R (on the application of Cobalt Data Centre 2 LLP and another) (Appellants) v Commissioners for His Majesty's Revenue and Customs (Respondent)

LORD BRIGGS AND LORD SALES (with whom Lord Burrows, Lady Rose and Lord Richards agree):

Introduction – the Issues

1. This appeal concerns the conditions for the availability of the initial 100% capital allowances (“EZA”) regime arising from expenditure incurred in the construction of buildings in an enterprise zone under the Capital Allowances Act 2001 (“the 2001 Act”). Section 298 of the 2001 Act provides that:

   1. For the purposes of sections 299 to 304, the time limit for expenditure on the construction of a building on a site in an enterprise zone is-

   1. 10 years after the site was first included in the zone, or

   1. If the expenditure is incurred under a contract entered into within those 10 years, 20 years after the site was first included in the zone.”

1. In the present case the relevant expenditure was incurred more than 10 years but less than 20 years after the site was first included in the zone, so that the taxpayer was required to show that the expenditure was incurred “under a contract entered into within those 10 years” within the meaning of section 298(1)(b). We will refer to years 1 to 10 as the first period and to years 11 to 20 as the second period.

1. The contract upon which the taxpayers rely for this purpose in the present case is a type of building contract which has come to be known as a golden contract, and it has been labelled “the Golden Contract” in these proceedings. The distinguishing feature of a golden contract in this context is that, rather than prescribe one or more construction projects which the contractor undertakes to carry out, it sets out a range of alternative construction projects, each described in detail, between which the developer is entitled to (and must) choose, by service of a specified notice upon the contractor. The contract consists of more than a series of mere options (although that is how the specified alternatives were labelled in this Golden Contract), because the developer is required to choose one within a specified time frame, so that the contractor has a contractual right from the outset that one of the specified building projects will be commissioned. A golden contract creates a regime according to which the developer’s obligation to proceed with a development is matched by the developer’s right to select between specified projects, rather than granting an option or set of options leaving the developer free to do nothing. There is therefore a commitment from the outset to the carrying out of a building project on a site within the enterprise zone, but the developer retains the right to decide which one.

1. The Golden Contract in the present case specified six alternative projects, each for different buildings on different sites (although many of the sites overlapped) within the same enterprise zone, each identified by a description of the type of building, the site on which it was to be constructed, and by reference to an appendix setting out the agreed specification in great detail. It is common ground that the Golden Contract, as originally made and as it remained at the end of the first period, required the developer to select one of the alternative projects. For ease of reference, whilst it should be emphasised that it imposed an obligation on the developer to make a selection, we will call it the developer’s right to select.

1. Building contracts commonly contain a right for the developer to insist on changes to be made in the specification of the project as it goes along, usually with a right conferred on the building contractor to refuse to accept unreasonable changes, and provision for payment of the resulting extra cost (if any). The Golden Contract included such provision. We will call it the developer’s right to change.

1. The combination of the developer’s right to select and the developer’s right to change provided the developer under the Golden Contract with valuable flexibility to make significant choices and adjustments to the projects and therefore to the expenditure to be incurred during the second period (ie between the tenth and twentieth anniversaries of the relevant site being included in the enterprise zone), without losing the benefit of the EZA regime. This is because both the right to select and the right to change are unilateral rights conferred on the developer by the Golden Contract in its original form. Expenditure incurred by reason of the exercise of either of those rights is, as the respondents (“HMRC”) accept, expenditure incurred “under” the Golden Contract. Because the Golden Contract was made during the first period, any expenditure incurred in the second period as a result of the exercise of those rights would satisfy the composite time limit in section 298(1)(b).

1. Under the common law which regulates the legal relationship between contracting parties, there is of course freedom to make almost any alteration to this relationship by a further agreement. This may be achieved (broadly speaking) by one or other of two mechanisms. The first is to vary the existing contract by altering one or more of its terms. The second is to put an end to the existing contract and replace it with a new one. We will call the first mechanism variation and the second replacement. The second has tended to be called rescission during argument, but this is a word with a variety of meanings, only one of which is to put an end to a contract by a further agreement. Furthermore rescission says nothing about any continuing contractual relationship, whereas replacement does. It is again common ground that both variation and replacement require a further agreement which satisfies the common law requirements of a binding contract, including fresh consideration.

1. The facts which have given rise to the issues to be determined on this appeal may, in a nutshell, be summarised as follows. The Tyne Riverside Enterprise Zone was established on 19 February 1996. On 17 February 2006 two wholly owned and controlled special purpose subsidiaries of the same corporate parent made the Golden Contract for the construction of a building in that enterprise zone just two days before the expiry of the first 10 year period. The parties were Highbridge North Tyneside Developer One Limited (called the Developer) and Highbridge North Tyneside Contractor One Limited (called the Contractor). The appellant taxpayers are successors in title to the rights of the Developer. The Golden Contract gave the Developer the right of selection of one out of six specified projects, called Works Option 1 to Works Option 6. By clause 12 of the JCT Standard Form as incorporated in and amended by the Golden Contract (“clause 12”), the Developer was given a right to change the design, quality or quantity of “the Works” (as defined) included in the detailed specifications within each Works Option, subject to a requirement that the Contractor consent to a change to design, such consent not to be unreasonably withheld or delayed, and with provision for extra payment to the Contractor where changes necessitated extra work.

1. At various times during the second period the Developer purported to exercise both the right to select and the right to change. The Developer and the Contractor also purported during the second period to vary the Golden Contract so as, inter alia, to enable the Developer to select more than one of the specified Works Options. Thereafter the Contractor built and the Developer and the taxpayers (the Developer’s successors) paid for three buildings, called DC1, DC2 and DC3. The present appeal is concerned with a claim for EZAs in respect of buildings DC2 and DC3. Those buildings differ in significant respects from the subject matter of any of the Works Options set out in the Golden Contract in its original form. The expenditure incurred by the Developer and the taxpayers on DC2 and DC3 within the second period (“the Relevant Expenditure”) constitutes the basis of the claim to 100% capital allowances in issue on this appeal.

1. The primary case of the taxpayers is that the Relevant Expenditure was all incurred under the Golden Contract and hence fell within the scope of section 298, because it was all commissioned by the unilateral exercise by the Developer of the right to select and the right to change set out in clause 12 conferred by the Golden Contract in its original form, ie as made during the first period. HMRC say that those rights, on the true construction of the Golden Contract, were insufficiently wide to enable the Developer to require the Contractor to build DC2 or DC3, which could only be contracted for by a new agreement, made after the end of the first period, and therefore falling foul of the time limits in section 298. The taxpayers reply by claiming, in the alternative to their primary case, that if the Relevant Expenditure was incurred as the result of a new agreement enabling the Developer to select additional Works Options, it was one which varied rather than replaced the Golden Contract, so that it was still incurred “under” the Golden Contract as varied. To that alternative case HMRC makes two responses. First (in logic though not in time), section 298 does not on its true construction permit expenditure required or allowed by the content of a variation made during the second period of a contract made during the first period (or at least a variation which changed the type of building or the site on which it was to be built) to be treated as expenditure incurred “under” the earlier contract. Secondly, the alterations (to use a neutral word) necessary to provide for the construction of DC2 and DC3 amounted to a replacement of the Golden Contract rather than a variation of it, so that on no construction of section 298 could the replacement contract be said to have been made during the first period.

1. Thus the issues which emerge for decision by this court may be summarised as follows:

   1. Was the Relevant Expenditure triggered by the exercise of the Developer’s unilateral rights to select and to change conferred by the Golden Contract in its original form? (“The Clause 12 Issue”)

   1. If not, does section 298 on its true construction enable expenditure, incurred by reason of a variation during the second period of a contract originally made in the first period, to be treated as expenditure incurred under the original contract? (“The section 298 Issue”)

   1. If it does, was the Relevant Expenditure triggered by a variation or by a replacement of the Golden Contract? (“The Variation Issue”)

1. The Clause 12 Issue raises questions of construction of the Golden Contract, mainly in relation to clause 12, and its application to agreed facts, although the issues of construction go a little wider than that. If the question as framed is given an affirmative answer then HMRC accept that the appeal should be allowed. We deal with this issue at paras 108-124 below.

1. The section 298 Issue raises an important question of construction of section 298, in its statutory context. If it is answered in the negative, then the appeal must fail, and the Variation Issue becomes largely academic. But the taxpayers raise the threshold question whether it is open to HMRC to raise the section 298 Issue at all, having, it is said, declined to do so in the courts below in circumstances where permission to raise it now would cause the taxpayers prejudice. We deal with this issue at paras 58-107 below.

1. The Variation Issue is said to raise an important unresolved question of pure common law, namely whether and if so to what extent the characterisation of a contractual alteration to a contractual relationship as either a variation or a replacement (or, if one wishes to use the word, rescission) of the original contract depends upon the common intention of the parties, objectively ascertained. We will call it the Variation Issue. This is a point upon which the courts below disagreed, and in relation to which the judgments of the members of the Court of Appeal do not deliver entirely uniform reasoning. But it only arises if this court answers the Clause 12 Issue “no” and either refuses to entertain the section 298 Issue or answers it “yes”. We deal with this issue at paras 125-161 below.

1. For reasons which will in due course appear, we would answer the Clause 12 Issue in the negative. We consider that the court should entertain the section 298 Issue and we would also answer it in the negative. We would therefore dismiss the appeal, albeit for different reasons than those given by the Court of Appeal for the same outcome. While the Variation Issue is therefore in our view largely academic, it was the basis for the Court of Appeal’s decision and the subject of extensive reasoning in that court. It has been fully argued on this appeal, and we consider it to be of sufficient public importance to address it in any event. It does not in our view admit of a simple yes or no answer. Because the section 298 Issue is also of general importance and because a proper understanding of the time limits in section 298 forms part of the context in which the other issues fall to be decided, we propose to consider it first, after a fuller deployment of the facts, the terms of the Golden Contract and a summary of the decisions of the courts below.

The Facts

1. In 1996, an Order was made to designate an enterprise zone in North Tyneside to include the Cobalt Business Park (“the Site”) during the period 19 February 1996 to 18 February 2006: the Tyne Riverside Enterprise Zones (North Tyneside) (Designation) (No. 1) Order 1996 (SI 1996/106).

1. Prior to 2006, part of the Site had been used by Siemens, the well-known manufacturing company, for a facility to make semiconductors. However, following a downturn in the price for computer memory chips, Siemens ceased production and sold the Site to the Atmel group (“Atmel”). In 2006, realising that the enterprise zone would soon be coming to an end, Atmel took steps to preserve the ability to claim EZAs in respect of future construction work at the Site. It incorporated the Developer and the Contractor as special purpose vehicles with a view to achieving this.

1. On 17 February 2006 – as noted above, two days before the deadline specified in section 298(1) of 10 years after 19 February 1996 - the Developer and the Contractor entered into the Golden Contract for the construction of a building at the Site. In doing this, the intention of both the Developer and the Contractor was that the Developer would have the tax benefit of being able to claim EZAs in relation to the construction costs, pursuant to section 298(1)(b), for whichever building was chosen for construction under the Golden Contract.

1. The Golden Contract incorporated the conditions of the JCT Standard Form of Building Contract with Contractor’s Design 1998 Edition (“the JCT Standard Form”) with certain specified amendments agreed by the parties. In the JCT Standard Form clauses the Developer is called “the Employer”, and both terms are used in this judgment.

1. The JCT Standard Form provides that the Employer is entitled (and obliged) to require the Contractor to undertake a single building project. But by amendment of that form, the Golden Contract provided from the outset that the Developer was entitled (and obliged) to require the Contractor to undertake any one (but not more than one) of six specified building projects. The alternative projects were called “Works Option 1” to “Works Option 6” and definitions were provided for each of these terms which referred to very detailed documentation specifying the Developer’s instructions for that option (called “the Works Option 1 Employer’s Requirements”, “the Works Option 2 Employer’s Requirements” and so on, respectively). The six Works Options defined in the Golden Contract differed significantly in size and scope, provided for works to be undertaken on different parts of the Site (on areas described as Sites A, B or C, depending on the Works Option) and provided in each case for a different specified “Contract Sum” payable by the Developer.

1. Works Option 1 was defined as follows:

   “… the design, construction and commissioning work comprising an industrial unit to accommodate the manufacture of an eight inch board on Site C for which works the Employer has issued to the Contractor its requirements (hereinafter referred to as the ‘Works Option 1 Employer’s Requirements’).”

   Works Option 3 was defined as follows:

   “… the design and construction works comprising an office business park on Site A for which works the Employer has issued to the Contractor its requirements (hereinafter referred to as the ‘Works Option 3 Employer’s Requirements’).”

1. Clause 23A of the Golden Contract obliged the Developer to serve a Notice to Proceed on the Contractor which was to state “which Works Option the Contractor shall carry out and complete”.

1. In February 2009 (that is, outside the first 10 year period specified in section 298) the parties agreed to vary the Golden Contract to permit the Developer to submit a Notice to Proceed in respect of a combination of specified Works Options, stating that notwithstanding the giving of a Notice to Proceed in respect of Works Option 2, the Employer could also give a Notice to Proceed in respect of Works Option 3 (“Variation 1”). In April 2009 a further variation was agreed to replace Variation 1 to permit the Developer to choose to proceed with a different combination of Works Options, being Works Option 1 and Works Option 3 (“Variation 2”). Clause 23A was amended accordingly, to say that notwithstanding the giving of a Notice to Proceed as respects Works Option 1 the Developer could also give a Notice to Proceed as respects Works Option 3.As is clear, these variations effected significant substantive alterations in the rights and obligations of the Developer and the Contractor as they had originally been specified in the Golden Contract.

1. Clause 12 of the JCT Standard Form, as incorporated in and amended by the Golden Contract, headed “Changes in the Employer’s Requirements and provisional sums”, provided in relevant part as follows:

   1. The term ‘Change in the Employer’s Requirements’ or ‘Change’ means:

   1. a change in the Employer’s Requirements which makes necessary the alteration or modification of the design, quality or quantity of the Works, otherwise than such as may be reasonably necessary for the purposes of rectification pursuant to clause 8.4, including

      .1.1 the addition, omission or substitution of any work,

      .1.2 the alteration of the kind or standard of any of the materials or goods to be used in the Works,

      .1.3 the removal from the site of any work executed or materials or goods brought thereon by the Contractor for the purposes of the Works other than work materials or goods which are not in accordance with this Contract;

   1. the imposition by the Employer of any obligations or restrictions in regard to the matters set out in clause 12.1.2.1 to 12.1.2.4 or the addition to or alteration or omission of any such obligations or restrictions so imposed or imposed by the Employer in the Employer’s Requirements in regard to:

      .2.1 access to the site or use of any specific parts of the site,

      .2.2 limitations of working space,

      .2.3. limitations of working hours …,

      .2.4 the execution or completion of the work in any specific order.

   1. The Employer may subject to the proviso hereto and to clause 12.2.2 issue instructions effecting a Change in the Employer’s Requirements. No Change effected by the Employer shall vitiate this Contract. Provided that the Employer may not effect a Change which is, or which makes necessary, an alteration or modification in the design of the Works without the consent of the Contract which consent shall not be unreasonably delayed or withheld.”

1. The expression “the Employer’s Requirements” used in clause 12.1.1 was defined to mean:

   “The document referred to in Appendix 14 Appendix 15 Appendix 16 Appendix 17 Appendix 18 Appendix 19 (as the case may be) setting out the requirements of the Employer in relation to the relevant Works Option.”

   Each Appendix corresponded to a particular Works Option, in the same order. Hence “Works Option 1 Employer’s Requirements” was defined to mean “the documents referred to in Appendix 14 as Ref: ER WO1”, and the other Works Option Employer’s Requirements were defined in a similar way by reference to the other Appendices, respectively. We address the terms relevant to the operation of clause 12 in more detail in the section below on the Clause 12 Issue.

1. Clause 13 of the JCT Standard Form, as incorporated into the Golden Contract, provided that the Contract Sum could not be adjusted or altered in any way whatsoever otherwise than in accordance with the express provisions of the JCT Standard Form.

1. On 20 November 2009 the Developer issued Change Order 1, expressed to be made relying on clause 12, with reference to Works Option 1 and Works Option 3 (that is, invoking the Contractor’s obligations under the Golden Contract as varied by Variation 2), to instruct the Contractor to undertake the design and construction of a data centre referred to as “DC1” on Site C (which had been the site allocated to Works Option 1 under the Golden Contract in its original form). Change Order 1 also stated that “[f]urther Change Orders may be issued in respect of the buildings within Works Option 3 or otherwise in accordance with the contract to the extent that they relate to that part of the land [meaning, the Site] not affected by this Change Order”. Pursuant to Change Order 1, DC1 was constructed on Site C with practical completion of the shell and core being achieved in 2011. The position in relation to DC1 and the capital allowance regime under the 2001 Act is not in issue in this appeal.

1. On 1 April 2011, again expressly relying on clause 12, the Developer issued Change Order 2, referring to Works Option 1 and requiring the Contractor to undertake the design, construction and commissioning of another data centre, DC2, “totalling 3,360 square metres net technical space”, in accordance with the detailed specification in a new set of Employer’s Requirements, for the sum of £54,845,150. The Developer paid the Contractor this sum on the same date. This amount contrasts with the original specified Contract Sum of £102,500,000 for Works Option 1. DC2 was to be constructed on Site A.

1. On 4 April 2011, once more relying on clause 12 and again referring to Works Option 1, the Developer issued Change Order 3, requiring the Contractor to undertake the design, construction and commissioning of another data centre, DC3, “totalling 2,400 square metres net technical space”, in accordance with the detailed specification in a further new set of Employer’s Requirements, for the sum of £42,284,000. The Developer paid the Contractor this sum on the same date. DC3 was to be constructed on Site B.

1. Following the service of Change Order 2 and Change Order 3, the Developer served Notices to Proceed with DC2 and DC3. The Contractor kept the sums it had been paid and proceeded to build the shell and core of both data centres. Although these were constructed on sites different from that allocated to Works Option 1 under the Golden Contract (ie Site C), they were built close by and the Upper Tribunal found that the change in location was not material.

1. Also in April 2011, the Developer, acting in combination with the Contractor, transferred the DC2 and DC3 development projects to the taxpayers. On 4 April 2011, the Developer and the Contractor entered into a sale and development agreement (“SDA”) in relation to DC2 with Cobalt Data Centre 2 LLP (“the DC2 LLP”), the first appellant. The price paid by the DC2 LLP was £153,709,750. On 5 April 2011, the Developer and the Contractor entered into an SDA in relation to DC3 with Cobalt Data Centre 3 LLP (“the DC3 LLP”), the second appellant. The price paid by the DC3 LLP was £109,754,500. On those dates, pursuant to the SDAs, the Developer assigned to the DC2 LLP and the DC3 LLP, respectively, the benefit of its rights under the Golden Contract concerning DC2 and DC3. In this judgment, we refer to the DC2 LLP and the DC3 LLP together as “the taxpayers”.

1. The issues of principle which arise in relation to the claims for EZAs by the DC2 LLP and the DC3 LLP are the same, so throughout the proceedings and on this appeal, for convenience, the arguments and analysis have proceeded by reference to DC2 alone.

1. Other parties to the SDA of 4 April 2011 in relation to DC2 were Highbridge Business Park Limited (“HBPL”) and Highbridge Properties plc. HBPL was the owner of the relevant superior lease of the Site and had granted a lease of the land for DC2 to the Developer.

1. Under the SDA the Developer assigned its lease and the benefit of its rights relating to DC2 under the Golden Contract (as varied) to the DC2 LLP. Clause 2.3 of the SDA recorded that the Developer agreed to procure the construction of DC2 for the DC2 LLP on the terms recorded in the SDA. Clause 2.4 provided that the DC2 LLP undertook certain obligations in consideration of the obligations on the part of the Developer and the Contractor to carry out and complete the building works in the manner set out in the SDA. Clause 2.5 stated that the Developer had already paid the Contractor the sum due pursuant to the Golden Contract (as varied). The SDA provided for distinct sets of obligations in relation to the construction of the shell and core of DC2 and its fitting out. In both cases, it was contemplated that the Contractor would engage sub-contractors to carry out the work. The person to whom DC2 was let would be entitled to specify how it should be fitted out.

1. In due course the shell and core elements of DC2 and DC3 were constructed at the Site in the enterprise zone, with completion dates of 28 January 2013 and 17 December 2012, respectively. However, the taxpayers have not succeeded in finding tenants for the data centres.

1. An issue has arisen as to the basis on which the Contractor proceeded to carry out the construction of DC2 (and DC3). The Contractor and the Developer believed that this was done pursuant to a valid notice given under clause 12 and hence pursuant to obligations contained in the Golden Contract as earlier varied by Variation 1 and Variation 2, that is to say that the issue of Change Order 2 did not itself constitute a variation of the Golden Contract. However, as the Upper Tribunal and the Court of Appeal held, and as we agree, they were mistaken about this. The Upper Tribunal held that the Golden Contract was varied by an agreement between the Developer and the Contractor reflecting the terms of Change Order 2, but was not precise about how the Contractor expressed its agreement in that regard. That may have been because HMRC did not dispute that an agreement arose between the Developer and the Contractor as a result of Change Order 2. In the Court of Appeal the taxpayers contended that the Contractor’s agreement could be inferred from the fact that the Contractor accepted payment from the Developer and proceeded to build DC2 on the footing it was contractually bound to do so in accordance with the specification in Change Order 2 and, having regard to the position adopted by HMRC in the Upper Tribunal, the Court of Appeal proceeded on that basis: paras 70 (Lewison LJ) and 139 (Newey LJ).

1. In this court, however, HMRC submitted that on proper analysis the Contractor carried out the work to construct DC2 not under the Golden Contract but under a separate agreement constituted by the SDA. We discuss this in paras 152-156 below. In the event, the outcome of this appeal does not depend upon a precise analysis of the contractual position between the Developer and the Contractor in the period after April 2011 when DC2 was under construction, going beyond our conclusion that DC2 was not required to be constructed by the exercise of any Developer’s unilateral right in the Golden Contract in its original form as at the expiry of the first 10 year period.

The Taxpayers’ Capital Allowance Claims and the Proceedings in the Upper Tribunal

1. In their tax returns for the year 2010-2011, the taxpayers claimed for EZAs which they contend arose on the expenditure which they incurred in acquiring by assignment their rights under the Golden Contract (as varied) in respect of DC2 and DC3. The taxpayers relied on section 296 of the 2001 Act, which allows a person who purchases from a developer a relevant interest in a building constructed in an enterprise zone before it has been used to treat the capital sum paid for that interest as “qualifying expenditure” for which an EZA may be claimed. Using DC2 for illustration, the DC2 LLP claimed an EZA in the sum of £153,709,750.

1. By closure notices issued on 28 July 2016 HMRC denied the taxpayers’ EZA claims.

1. The taxpayers appealed against the closure notices to the First-tier Tax Tribunal. On 27 October 2016 they also issued a claim for judicial review, in which they maintained that, in denying the EZAs which had been claimed, HMRC had acted contrary to their published statement of practice which gave the taxpayers a legitimate expectation that EZAs would be available. The tax appeals and the judicial review claim were transferred to the Upper Tribunal, to be heard together.

1. A number of issues arose in the tax appeals, including whether the full capital sum in respect of which EZAs were claimed was paid for the relevant interest referred to in section 296. In due course, most of the issues were resolved by the Upper Tribunal, including by a significant reduction in the amount of the EZAs, in ways which do not call for consideration in this appeal. The relevant issue in this appeal depends upon the nature of the expenditure incurred by the Developer, since under the 2001 Act the taxpayers’ claims for EZAs in respect of their own expenditure on acquiring their interests in the respective development projects depend upon them showing that the Developer’s own expenditure on the projects would have qualified for EZAs had the Developer retained ownership of them. The issue was defined in the Upper Tribunal as whether the Developer incurred the expenditure “under a contract” which had been entered into before 19 February 2006 (the relevant 10 year cut-off date, as explained above) for the purposes of section 298 of the 2001 Act.

1. As regards that issue, by its decision the Upper Tribunal allowed the taxpayers’ appeal, holding that the Developer’s expenditure on each of DC2 and DC3 was incurred under the Golden Contract, which had been entered into before 19 February 2006.

1. In reaching that decision the Upper Tribunal rejected the principal submission of the taxpayers that Change Order 2 (in relation to DC2) and Change Order 3 (in relation to DC3) had been validly issued pursuant to clause 12. However, the tribunal proceeded on the basis that, in one way or another, the Contractor had agreed to build DC2 and DC3 in accordance with the Change Orders.

1. The Upper Tribunal then rejected the principal submission of HMRC, that by one or other of the Change Orders issued on 20 November 2009, 1 April 2011 or 4 April 2011 (paras 27-29 above) the Developer had rescinded – that is, replaced – the Golden Contract with a new contract with the Contractor on new terms after the relevant cut-off date under section 298 (including by incorporating many terms which had originally been set out in the Golden Contract). (In the course of the hearing in the Upper Tribunal, HMRC abandoned a further argument, that Variation 1 or Variation 2 had operated to rescind and replace the Golden Contract). Instead, the Upper Tribunal found that the Golden Contract, as a contract made before the relevant cut-off date, had remained in place, albeit it had been varied by agreement of the parties pursuant to (so far as was relevant) Change Order 2 and Change Order 3, so that expenditure incurred under that contract as so varied qualified as “expenditure incurred under a contract entered into” within the first period as required by section 298(1)(b). In other words, using our terminology, the Upper Tribunal concluded that the Golden Contract had been varied but not replaced.

1. In the view of the Upper Tribunal, the decision whether there had been a variation or a replacement was to be determined by the general law of contract. In the course of the hearing in the tribunal, subject to certain qualifications, HMRC had indicated their broad agreement that the application of the relevant phrase in section 298(1)(b) (“incurred under a contract entered into” within the first 10 year period) depended on general principles of the common law of contract. The tribunal rejected HMRC’s argument that, according to the general law, whether there is a variation or a replacement depends upon the magnitude of the changes and that in this case the changes made by the Change Orders to the Golden Contract, as it existed before those Change Orders were issued, were so great that they had to be analysed as effecting a replacement rather than a variation of the Golden Contract. The tribunal accepted instead the taxpayers’ opposing argument that, according to the general law, the choice between the two mechanisms was to be resolved by identifying, in the usual objective manner, the intention of the parties to the Golden Contract. The context in which the Change Orders came to be given was one where all the parties involved (including, in particular, the Developer and the Contractor) were aware of the critical feature of the tax background for the transactions and of the need for EZAs to be available in respect of the Developer’s costs, in order to promote the financial viability of the developments and to maximise their commercial value. Accordingly, it was clear that the parties intended that the changes should take effect by way of variation of the Golden Contract, to preserve the right to claim EZAs under section 298, rather than by way of replacement of that contract.

1. HMRC also argued that, even if the Golden Contract had been varied by the Change Orders rather than replaced, the Change Orders had created a new contract separate from the Golden Contract and that the relevant expenditure had been incurred “under” that new contract for the purposes of section 298. The Upper Tribunal rejected this contention for similar reasons, holding that the question, under which contract was expenditure incurred, depended on the intention of the parties.

1. The Upper Tribunal also rejected a contention of HMRC, which was introduced for the first time at the hearing, that for the purposes of section 298 (although not for the purposes of the common law) the Golden Contract was to be regarded as a mere unenforceable agreement to agree so that the relevant expenditure of the Developer could not be regarded as having been made “under” a contract within the meaning of that provision. The Upper Tribunal concluded that there were binding obligations on both the Developer and the Contractor from the time when the Golden Contract was entered into, which were then varied as the parties intended; performance and payment had been rendered pursuant to those obligations; and this was all that was required by section 298.

1. As well as rejecting this argument on its merits, the Upper Tribunal said that it did not consider that it was open to HMRC to introduce it, because it was “an argument about the proper construction of section 298” and so was contrary to an agreement between the parties that the issue regarding application of that provision turned on ordinary common law principles of contract. However, in their appeal to the Court of Appeal, HMRC made detailed submissions to explain that they had not in fact agreed that the application of section 298 turned solely on the general law of contract, but had always maintained a distinct argument that (whether or not the Golden Contract was varied according to the general law), the relevant expenditure by the Developer was not “under” a contract which satisfied the requirements set out in section 298 according to its proper construction. In the Court of Appeal, the taxpayers reserved their position in relation to this in their skeleton argument, but did not present detailed argument either in writing or orally to contest the point made by HMRC: see paras 61–63 below.

1. The taxpayers’ claim for judicial review on the basis of alleged infringement of a legitimate expectation related only to the debate in the Upper Tribunal about the extent of the EZAs which the taxpayers were entitled to claim, should they fail in their submission (as they did) that pursuant to section 296 they were entitled to claim EZAs in the full amount which they paid to acquire the DC2 and DC3 developments. The basis for the legitimate expectation claim was the contention that in 1994 HMRC had given assurances regarding the extent to which EZAs could be claimed in respect of the cost of providing forms of rental support for incoming tenants where there was a qualifying investment by third party investors such as the taxpayers and that subsequently, down to and including 2011 (when the relevant events in this case occurred), HMRC had confirmed those assurances by their unvarying practice in allowing claims for EZAs in relation to such arrangements. The Upper Tribunal found that HMRC had made a representation that was “clear, unambiguous and devoid of relevant qualification” (being the applicable test for a legitimate expectation to arise: see R v Inland Revenue Comrs, Ex p MFK Underwriting Agents Ltd [1990] 1 WLR 1545) in relation to accepting claims for EZAs in relation to such rental support arrangements. The Upper Tribunal accordingly upheld the taxpayers’ claim in relation to a legitimate expectation that sums paid by them in respect of such arrangements could be the subject of EZAs. The effect of this was that HMRC was precluded from denying the taxpayers’ claim for EZAs in relation to their expenditure on such arrangements, to the extent that on true construction of the statutory provisions they would not have been entitled to EZAs in relation to it. The tribunal noted that the taxpayers’ argument was that the relevant representation relied upon did not extend beyond this.

The Court of Appeal

1. HMRC appealed to the Court of Appeal, with permission granted by Asplin LJ, on the ground that the Upper Tribunal erred in finding that the Relevant Expenditure was incurred under “a statutorily relevant contract” entered into within the first 10 year period referred to in section 298(1)(b). (The taxpayers cross-appealed in relation to the extent of the EZAs which the Upper Tribunal had found they could claim, but it is not necessary to say more about this). In their skeleton argument for the appeal, HMRC advanced the submission (among others) that the contractual arrangements between the Developer and the Contractor did not satisfy the requirements of section 298 according to its proper construction, since neither when the Golden Contract was entered into nor otherwise in the first 10 year period was the construction of DC2 or DC3 provided for under that contract. HMRC submitted that the Upper Tribunal had erred in law in failing to consider the proper construction of section 298 and apply it correctly to the facts.

1. In the taxpayers’ skeleton argument for the appeal they responded to this submission by maintaining that it was a new argument and saying merely that they reserved their position as to: whether it fell within the scope of the permission to appeal granted by Asplin LJ, whether it was open to HMRC “in the light of concessions made by them below” and whether the necessary findings of fact to support it had been made. They did not condescend to particulars and advanced no detailed submissions in response to HMRC’s written case that the point had in fact been raised before the Upper Tribunal. The taxpayers then set out their substantive submissions to answer HMRC’s submission as to the construction of section 298, on its merits.

1. In the event, the Court of Appeal held that this submission fell within the scope of the permission to appeal which had been granted to HMRC. This is not now in dispute. Nor is it said that there is any uncertainty in the findings of fact by the Upper Tribunal which precluded examination of the submission by HMRC in the Court of Appeal or precludes it in this court. The relevant facts have been found and it is a pure matter of law whether section 298 is satisfied, according to its true construction.

1. The Court of Appeal nonetheless rejected HMRC’s submission on the proper construction of section 298 on its merits: paras 38-46, per Lewison LJ. The court therefore proceeded to examine three remaining issues to determine whether the Relevant Expenditure was incurred under the same contract as had been entered into within the first 10 year period referred to in section 298: (i) whether, as the taxpayers submitted, Change Orders 2 and 3 were validly given under clause 12 of the Golden Contract; (ii) whether, as HMRC submitted, the Change Orders were so radically different from the Golden Contract as to lead to the conclusion that the Golden Contract had been replaced (or rescinded, in the words of HMRC and adopted by the Court of Appeal) rather than varied; and (iii) whether, as HMRC further submitted, even if the Golden Contract was not replaced but remained in effect, nevertheless a new separate contract came into existence as a result of the Change Orders and it was under that new contract, not the Golden Contract, that the Relevant Expenditure was incurred.

1. The Court of Appeal unanimously rejected the taxpayers’ submission under (i) above and held, in common with the Upper Tribunal, that the giving of Change Orders 2 and 3 was not within the scope of the Developer’s rights under clause 12.

1. There was a degree of divergence of reasoning in the Court of Appeal in relation to issues (ii) and (iii). Lewison LJ considered that the Golden Contract gave the Developer a right to proceed with only one project, which right had been extended by Variation 2 to allow a choice to proceed with both Works Option 1 and Works Option 3; either way, this was a right to choose only once, and that right had been exercised and used up by the Developer issuing Change Order 1 (leading to the construction of DC1); therefore, focusing on DC2, Change Order 2 and the Contractor’s agreement to carry out the work it described amounted to a different contract: para 69. He then addressed the question whether the making of that contract constituted a variation or a replacement of the Golden Contract. In his view, the Upper Tribunal had erred by equating the desire of the Developer and the Contractor to preserve the ability to claim EZAs with an intention, on an objective assessment, to do so and hence to treat Change Order 2 and the agreement resulting from it as a variation of the Golden Contract. Instead, their intention, so assessed, was that the arrangement pursuant to Change Order 2 and the SDA which followed, and not the Golden Contract, was to be the basis for the construction of DC2. Thus the Relevant Expenditure was not incurred under a contract made within the first 10 year period as required by section 298 and it did not matter whether this involved replacement (or as he said, rescission) of the Golden Contract. See paras 115-121. The same reasoning led Lewison LJ to uphold HMRC’s further submission referred to in para 53 above, and it did not matter whether the new contract under which the Relevant Expenditure was incurred was the SDA or a separate contract formed by the Contractor’s acceptance of the price and performance of the work specified in Change Order 2: paras 122-124. Andrews LJ agreed with Lewison LJ and gave a short judgment of her own.

1. Newey LJ agreed that HMRC’s appeal should be allowed but for somewhat different reasons. He summarised the principles to be applied at para 136: to a great extent the question whether a subsequent agreement operates by way of replacement or variation depends on the intention of the parties, as objectively assessed; the background circumstances in which the parties were acting have a significant role to play in determining their objective intention and this can include the tax position in the light of which they negotiate with each other; if the parties have stated their intentions in terms in the later agreement, that will be determinative, subject to certain limits (citing a dictum by Lord Sumption in Plevin v Paragon Personal Finance Ltd (No 2) [2017] UKSC 23; [2017] 1 WLR 1249 (“Plevin”), para 13); if the parties have not stated their intention as to replacement or variation in terms, the earlier agreement will normally be taken to have been replaced (rescinded, in his words) rather than varied if the new one is, in its essential character, substantially inconsistent with it (citing statements in Morris v Baron & Co [1918] AC 1 and British and Beningtons Ltd v North Western Cachar Tea Co Ltd [1923] AC 48 ( “British and Beningtons”)). In Newey LJ’s view, the new agreement made pursuant to the Contractor’s acceptance of Change Order 2 involved a major departure from what had been agreed in the Golden Contract and did not constitute a variation of it, even though it was possible that it incorporated some of the terms found in the Golden Contract: paras 140-142. He did not regard the tax considerations as irrelevant in determining the intention of the parties on an objective basis (para 144); but those considerations were not of such significance as to outweigh other indications regarding their intention, including in particular that the Developer, by issuing Change Order 1, had already used up its entitlement under the Golden Contract to choose a project to be constructed: paras 144-145. The Golden Contract had not been rescinded (in the sense of set aside in its entirety), but that did not matter; the correct inference was that the Developer and the Contractor entered into fresh contractual arrangements which did not involve either variation or rescission of the Golden Contract, and it was under those fresh arrangements, made outside the first 10 year period specified by section 298, that the Relevant Expenditure was incurred: para 146.

1. The taxpayers now appeal to this court.

The Section 298 Issue

1. As we have explained, the Court of Appeal approached this case on the basis of their decision that section 298 did treat expenditure incurred under a contractual variation (during the second period) of a contract originally made during the first period as expenditure incurred under the original contract. That is why, having rejected the taxpayers’ case on the Clause 12 Issue, they considered it essential to decide whether the alterations to the Golden Contract which provided for the building of DC2 and DC3, and therefore the Relevant Expenditure, amounted to a variation or replacement of the Golden Contract.

Is There a Procedural Objection to HMRC Raising the Section 298 Issue?

1. The taxpayers submit that it is too late now, and would be an abuse of process, for HMRC to put forward a construction of section 298 which excludes (from qualifying under section 298) expenditure incurred pursuant to a contractual variation in the second 10 year period of a contract made during the first 10 year period. They submit that this court should decline to hear such an argument.

1. We do not accept this submission.

1. Going into the hearing in the Court of Appeal there was an issue between the parties whether in the Upper Tribunal HMRC had advanced a construction of section 298 along the lines now relied upon. HMRC in their skeleton argument gave a detailed account to explain that they had (para 50 above); the taxpayers merely reserved their position (para 51 above). Lewison LJ recorded in his judgment that at the hearing in the Court of Appeal counsel for the taxpayers raised no objection to HMRC presenting their submission based on the construction of section 298 on their appeal. One might think that would put an end to any procedural objection to the point being taken, but Mr Rabinowitz KC for the taxpayers says that Lewison LJ’s statement was incorrect. Mr Rabinowitz showed us a short passage in the transcript of the hearing in the Court of Appeal where counsel for the taxpayers (at that stage, Adrian Williamson KC), having presented all his substantive arguments in reply to HMRC’s submission regarding the proper interpretation of section 298, at the very close of his case said that, if the submission had been raised by HMRC at an earlier stage in the proceedings, “then we would certainly have considered judicial review proceedings in relation to that”. But no distinct submission was made that it was an abuse of process for HMRC to raise the issue on the appeal or that there was a determinative procedural objection to them doing so which should prevent the Court of Appeal from considering the full arguments which it had just heard about the proper construction of section 298. Clearly, neither Lewison LJ nor the other members of the court understood what Mr Williamson said to amount to a sustained objection on the part of the taxpayers to this submission of HMRC being made, whether it was new or not. When the Court of Appeal’s judgment was circulated to the parties in draft, no correction was suggested by the taxpayers.

1. If the taxpayers wished to argue in the Court of Appeal that it was an abuse of process for HMRC to raise this issue on the appeal to that court, or that there was any procedural objection to them doing so, when HMRC had asserted in its skeleton argument that it was not a new issue and set out its submissions on the substantive merits, it was incumbent on them to explain and make good that contention. They did not do so. In their skeleton argument the taxpayers made no positive submission that there was a procedural objection or that it was an abuse of process for HMRC to raise the issue. Nor did they develop any substantive submission orally to support such a contention. It was not enough to say merely that they would have considered judicial review proceedings in relation to this question. The court was not in a position from that statement to know whether the point was truly new or, as HMRC contended in detail in its skeleton argument, one which had been taken in the Upper Tribunal. Nor was the court told what the grounds for judicial review might have been (it being left to infer that perhaps there might have been a new and different legitimate expectation claim), still less was the court taken to any material to allow it to assess whether there would have been any merit at all in such a claim so as to know whether the alleged prejudice was real or not. The court was merely referred to correspondence in 1994 set out in the judgment of the Upper Tribunal at paras 320-322.

1. In our view, the taxpayers did not raise a procedural or abuse of process objection in a distinct and proper form in the Court of Appeal. Even if, contrary to this view, it could be said that they did enough to raise such an objection, they did not make it good and the Court of Appeal was right to admit into the proceedings the issue of the proper construction of section 298 and to rule upon it. We would add that, in so far as the taxpayers sought to suggest that statements in the correspondence set out by the Upper Tribunal gave rise to a valid legitimate expectation claim that any variation of a golden contract after the first 10 year period would be treated in the same way as a variation of a golden contract within that period, so as to prevent HMRC from raising the section 298 issue, the argument was without merit: as regards that point, the statements referred to did not satisfy the demanding test referred to in para 49 above.

1. Since the section 298 Issue was properly raised by HMRC with the permission of the Court of Appeal on the appeal to that court and is the subject of a determination by that court against which HMRC now appeals, in our view it is not open to the taxpayers to object to it being determined on the merits in this court.

1. In their written case in this court, the taxpayers seek to make factual points to support their argument that HMRC’s appeal on the question of the proper construction of section 298 should be dismissed on procedural grounds, regardless of the merits. However, in our judgment it is not open to the taxpayers to seek to introduce this procedural objection in this way, for three reasons.

1. First, it is too late. If the point was to be taken, it should have been taken in the Court of Appeal. But it was not raised in that court as a distinct substantive answer to HMRC’s submission regarding the proper construction of section 298. The submission is in reality a new point raised by the taxpayers for the first time in this court, for which no permission has been sought or given.

1. Secondly, even if it could be said that the procedural objection was raised in the Court of Appeal, that court was clearly right to proceed despite this, since on the arguments then presented by the taxpayers there was only one possible outcome, that their submission should be dismissed. There has been no material error of law on the basis of which it would be appropriate to go behind the decision of the Court of Appeal to determine this issue on the merits.

1. Thirdly, in so far as the taxpayers wished to advance a procedural objection to the section 298 Issue being raised in this court, they should have ensured that the relevant facts were set out in the Agreed Statement of Facts and Issues. But there is nothing there which would allow this court to decide the matter. Instead, the taxpayers make new factual assertions in their written case which are not agreed and have not been the subject of any factual findings below. It is not this court’s function to find facts relevant to the taxpayers’ submission and this was not an appropriate way to introduce such a submission at this level. Nor is the court in a position to do so, as it has not been provided with the materials which it would be necessary to examine if it were to find the relevant facts and decide this issue for itself.

1. In the event, the point on the proper construction of section 298 has been fully argued in this court (albeit de bene esse) both in the parties’ written cases and orally, without either side being under any procedural impediment, and without the need to deploy or test any additional evidence. Since the point was both argued and determined in the Court of Appeal, there is now a Court of Appeal decision, forming part of its ratio, which will bind both it and every other court apart from this one, and therefore all persons with similar issues between them, unless and until addressed by this court. As we will explain, we consider that the decision on that point was wrong, so it is appropriate in the public interest that it should be overruled by this court. We therefore turn to the merits of the point.

The Section 298 Issue: the Merits

1. Construction of statutes, and taxing statutes in particular, requires close attention to the purpose of the provision in issue, and a realistic view of the transaction or other matter to which it is alleged to apply. The relevant authorities were recently reviewed by this court inRossendale Borough Council v Hurstwood Properties (A) Ltd [2021] UKSC 16; [2022] AC 690, paras 9-17. Two well-known dicta from those cases will suffice. The first, from Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51; [2005] 1 AC 684, para 32, by Lord Nicholls of Birkenhead, giving the joint opinion of the appellate committee of the House of Lords, is that the essence of the correct approach is:

   “to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description.”

   The second, from Ribiero PJ in Collector of Stamp Revenue v Arrowtown Assets Ltd [2003] HKCFA 46, para 35, approved in Barclays Mercantile, is that:

   “The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.”

1. This is not, however, to downplay the importance of the language of the provision to be construed. As Lord Hodge said in R (O) v Secretary of State for the Home Department[2022] UKSC 3; [2023] AC 255, para 29, “they are the words which Parliament has chosen to enact as an expression of the purpose of the legislation and are therefore the primary source by which their meaning is ascertained”. That said, a “phrase or passage must be read in the context of the section as a whole and in the wider context of a relevant group of sections” (ibid, para 29) and “sources, such as Law Commission reports, reports of Royal Commissions and advisory committees, and Government White papers may disclose the background to a statute and assist the court to identify not only the mischief which it addresses but also the purpose of the legislation, thereby assisting a purposive interpretation of a particular statutory provision” (ibid, para 30).

1. As will be seen, there is limited, but nonetheless significant, external material but, beyond that, it is the words of section 298, read in their statutory context, from which the purpose of the section must be derived.

1. Section 298(1), with which this appeal is concerned, introduces important temporal limits on the availability of capital allowances. There are no other provisions which have a direct bearing on this, save for section 5 referred to below. We have already set out section 298 at the beginning of this judgment, but it may be helpful to repeat it here:

   1. For the purposes of sections 299 to 304, the time limit for expenditure on the construction of a building on a site in an enterprise zone is-

      1. 10 years after the site was first included in the zone, or

      1. if the expenditure is incurred under a contract entered into within those 10 years, 20 years after the site was first included in the zone.”

1. Section 5 of the 2001 Act provides a general rule which, if applicable, explains the meaning of the phrase “the expenditure is incurred” in section 298(1)(b). By section 5(1):

   “… the general rule is that an amount of capital expenditure is treated as incurred as soon as there is an unconditional obligation to pay it.”

   By section 5(2) and (5) a gap in time between the arising of the unconditional obligation and the contractual date for payment does not postpone the time when it is incurred, unless that gap is more than 4 months, in which case the obligation is incurred on the contractual date for payment.

1. The rival interpretations of section 298(1) may be summarised as follows. The taxpayers submit that the requirement that the relevant expenditure incurred in the second period must be “incurred under a contract entered into within” the first period is satisfied if the provision for such expenditure is to be found in the contract, even if such provision was not present in the contract as originally made but was added by a variation of it made in the second period. Notwithstanding that the variation was not made until the second period, it is accurate to describe the expenditure as having been incurred “under the contract” originally made in the first period. Although varied, it remains the same contract.

1. By contrast, HMRC submit that the language of section 298(1) requires expenditure incurred in the second period to have been made pursuant to a contractual commitment entered into in the first period. While the taxpayers’ construction may be literally permissible, HMRC submit that this construction fails to give effect to the evident purpose of section 298(1). Mr David Ewart KC, for HMRC, submits that this purpose is to be implemented by restricting the introduction of alterations into the original contract by later variation after the end of the first period to alterations which make no change to the nature of the building prescribed by the contract, or to the site upon which it is to be built. Any alterations which impose obligations to construct a different building, or a building (whether or not different) on a different site, do not give rise to the incurring of expenditure under the contract. HMRC’s written case puts it thus:

   “HMRC’s position is that the effect of section 298 is that EZAs are available (assuming other requirements to be satisfied) in respect of expenditure incurred in the second ten-year period on the construction of a building in an enterprise zone only if the expenditure is incurred pursuant to a contractual commitment (which arose in the initial ten-year period) to incur that expenditure on the construction of that building on its site.” (original underlining)

1. Also, in view of the arguments we have heard and since there was a divergence of view in the Court of Appeal, we think it is appropriate to say something about the difference in the approaches adopted by Lewison LJ and Newey LJ. The difference between them is essentially about the proper approach to determining the intention of the parties to the Golden Contract when they made their subsequent agreements consequent upon the issuing of Change Order 2 and Change Order 3.

1. It is not necessary to be definitive, but it seems to us the most convincing contractual analysis is that, even though the Change Orders were not validly issued pursuant to clause 12, the Contractor accepted that it would be contractually bound to build DC2 and DC3 by keeping the money paid in conjunction with those orders and then proceeding to build in accordance with the specifications in them. Alternatively, it may be that the new contractual rights and obligations came into being with the SDA in each case. Either way, interpretation of the new contractual arrangements would have to proceed with reference to the context in which they were entered into.

1. According to Lewison LJ, the Developer and the Contractor had a mere subjective desire to avoid tax and this could not be taken to affect their intentions, as objectively assessed. With respect, we disagree. The tax context in which the Golden Contract was entered into and the later contractual arrangements were made was known to both parties and was a very important part of the factual background for the making of the Golden Contract and those later arrangements. We agree with Newey LJ that the tax context in which an agreement or series of agreements is made can be part of the relevant background for assessing the intention of the parties. It often will be. This is all the more so where it may be said that the achievement of the relevant tax advantage was, as here, a shared goal.

1. When the parties confronted the question of altering the relationship constituted by the Golden Contract in terms of whether they wished to vary or replace it, as they did when agreeing Variation 1 and Variation 2, they clearly intended to make the alterations by way of variation rather than replacement. That is evident from the express label of “variation” which they gave to the new contracts which made those alterations. But even if they had not attached that label, we consider that in this tax context both parties understood the importance of maintaining a position that any subsequent expenditure could be taken to be incurred under the Golden Contract, so that EZAs could be claimed, and that their intention would have been assessed to be to vary the Golden Contract rather than replace it. It may not matter that they were mistaken in thinking that the use of the mechanism of variation was sufficient to secure the advantage of satisfying section 298. It is enough that they probably thought it was, or at least that its use gave them a better argument in any later dispute with HMRC than if they had opted for replacement.

1. Newey LJ addressed the difficult question whether the alterations in the contractual arrangements consequent on Change Order 2 and Change Order 3 were intended to be by way of variation or replacement. He considered that because the choice of building allowed by the Golden Contract, as varied by Variation 2, had already been exercised by the Developer issuing Change Order 1, the better view was that the later Change Orders took effect by way of replacement rather than variation. We are doubtful about that. If the parties had appreciated that they needed a new agreement to alter the Golden Contract in order to issue Change Order 2 and Change Order 3, and agreed to do so, we are by no means sure that in applying the common law it would have been right to assess their intention as being to replace rather than vary the Golden Contract. In view of the degree of respect afforded by the common law to party autonomy and the relevance of the tax context, we would incline to the view that such alterations would in such circumstances have been assessed to be by way of variation rather than replacement. But, as we explain below, the point does not arise for decision and it is not necessary or appropriate to say any more about this.

Characterisation of the Contractual Alterations on the Facts

1. In 2011 the Developer and the Contractor thought that there was no need to alter the Golden Contract. They believed that Change Order 2 and Change Order 3 were validly issued under clause 12 and that (presumably) Variation 2 had not already taken them out of the time-frame required by section 298, because it was a variation rather than a replacement of the Golden Contract. The test of party intention as regards variation or replacement is difficult to apply where, as in this case, it is evident that the parties to a contract intended neither.

1. At this stage of the analysis, the taxpayers’ submission implicitly gives priority to the statutory rule rather than the common law. It amounts to this: the statutory rule requires a choice to be made between variation and replacement, therefore what the parties to the Golden Contract did must be fitted into one or other of those categories even though to do so means departing from their objective common intention. The common law does not require such a choice to be made, but the statute does.

1. It is implicit in this contention that the taxpayers are not contending that section 298(1)(b) simply refers to the common law, without more. Mr Rabinowitz’s submission was that we should decide whether there was a variation or a replacement of the Golden Contract by determining what the parties’ intention would have been had they appreciated (i) that the Change Orders were not validly given under clause 12 and (ii) that only an alteration by way of variation would pass the time limit under section 298 (which is probably what they thought, even though they would have been wrong). In support of this he relied on United Dominions Corpn (Jamaica) Ltd v Shoucair [1969] 1 AC 340 (PC), 348-349.

1. For reasons we have already given, we disagree. We do not consider that, on its proper construction, section 298 requires such an artificial choice to be made. The question whether the expenditure on DC2 and DC3 was incurred under the Golden Contract does not depend upon whether the contractual effects consequent upon Change Order 2 and Change Order 3 were achieved by way of variation or replacement of the Golden Contract.

1. Since the statute does not pose the question whether the events after 2006 amounted to a variation or a replacement of the Golden Contract, there is no good reason for us to answer it.

Conclusion

1. We agree with the Upper Tribunal and the Court of Appeal that Change Order 2 and Change Order 3 were not validly issued under clause 12 of the Golden Contract. Our conclusion is that, on the proper interpretation of the 2001 Act, the Relevant Expenditure was not incurred under a contract made before the end of the first 10 year period, as required by section 298(1). Therefore, for reasons different from those given by the Court of Appeal, we would dismiss the appeal.