contract. The Supreme Court noted that "the general rule" in statutory language is that the singular includes the plural and concluded that it would not make a difference whether the requisite contractual commitment was constituted by multiple contracts. Presumably, the Supreme Court intended to add that this rule applies vice versa but omitted to do so. 

It is interesting to note that the Supreme Court did not make reference to section 6 of the Interpretation Act 1978 to make this point, as it would have added more force to the preferred interpretation as opposed to relying on the vagueness of a general rule – it is possible that the Supreme Court was indeed applying section 6 of the Interpretation Act 1978 without making that point explicit. Perhaps though, that would have added further complexity to the analysis because the rule concerning words in the plural including the singular (and vice versa) in section 6 of the Interpretation Act 1978 applies only in the absence of a "contrary intention". That being said, there are existing precedents which either: take the same approach as the Supreme Court and consider the rule an obvious one which does not merit further consideration, and/or impose a relatively high bar for the "contrary intention" test.

The key takeaway here is, once again, that legislation must be applied with a somewhat “wide lens” and that, whilst purposive interpretation is crucial in that exercise, the language itself (perhaps paradoxically) cannot be taken purely at face value.