Contractual conundrum: variation or replacement?

Background - tax breaks

The UK government used to provide tax breaks for funding new industrial buildings in specified locations. To qualify for relief the developer had to enter into a construction contract within 10 years of a location being included.

Cobalt executed a qualifying contract, but later amended it. HMRC said the amendments were so significant that the parties had actually entered into a new contract, after the 10-year period.

The Supreme Court decided the tax break was not available for other reasons but still considered what test should apply when considering whether a contract has been replaced or simply varied.

To vary or not to vary? That is the question

The court observed that, most of the time, parties probably do not care whether a contract has been varied or replaced. If they do, they have quite a bit of freedom to choose and express that choice. Ultimately what they have chosen is to be assessed objectively. There are limits, however. The court felt that at some point it would bring the law into disrepute if the parties specified that some change in their contractual relations should take effect as a variation rather than a replacement even though that was utterly absurd.

Although it did not need to decide (and stressed that it was not in fact deciding) the court was inclined to say that trying to get a tax advantage through an admittedly significant series of amendments, was not so absurd that it would bring the law into disrepute. The court preferred to see it as a variation on the basis that the common law respects party autonomy and that the tax context was important in ascertaining the parties' intention.

Judgment: Cobalt v HRMC