The case of Cobalt Data Centre v HMRC [2019] UKUT 0342 (TCC) concerns the availability of 100% enterprise zone allowances through the use of a “Golden Contract” for the creation of data centres at the former Siemens and Atmel semiconductor facility at Newcastle’s Cobalt Park.
The case first attracted headlines in 2016 “HMRC claws back celebrities’ tax profit on empty data centres” and this is the latest Tribunal decision that in part went in favour of the claimants and not HM Revenue & Customs (“HMRC”).
Background
The Tyne Riverside Enterprise Zone (“EZ”) was created in 1996 and allowed investors to claim 100% Enterprise Zone Allowances (“EZAs”) for expenditure on commercial buildings. EZAs were introduced to help bring jobs and infrastructure to disadvantaged areas of the UK.
Siemens was one of the first to benefit from this incentive opening up its £1 billion factory on Wallsend’s Silverlink Estate in 1997. However, following a downturn in the world price for computer memory chips, Siemens ceased production at the site the following year (1998).
Atmel took over the factory from Siemens and set about updating production lines for alternate sized semi-conductor production. Alas, the market and demand changed rapidly and Atmel soon found itself needing to restructure itself globally.
In 2006, Atmel realised that the enterprise zone at the site would shortly be coming to an end and took positive steps, by engaging advisers and developers who were knowledgeable about EZAs, and with whom Atmel had a good relationship, to ensure that the ability to claim EZAs on future development of the site would not cease.
Enterprise Zone designations lasted for 10 years; however, the availability of EZAs could last a further 10 years under a valid construction “Golden Contract” entered into during the life of the original zone.
Atmel set up a structure to preserve the validity of EZAs with a range of development options using a “Golden Contract” that was entered into the day before the enterprise zone at the site expired.
Atmel sold the companies which owned the site (and contained the “Golden Contract”) for development to a specialist EZ property development team who raised monies from wealthy investors who were able to help finance construction in exchange for accelerated tax returns and future property income.
Disputed Points
HMRC rejected the validity of the “Golden Contract” on the basis that Change Orders after the original EZ designation effectively created a new contract beyond the 10 year expiry deadline. They also rejected the commercial reality of the partnerships (the ultimate EZA claimants) and the valuation methodology used to calculate the actual qualifying expenditure.
An unusual feature of the appeal is that Cobalt also considered that, in denying the allowances that had been claimed, HMRC were acting contrary to their published practice which gave them a legitimate expectation that EZAs would be available and they therefore also instituted judicial review proceedings.
Decision
Tax Tribunal concluded that the appeal against HMRC’s closure notices should be allowed in part and that the claim for judicial review is allowed.
The claimants should be entitled to claim EZAs but not on the full amount claimed and not to the extent limited by HMRC. Tribunal extended the time limit for appeal until both parties have time to consider the ruling and submit alternate apportionment calculations on what proportion of the price paid qualifies for EZAs.
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