In a ruling delivered in late 2024 in R (on the application of Cobalt Data Centre 2 LLP and another) v HMRC [2024] UKSC 40, the Supreme Court upheld HMRC’s decision to deny allowances under the Capital Allowances Act 2001 (“CAA 2001”) related to an enterprise zone scheme, ultimately dismissing the appellants’ appeal.

This case provides guidance on the Supreme Court’s position on what constitutes a variation of a contract as opposed to a replacement.

Variation or Replacement – What’s the Difference?

When parties wish to change the terms of a contract, they have two options:

• Variation – when a contract is varied, the original terms of the contract remain in effect, with only the provisions outlined in the variation being modified. This is a suitable approach when you wish to make minor changes to specific terms while the remainder of the contract is unchanged.
  
• Replacement – when a contract is terminated and replaced, the original contract is no longer in force, and its obligations typically no longer apply (unless the provisions are specifically stated to survive termination). The new contract stands independently and does not need to be tied to the terms of the old one. If the changes you want to make are significant and substantial, replacing the contract in its entirety may be the preferable option.

The Supreme Court Ruling

The case centred on whether capital allowances were available for the construction of buildings within an enterprise zone under the 10-year period set by the CAA 2001.

The taxpayers relied on a “Golden Contract” signed before the deadline, arguing that it qualified for tax relief. This contract allowed the developer (succeeded in title by the taxpayers) to select from several potential construction projects and adjust their scope. Three buildings were eventually constructed – DC1, DC2, and DC3.

HMRC argued that the Golden Contract did not cover DC2 and DC3, as they significantly deviated from the original contract’s scope. Therefore, HMRC contended that rights to construct these buildings could only have been contracted after the 10-year period, making them ineligible for tax relief.

The taxpayers claimed that the Golden Contract had been varied, not replaced, preserving its eligibility for relief. However, HMRC maintained that the changes were so substantial that they effectively replaced the original contract.

The Supreme Court ruled that the modifications exceeded the contract’s original terms, meaning the agreement had been replaced, not varied. However, it noted that if parties explicitly intend to vary rather than replace a contract, that intention should generally be upheld—unless doing so would be “utterly absurd.”

Berry Smith Comment – To Vary or Replace?

When deciding whether to vary or replace a contract, consider the following:

• Extent of changes – Minor amendments suit variation, whereas substantial modifications may necessitate a replacement.
• Relevance of existing provisions – If most of the contract remains relevant, a variation may suffice. Otherwise, replacing the contract may be clearer and more practical.
• Clarity – Frequent or extensive variations can make a contract confusing; a new agreement may provide better structure.
• Negotiation and agreement – Variations are often quicker and easier to finalise, but replacing a contract allows parties to renegotiate terms under new circumstances.

Next Steps

If variation is the chosen approach, first check if the original contract includes a variation clause; if not, any amendments must follow common law. Another key consideration is ensuring there is valid consideration, often addressed by structuring the variation as a deed or including a nominal payment to manage the risk of disputes arising over the validity of the consideration. The variation should specify which contract is being amended, referencing the parties and the signing date. It should clearly outline which clauses are being altered, whether they are being fully replaced or partially modified, and confirm that all other terms of the original contract remain valid and enforceable.

If you opt to replace the contract with new terms, the first step is to check if the contract can be terminated and how, including any required notice period. The new contract will be independent, but some provisions from the original contract, such as confidentiality clauses, may continue after termination. It’s important to clarify which terms will remain in effect and for how long before proceeding to draft, negotiate, and enter into the new contract.

To conclude, as set out in the Supreme Court’s ruling, it is ultimately up to the parties to decide whether a change will be a variation or replacement, unless the change is substantial. As mentioned earlier, several factors need to be considered to determine the best approach.

There is no one-size-fits-all answer, and the choice between variation or replacement depends on the specific circumstances of the amendment as to which approach will be the most efficient. Whichever approach is taken, our commercial team can provide assistance.

Please contact us if you would like more information about the issue raised in this article or any other aspect of Commercial law at 029 2034 5511 or commercial@berrysmith.com