Cobalt Data Centre 2 LLP & Anor, R. (on the application of) v Revenue and Customs

Factual and Procedural Background

An enterprise zone covering The Site in The City was designated on 19 February 1996. Within the initial ten-year window allowed by the Capital Allowances Act 2001 (“the 2001 Act”), two special-purpose companies wholly owned by the same corporate parent – “Company A” (developer) and “Company B” (contractor) – executed what later became known as the “Golden Contract”. That contract obliged Company B to construct whichever one of six fully-specified building projects Company A selected by service of a Notice to Proceed.

After the ten-year cut-off but before the statutory long-stop of twenty years, the parties agreed two written amendments (“Variation 1” and “Variation 2”) that permitted Company A to commission more than one of the listed projects. Thereafter, Company A issued:

• Change Order 1 – resulting in construction of building “DC1”.
• Change Orders 2 and 3 – calling for two further data-centre shells (“DC2” and “DC3”) on different parts of The Site.

Company C and Company D (limited-liability partnerships; together, “the Appellants”) purchased from Company A the leases and contractual rights to DC2 and DC3 and claimed 100 % Enterprise Zone Allowances (“EZAs”) on their acquisition costs. The Respondent, “Government Agency”, denied the allowances, asserting that the expenditure fell outside section 298 of the 2001 Act.

The First-tier Tribunal, Upper Tribunal and Court of Appeal each grappled with whether the relevant expenditure was “incurred under a contract entered into” in the initial ten-year period. The Upper Tribunal found for the Appellants; the Court of Appeal reversed. The Appellants then brought the present appeal to the Supreme Court.

Legal Issues Presented

1. The Clause 12 Issue: Did Change Orders 2 and 3 validly invoke Company A’s unilateral right to “change” the works under clause 12 of the Golden Contract?
2. The Section 298 Issue: Does section 298(1)(b) of the 2001 Act permit 100 % EZAs where the relevant expenditure arises from a contractual variation agreed after the initial ten years but before twenty years?
3. The Variation Issue: Assuming section 298 is satisfied, were the 2011 alterations to the Golden Contract a “variation” or a “replacement” of that contract under the common law?

Arguments of the Parties

Appellants' Arguments

• The expenditure on DC2 and DC3 was incurred under the original Golden Contract because Change Orders 2 and 3 were authorised by clause 12, which allowed substitution of “any work”.
• Alternatively, even if clause 12 did not suffice, the 2011 documents merely varied the Golden Contract; section 298 treats expenditure under such a variation as expenditure “under” the original contract.
• The Respondent was procedurally barred from advancing a new statutory-construction argument in the Supreme Court.

Respondent's Arguments

• Clause 12 permits only alterations to the design, quality or quantity of the selected option; it does not authorise wholly new buildings on other sites.
• Section 298 requires that, by the tenth anniversary, the developer must already be contractually committed to the specific expenditure; post-cut-off variations that change the building or site fall outside the statute.
• The 2011 documents were so fundamentally different that they replaced, rather than varied, the Golden Contract; consequently the expenditure arose under a post-cut-off contract.

Table of Precedents Cited

Court's Reasoning and Analysis

Section 298 Issue. The Court began with the statute’s purpose: 100 % EZAs are an incentive to commit to qualifying construction within ten years. If post-cut-off variations could fundamentally alter the project while still qualifying, the ten-year limit would be hollow. The Court therefore held that section 298(1)(b) requires, by the tenth anniversary, a substantive contractual commitment to the expenditure eventually incurred. Subsequent unilateral rights to “select” or to make minor “changes” may be exercised, but a later agreement that introduces a different building or site cannot qualify.

Procedural objection. The Appellants’ claim that the Respondent was barred from raising the statutory-construction argument was rejected: the point had been aired below and involved pure law; no unfair prejudice was shown.

Clause 12 Issue. Analysing the definitions within the Golden Contract, the Court concluded that clause 12 permits only alterations to the design, quality or quantity of the particular Works Option selected. DC2 and DC3 differed in purpose, size and location from the previously selected option and therefore lay outside clause 12. The Change Orders were not unilateral variations authorised by the contract.

Variation Issue (obiter). While unnecessary to the result, the Court clarified that, under the common law, whether an alteration is a variation or replacement ordinarily depends on the parties’ objectively assessed intention, albeit subject to a boundary where the law will not give effect to a plainly absurd characterisation. On the facts, however, the expenditure failed section 298 regardless of that characterisation.

Holding and Implications

APPEAL DISMISSED.

The expenditure on DC2 and DC3 was not incurred “under a contract entered into” within the initial ten-year period for the purposes of section 298(1)(b) of the 2001 Act. Consequently, the Appellants are not entitled to claim 100 % Enterprise Zone Allowances on those costs.

Practically, the decision tightens the availability of EZAs by confirming that developers must secure substantive contractual commitments within the first decade; post-cut-off variations that alter the building or site will not suffice. No new precedent on common-law variation was set, but the Court’s obiter remarks reinforce that party autonomy is wide yet not unlimited.