In David Wellstead v HMRC1, the First-tier Tribunal (FTT) has held that where a developer acquired a lease of land, constructed industrial units on that land and sold one of the units by way of an under-lease, the grant of the under-lease amounted to the sale of a relevant interest for the purposes of section 296, Capital Allowances Act 2001 (CAA 2001), entitling the purchaser to claim industrial buildings allowances (IBAs) on the purchase price.
Mr Wellstead (the Appellant), was a director of Hillford Construction Limited (HCL). In 2001, HCL purchased a 125 year lease of land at an industrial park and developed two industrial units on the land. In 2004, HCL granted an under-lease of one of the units to the Appellant. The under-lease was for the same term as HCL’s lease less 5 days. The Appellant paid a premium of £1m for the under-lease.
The Appellant claimed IBAs on the purchase price in the sum of £840,880, pursuant to section 290, CAA 2001.
HMRC refused the claim on the basis that the under-lease was not the sale of “the relevant interest”, for the purpose of section 296, CAA 2001.
HMRC was of the view that the legislation only permits IBAs to be claimed where the purchaser purchases the same interest as was held by the developer at the time the buildings were built. The Appellant would therefore only be entitled to IBAs if he had taken an assignment of the lease. As the Appellant had acquired an under-lease, he was not entitled to IBAs.
The Appellant’s position was that the legislation was designed, amongst other things, to encourage expenditure in enterprise zones by granting IBAs to those incurring expenditure on buildings in enterprise zones. He had incurred such expenditure and in the context of that overriding purpose, there was no policy reason or rationale for a distinction between the lease and the under-lease. A realistic and purposive construction of the provisions should therefore be adopted.
Importantly, the Appellant also relied on the terms of section 288(1), CAA 2001, which provided 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” (emphasis added).
Section 288(1) refers to the position where a lease or other subordinate interest is created to which the relevant interest is subject. The effect of this subsection was that the grant of a subordinate interest will not, on its own, cause an interest to cease to be a relevant interest. It depended on the circumstances of the individual case whether the grant of a subordinate interest would cause an interest to cease to be the relevant interest.
The FTT agreed with the Appellant that the legislation did not specify when the granting of a sub-lease would cause the relevant interest to cease to exist as it was a matter of degree. The legislation was not prescriptive of all of the circumstances in which a grant might amount to the transfer of the relevant interest.
The FTT noted that the sale could have been completed in either one of two ways (1) the grant of a sub-lease or (2) an assignment of the lease itself. In both instances, the taxpayer would pay the same consideration. This suggested that there was no commercial difference between the lease and the under-lease.
HMRC was unable to direct the FTT to any policy reason as to why IBAs should be available to the assignee of a head-lease but not to a purchaser of the whole of a sub-lease, less a few days.
The FTT therefore accepted the Appellant’s submission that the grant of the under-lease satisfied the statutory description of a sale of the relevant interest, for the purpose of section 296, and therefore qualified for IBAs.
The appeal was allowed.
HMRC regularly argues that a purposive interpretation should be adopted when construing fiscal legislation, especially in the context of tax avoidance arrangements which it disapproves of. However, on this occasion, in order to deny the claim for IBAs, it suited it to argue that the legislation was highly prescriptive. It was clearly the intention of the parties that the Appellant enjoy the same rights over the land as HCL and as the legislation was designed to encourage expenditure in enterprise zones, the FTT was not prepared to construe it in the narrow technical sense advocated by HMRC.
Although this decision will be welcomed by taxpayers, as it depended to a large extent on one ambiguous word contained in section 288(1), CAA 2001, it would not be surprising if HMRC seek to appeal the decision to the Upper Tribunal.
A copy of the decision can be found here.