A property developer has lost its case at the Court of Appeal concerning the very generous Enterprise Zone Industrial Building Allowances (EZAs) that were available under the old Industrial Building Allowances scheme that was wound down via Finance Act 2008. Under the scheme a taxpayer could obtain 100% writing down allowances. In this case the taxpayer was hoping to write off, for tax purposes, the whole of the cost of construction.
The issue for the taxpayer was that scheme was time-limited to encourage quick regeneration in the enterprise zones (EZ). The legislation stipulated that a contract had to be concluded within 10 years from when the site was included within an EZ and that qualifying expenditure had to incurred within a further 10 years under a contract concluded within the first 10-year time limit. The question before the CoA was whether the works undertaken to construct some data centres were incurred under an agreement concluded within the first 10-year time limit.
A day before the expiration of the first 10-year time limit the developer entered into a standard form design and build contract with a contractor. This contract gave the developer many different options to choose from when deciding what type industrial building could be constructed. A few years after the conclusion of this contract the developer and the contractor agreed a variation of the contract to build data centres that were not included in this initial package of development options. The closest option under the original agreement was a microchip manufacturing plant.
After a review of the contracts and the documentation issued around the contracts the CoA has concluded that the data centres must have been built under different contracts. There were too many discrepancies between the end buildings and the initial contracts for the CoA to consider that the buildings were built under the original agreement that was signed just before the time-limit ended. The developer cannot claim the EZAs, overturning the decision at the Upper Tribunal.
Industrial Building Allowances are no longer available but since late 2018 taxpayers can claim Structures and Building Allowances (SBAs). In a similar manner to the EZs the Government, as part of its Levelling Up Agenda, has now created Freeports where tax incentives similar to those granted within the EZs are available. Currently SBAs are available at the higher rate of 10% in Freeports as opposed to 3% nationwide but the legislation provides a sunset clause of 30 September 2026 for both bringing the building into use and incurring the expenditure, a far shorter time limit that under the EZA scheme. As the Freeports legislation doesn’t refer to contracts concluded within a specific time period, the chances of similar issues arising as in the case just decided are remote.
The decision can be found at: Colbalt Data Centre 2 LLP & Anor. The Commissioners for HMRC – Find case law (nationalarchives.gov.uk)
Please contact us if you have any questions on capital allowances or Freeports, these can be very generous reliefs but where transactions are not structured correctly, then these generous allowances could be lost.
