The taxpayer was successful in claiming IBAs on a commercial development based on a purposive reading of the capital allowances legislation.
This case considered the entitlement of David Wellstead – a Director of Hillford Construction Limited (HCL) – to claim Industrial Buildings Allowances (IBAs) in respect of a commercial property that the company had developed but not used. The property was partly located in an Enterprise Zone (as defined under previous legislation), HCL had constructed it under a 125-year headlease and had granted a sub-lease to Mr Wellstead for 125 years less 5 days in return for a £1m premium.
In the case of an unused development the legislation (CAA 2001 s296) states that IBAs are available where there has been a sale of the relevant interest in return for a capital sum, the relevant interest being the headlease to which HCL was entitled on construction of the property. It also states that the grant of a sub-lease can be deemed a sale provided that it is more than 50 years in length, a capital sum is paid, the two parties are not connected and an election is made (CAA 2001 s290 and s291).
Mr Wellstead and HCL did previously attempt to submit a s290 election to HMRC, but this was rejected on the grounds that the two parties are connected. This point was not in dispute.
The two key points that the First-tier Tribunal (FTT) considered were:
HMRC argued that these points could only apply if the provisions of s290 and s291 were met in relation to the sub-lease, and in this case they had not.
Counsel for Mr Wellstead countered by drawing the FTT’s attention to the wording of CAA 2001 s288 which states that ‘an interest does not cease to be the relevant interest merely because of the creation of a lease or other interest to which that interest is subject.’ This implies that there are a number of other scenarios apart from s290 where the headlease could cease to be the relevant interest, and each case would have to be considered based on its own merits.
On the second point Counsel argued that there was no way of distinguishing in this case between the headlease and sub-lease in commercial terms. Not only were they both worth the same amount to Mr Wellstead in the circumstances (£1m), but they were also effectively the same length and had broadly the same rights and responsibilities; it was a technicality in the contract which meant that only the sub-lease could be granted. As such, HCL’s headlease had ceased to be the relevant interest in land because Mr Wellstead had effectively purchased it through the sub-lease.
In closing, Counsel stated that to reach an alternative conclusion would not be in keeping with Parliament’s intention when drafting the IBA legislation, which was to encourage (among other things) capital investment in Enterprise Zones, and this is what Mr Wellstead had done.
The FTT agreed with the taxpayer, placing specific emphasis on the wording in s288 and making the point that if the analysis reached was not Parliament’s intention when drafting the legislation, then this section would otherwise be redundant.
What this case shows is that the Courts are committed to reading legislation in a purposive way in line with Ramsay principles as applied to the individual facts, rather than simply taking a literal, prescriptive approach. HMRC may well attempt to appeal the decision, particularly as it goes against their strict interpretation of the law, however this is an important decision for the taxpayer and could well set the tone for other similar cases to come in the future.
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