London Luton Hotel BPRA Property Fund LLP v Revenue & Customs (INCOME TAX/CORPORATION TAX : Capital allowances) [2019] UKFTT 212 (TC)

“It is common ground in the present case that the [LLP] both (a) incurred the relevant expenditure and (b) had the relevant interest in the Property.”

“We have just purchased this prominent building which is next to the Ibis Hotel at Luton airport. It is 27,000 sq ft building having been constructed about 6 years ago upon a 2 acre plot. The building was used as a flight training centre by Boeing with offices at the front. The building is in an employment zone and can be used for any of the B classes but in addition, planning permission has been obtained for a 149 bedroom hotel.” 49. Matters progressed and, on 19 November 2009, Mr Tracey was able to email Mr Levy attaching terms. The email stated: “On the basis that these [terms] are agreed I will instruct our side. The only matter outstanding is the identity of the developer – I need to discuss with Stephen [Bantoft] and my FD and will confirm which company we will be running this through. I will also commence discussions with the planners tomorrow with a view to meeting them early next week. Please confirm that you are happy for me to do so.” 50. The terms attached to the email provided: TRANSACTION: Cannock Developments Ltd proposes to acquire on behalf of the Purchaser (detailed below) the freehold interest in the Property from Chainridge Limited under the terms and conditions as set out in these Heads of Terms. … DEVELOPER: A company controlled by Cannock Developments Ltd (to be confirmed) … FAO Mike Tracey PURCHASER: Newly formed On-Shore LLP C/O Downing Corporate Finance 51. Chainridge Limited (“Chainridge”) of which Mr Levy was a director, as is clear from a statutory declaration he made on 11 March 2011, had purchased the Property, which had been vacant, on 30 November 2009 and was its freehold owner. It agreed to sell the Property, under the terms of a conditional agreement dated 9 December 2009 between Chainridge¸ OVL (a Cannock company) and the LLP, to OVL and the LLP. Although this contract envisaged a contractual completion date on or before 31 May 2010 it was not completed. Instead the agreement went through a number of iterations between 9 December 2009 and 25 March 2011 when the freehold interest in the Property was actually transferred to the LLP. This included, in addition to the Property the surrounding access land and car parking. The purchase price was £2,880,000 plus VAT and the Developer was to pay a deposit of £29,999 plus VAT and the LLP £1. 52. Immediately after the acquisition of the Property by the LLP, also on 25 March 2011 Chainridge sold “land adjoining Blush House” to OVL for which OVL paid £250,000 (plus VAT). Additionally, on 25 March 2011, OVL entered into a Deed of Covenant in favour of the London Luton 2010 Limited, the Operating Company (see below) which OVL appointed as manager of 49 car parking spaces on the adjoining land for consideration of £35 per space per calendar month. 53. An application for planning permission was made on 18 December 2009 and registered on 30 December 2009. To meet the local planning criteria, which required the generation of sufficient employment opportunities which the hotel alone would not provide, the application included in addition to the conversion of the Property to a hotel a separate small office scheme located on the north east car park area. Initial planning permission was granted on 17 February which was conditional on the delivery of the office scheme. However, following a second application on 25 June 2010, which was granted on 19 August 2010, the office scheme requirement was removed. By this time OVL had become Cannock Projects LLP (“Cannock”) which is how we shall subsequently refer to it. 54. Cannock explored various franchise agreements for the Property by considering the hotels already operating in the vicinity and speaking to hotel operators and hospitality specialists. There was already a Holiday Inn Express near Luton airport and a “lock out” agreement with another hotel owner prevented the creation of any other IHG brand hotel nearby. Hilton were advanced negotiations for a site near to the Property and Accor traded from an adjacent site. Therefore, discussions were opened and successfully concluded with Wyndham Worldwide for a Ramada Encore franchise. 55. During March and April 2010 Cannock was in discussions with a Mr Simon Matthews-Williams of Sanguine Hospitality Management Limited (“Sanguine”) in relation to the anticipated trading figures for a Ramada Encore hotel operating at Luton Airport and provision of advice on the layout, design and finishes for the completed hotel. However. Cannock subsequently identified ThenHotels Limited trading as ThenHospitality (“ThenHospitality”) as suitable mangers and operators for the hotel on completion and its, rather than Sanguine’s, assistance was sought throughout the design and development of the project. Mr Lewis explained that this was because of the deterioration of the personal relationship between Mr Bantoft, who Mr Lewis described as “not always the easiest person to get on with”, and Mr Matthews-Williams and that although Sanguine was not appointed to that role it did receive a payment of £248,000 (net of VAT) by Cannock. Mr Tracey said that that this payment was not a Franchise cost but a sum agreed between Sanguine and Mr Bantoft as a result of the decision to use ThenHospitality and not Sanguine to advise throughout the design and development period and as a suitable for the operation of the hotel. 56. Financial projections for the development of a 124-room Ramada Encore hotel at the Property were prepared by ThenHospitality. These projections were reviewed by TRI Hospitality Consulting (“TRI”), a management consultancy specialising in data analytics for the hotel sector from which Cannock sought advice. On 20 January 2011, TRI provided Cannock with its ‘final report’ which concluded that the projections prepared by ThenHospitality: “… appear reasonable, accurately reflecting the anticipated market position of the hotel and the strength of the market opportunity.”

“… conditional to the issue of a notice by [Cannock] to [Multibuild] that Financial Close has occurred and that the Agreement is not longer conditional.”

“… terminate this Agreement by the service of written notice to that effect in which event [Multibuild] and [Cannock] agree that the obligations of both parties under this Agreement will immediately cease and neither party shall owe the other any form of liability under the terms of this Agreement.” 59. Under the Contract, “Financial Close” was defined as the date on which the Loan Agreement was entered into between the Co-op and LLP (see below) which, as Mr Tracey explained, was the usual practice as it is necessary to have a contractor in place ready to undertake work immediately after legal completion to avoid any delay in the commencement of the works and avoid a risk of a premium on the contractor’s fees. 60. On 24 March 2011 Multibuild and Cannock had entered into a FF&E Supply Agreement (the “FF&E Supply Agreement”) under which, although in its original tender it had allowed £817,896 for loose FF&E, Multibuild agreed to the reduced sum of £685,000 corresponding to the amount that Cannock had agreed the LLP should pay for loose FF&E. However, having agreed the reduction in price Multibuild faced difficulties with its subcontractors who had provided fixed prices but, due to the passage of time since their quotes, found themselves being squeezed. Cannock therefore entered into a Deed of Agreement with Multibuild under which Cannock agreed to meet any additional costs over £685,000 incurred in the provision of FF&E: “… subject to a maximum of £817,896. For the avoidance of doubt if the sums incurred for the provision of FF&E are less than £850,000 [Cannock] shall only be liable for such lessor amount plus attendances, overheads and profit.” 61. Like the Design and Build Contract the FF&E Supply Agreement pre-dated the acquisition by the LLP of the freehold of the Property and was conditional on Financial Close by 5 April 2011. There were no conditions as to the commencement of works which began in May 2011, after legal completion. These were completed in June 2012. Bank Loan 62. Following the 2008 global banking crisis, Cannock found it difficult to obtain bank finance for the development project. Indeed, as Mr Tracey confirmed in evidence, Cannock were turned down by RBS, HSBC, Lloyds and Santander before finance for the project was eventually obtained through the Co-op. Cannock was responsible for making the request for debt finance to the banks and, according to Mr Tracey, the same information was provided to all of the banks from which finance was sought. 63. On 6 December 2010 in an email to Mr David Matthews at the Co-op, Mr Tracey referred to the “outline details” for the Luton hotel scheme. The email explained that TRI was “finalising” its comments on the scheme. The details to which he referred were contained in a Debt Finance Request that had been prepared by Cannock. This explained that: “The developer in this instance will be [Cannock], a development company owned by Stephen Bantoft and Mike Tracey. Between Cannock Developments, Office Villages Limited and various OVL LLP’s we have developed in excess of 2,000,000 sq ft of commercial accommodation funded both through tax driven vehicles and traditionally.”

“ 3. Fund Administration The raising of investor funds and ongoing administration of the purchasing vehicle will be carried out by Downing Corporate Finance. Downing has acted as sponsor on our past four BPRA syndicated deals. … 4. The Structure … The purchasing entity will be an on shore LLP funded by way of Investor equity, primary bank debt and developer loan. It will simultaneously purchase the freehold in the property and enter the development agreement with the developer. The developer will have entered a fixed priced building contract for the works subject to funding prior to completion of the Development Agreement. The Development Agreement will oblige the developer to complete the building in compliance with the planning permission and brand requirements that will have been pre-approved by all parties. … 5. The Hotel Operation The Purchasing LLP (PropCo) will own 100% shares in the Operational Company set up to run the hotel. This OpCo will enter a 25 year lease with PropCo with the rent payable being made up of a base rent and turnover do that the total rent equates as closely as possible to EBITDA. The hotel will be operated as a Ramada Encore, a Wyndham international hotel brand and will be managed on behalf of the OpCo by Sanguine Hospitality. The OpCo will enter into the franchise agreement and separate management contract with Sanguine. To protect the bank and investors suitable termination clauses will be built into the management contract and non disturbance agreements and step in rights will be negotiated with the Franchisor. … 64. Having set out the envisaged development costs, which included sponsors and IFA fees (£525,000), developers, LLPs, Franchise and freeholders “legals” (£50,000, £70,000, £35,000 and £10,000 respectively), fees (including the bank arrangement fee £87,500) and “hotel set up costs” (Sanguine £248,000, Wyndham £80,000, working capital account £350,000 and FF&E £500,000) the debt request turned to “Loan Security” and the “Loan Sought”, stating: 8. Loan Security In addition to the stature of the parties involved the bank will derive its protection and comfort from the following: 1. First charge over the property. 2. Charges over the initial deposits to include: Construction Costs £5,200,000 Construction Cost Overrun £350.000 Interest Account £243,858 FF&E Account £500,000 OpCo Loan Account £350,000 Developers Security Account £2,000,000 Total Day One Secured Deposit £8,643,858 3. Step in rights to the development agreement and building contract. 4. Warranties form the contractor and professional team. 5. Access to the developer’s Security Account in the event repayments are not made by the PropCo. 6. Non disturbance agreements with the Franchisor permitting rectification of breaches and removal of the management company. The Developers Capital Account is provided by the developer to give additional comfort to the Bank and investors throughout the initial loan period. It may be called upon in the even that pre-agreed interest and amortisation payments (and other loan covenants) are nor met out of trading income. The benefit of the account should therefore be taken into account when calculating the loan covenants throughout the period. … 9. Loan Sought We are seeking debt finance to assist the investors in their purchase of the building. The loan would ideally be for a term of between 5 and 8 years at a margin above LIBOR. … Edward Symmons have advised, based on the revised trading figures that the hotel would have an estimated value of £12,400,000. Assuming a loan of £6,500,000 this represents an LTV [loan to value] of 52.4%. After deduction of the security deposit (and this show the true day one net lend) the LTV reduces to 36.3%. Edward Symmons have also provided a valuation of the property at PC and fully fitted but prior to trading of £11.25m” 65. Mr Tracey explained the reasoning behind the £2 million Developers Security Account, which was also described as the Capital Account, as being “something in addition” to the other security offered to the bank. He said that the “genesis of the capital account” had come about in the first trading hotel transaction that Downing had undertaken following lengthy discussions with RBS as to how best to obtain finance of any level on a trading hotel. Mr Matthews said, in relation to the capital account, that he thought it worked well in terms of protecting the Co-op’s interests and that he would not have encouraged the parties to consider other options which, from his past experience of development projects were inherently risky. But, as Mr Matthews accepted, the proposal for a capital account was in place before the Co-op had been approached by Cannock and it was not included as a requirement of the bank. However, Mr Matthews could not say that its inclusion had not been “driven” by another bank. As he said in evidence: “I wasn’t naïve enough to think that we were the first bank that had been asked to look at this proposition, and I was aware that this sort of mechanism had been used at the behest of other banks. When it was introduced as a concept in this proposal, it was something I felt worked well for parties, particularly the bank, from my past experience of similar projects, and I very quickly got comfortable with that and felt it was the best way forward for the bank … and so [I] didn’t really look at any variations beyond that other than the quantum of debt that the bank would be comfortable with.” 66. Having considered the proposed scheme to be “interesting” and the funding requirement to be “within the banks parameters”, Mr Matthews responded to Mr Tracey’s email on 17 December 2010. He requested a copy of the TRI Report and any valuations following which he hoped to be able to provide “indicative terms and conditions.”

“Charge over Developers Security Account balance of £2.0m – to be released on a basis to be agreed.” 68. Mr Matthews explained that these terms were not a bank document but a “Dave Matthews document”, something he put together himself. He explained that unlike most of his Co-op colleagues, who would have been wary of putting something into writing at such an early stage in the transaction, Mr Matthews sought to summarise the position to “flush out” any issues at the very earliest stage possible and avoid wasting time before taking the proposal to more senior people at the bank, who would be responsible for making the decision on whether to approve the loan. Mr Matthews said that if the terms were acceptable to a potential borrower it would give him the encouragement to invest further time and effort to try to move the deal forward. However, he made it clear that the terms were “far from” a formal bank offer letter and appreciated and accepted that the proposed transaction would evolve and change before reaching such a stage. 69. Mr Tracey responded to Mr Matthews by email on 17 January 2011, within hours of receiving the above terms: “Dave, Many thanks for the Terms. All seems fine but could you stretch this to a further £250,000 being a loan of £6.75m? It would help feed the ever growing family. Also, will you speak with Carl Ridgeley at Edward Symmons to ensure that they can be appointed as banks valuers? Regards, Mike” 70. It was accepted by Mr Lewis, Mr Tracey and Mr Matthews that there were no increased costs of the project that necessitated the additional £250,000 but that, notwithstanding the loan was to the LLP, the purpose of the increased facility was to improve Cannock’s cashflow. With regard to the reference to Mr Tracey’s “ever growing family” in the email Mr Matthews said that he regarded this not as meaning that Mr Tracey would benefit personally from the further £250,000 but, having met Mr Tracey and discussed their families and knowing that he was expecting a new addition to the family, took it “as a joke, a bit of banter” and did not read any more into it. 71. Although at this stage there had been no formal involvement by Downing, Mr Tracey explained that there would have been discussions between himself and Mr Lewis from around November 2009 to ensure that the proposal was suitable to Downing and would attract investors in the LLP. Indeed, this is confirmed by a letter of 15 November 2010 from Mr Bantoft to Mr Lewis setting out their agreement in relation to the proposed fundraising for the hotel development under which, for consideration of £1, Mr Bantoft undertook to ensure that Downing and Blakes were appointed as sponsor and property adviser (respectively) to the project. 72. On 19 January 2011 Mr Tracey sent the updated TRI Report to Mr Matthews. The Report, clearly marked “Draft”, was that sent to Stephen Bantoft on 19 January 2011. Mr Tracey subsequently provided Mr Matthews with three references for ThenHospitality and asked Mr Matthews if there was anything further he required for his report by which Mr Tracey meant the report that Mr Matthews was preparing for the credit committee of the Co-op. In the meantime, on 20 January 2011 there had been a meeting in London between Mr Matthews and Mr Nick Lewis of Downing. However, Mr Matthews explained that although the London Luton project may have been discussed the purpose of the meeting was to introduce his colleague, the Bank’s relationship manager who was “looking after the other Downing connections” with which the Co-op was involved, to Mr Lewis who had worked with Mr Matthews in relation to other Downing projects one of which, the Indigo Newcastle also involved a claim to BPRA. 73. Returning to the document prepared by Mr Matthews, the “Corporate Asset and Liability Asset Forum (CALM) & Preliminary Note” (“CALM”), dated 27 January 2011. This refers to the borrower as “Ramada Luton Airport BPRA and the “new money requirement” as being £6,750,000. The section headed “Rationale for proceeding” states: “Opportunity to support an experienced team that brings together an experienced property development company (Cannock Developments) a London based fund manager (Downing) and a major hotel brand (Ramada) to develop and operated a new Ramada Encore Hotel at Luton Airport. Total cost will be £11.5m and we are asked to fund a maximum of 58.7% of the cost with a day one market value expected to be minimum of £12m. The LTV will only be 56.2%. The borrowers are seeking an 8 year commitment. In addition we will have a £2m cash deposit as additional security reducing our net exposure to only 40% LTV. In summary an acceptable LTV, excellent return and deal structure that will meet all the hotel sector key credit criteria. Significant upfront cash input of minimum of £6.75m by high net worth investors. Approval is recommended.”

“• Downing Corporate Finance are London based fund managers who we know well through two other deals [one of £10m and the other £14.5m]. They will be raising the equity. • Edward Symmons have valued the hotel for the investors at £12.7m when complete and trading. We propose to obtain our own valuation from a bank approved valuer and will use either Collier’s or Christies.” 76. However, on 2 February 2011 Mr Matthews had received an email from Carl Ridgley of Edward Symmons. This referred to “our customer”

“While the stabilised market figure is of interest our primary focus will be on the ‘day one’ opening market value and the market value with special assumptions ie business closed, no licences, accounts and inventory. Our policy is to lend up to 70% of the current market value and 90% of the mvsa. The proposed loan in this case is £7m so I am sure there will be plenty of cover but if you have an indication of the likely values on these basis it would be helpful. I will organise an instruction letter. However, with regard to your fee my understanding was that the borrowers [ie the LLP] were to pay you directly. Is this correct?" 77. Having reviewed the proposal approved by CALM with a colleague, in an email, dated 7 February 2011, the Function Leader, Credit Underwriting, Banking Risk of the Co-op noted that he expected to be able to support it but: “… didn’t really understand why the £2m “developers security account” cash can’t be used to simply reduce the actual debt requirement, rather than just being held on a charged side account – perhaps this is something linked to BPRA rules, but not doubt the application will clarify this” 78. Mr Matthews said that he explained to his immediate superior at the bank that the rationale for the £2m security account was that it kept the developer committed to ensuring the success of the project and that if for some reason it failed there were funds available to cover the bank. 79. On 2 March 2011, having been instructed by the Co-op to do so, Edward Symmons provided the Co-op with its Report and Valuation of the Property as at 15 February 2011. The Report explains that Edward Symmons’: “… opinions of value are based on the bases of freehold vacant possession assuming acquisition by an owner operator or franchisee not subject to the proposed management contract to [ThenHospitality]. In formulating our opinions of the value of the proposed hotel on a Day One basis and in a Stabilised Year of Operation, we have relied upon financial projections prepared by [ThenHospitality]. We have also included additional revenue in the form of a management fee, in connection with 49 additional spaced which are to be held by [Cannock].”

“In providing our opinions of value we have had regard to the Market Study of the Luton hotel market and commentary on the projections of performance of the proposed Hotel, prepared by Tri Hospitality Consulting dated February 2011.” 80. Additionally, the Co-op instructed Gleeds Cost Management Limited (“Gleeds”) as its quantity surveyor and monitor notwithstanding it also acted as the project surveyor for the LLP. Mr Matthews was provided with the contact details of a director of Gleeds by Mr Tracey who explained, in an email of 28 February 2011 that: “Gleeds have acted for RBS on our past schemes so they know the procedure and the team involved. Will you issue a draft appointment document to him?” 81. In a submission, which he subsequently prepared for the Co-op’s credit department, Mr Matthews “strongly recommended” the proposal which was accepted by the bank on 16 March 2011. On 21 March 2011 Mr Matthew’s received the report from Gleeds, ‘Funder’s Technical Due Diligence Initial Report’. Having summarised the agreed amendments to the ‘Design and Build Contract 2005 Edition incorporating Revision 2 2009 issued by Joint Contracts Tribunal (JCT) (to which we refer in greater detail below) it concluded that: “… the amendments in totality are considered to be comprehensive and very well thought through from an Employer who is clearly risk averse. It is worth noting that the construction contract provides for a parent company guarantee, where the Balfour Beatty Group Limited will provide a guarantee of performance for their subsidiary, Multibuild (Construction & Interiors) Limited. … Overall we consider that the amendments are very comprehensive and serve to pass a significant amount of risk onto the contractor in both terms of cost and programme delivery.”

“The Main Contractor Multibuild (Construction & Interiors) Limited has stated the allowance for Main Contractor’s Overheads and Profit is included within the elemental breakdown of the Contract Sum Analysis. Multibuild (Construction & Interiors) Limited have stated the overall allowance for Main Contractor’s Overheads and Profit included within the Contract Sum Analysis is 7½% for overheads and 5% for profit which is at the higher end of the range we would normally expect to find given current market conditions. However, Gleeds would note this project is a refurbishment project, with more associated risks than for example a new build development which is therefore reflected in the level of overheads and profits Multibuild (Construction & Interiors) Limited would have priced for.” 82. Although in the “conditions precedent” (see paragraph 67, above) in his own document and in the CALM submission Mr Matthews had referred to “a Bank appointed” surveyor and QS to confirm the market value, market value of the hotel with special assumptions of the hotel on completion and to confirm the costings are realistic. He explained in evidence that, notwithstanding that Edward Symmons had valued the hotel for Cannock, it was “far from uncommon” when considering proposals such as this that a valuer would have valued a property “for another bank or whatever purposes” for the same valuers would also be instructed by the Co-op. This was especially the case where valuation fees could be “sometimes in the tens of thousands” and borrowers, who were responsible for the fees, “were often reluctant to bring a whole new firm in and get a fresh new valuation. 83. Mr Matthews made it clear that if he had any doubt about the integrity or accuracy he would insist on another valuation. However, in this case Edward Symmons were on the Co-op’s panel of valuers and were “well known and trusted by the bank” and had the appropriate professional indemnity insurance. Mr Matthews was of the view that Edward Symmons would not risk their relationship with the Co-op by providing a “one-off” valuation for someone like Cannock which was in any way erroneous. He explained that he had taken a similar view in respect of Gleeds and in relation to the TRI Report. 84. Therefore, because of the “very tight time frame” to approve the deal and given that any other valuer on the Co-o’s panel would “be starting from scratch with no knowledge of the building would be unable to supply the valuation we needed within the likely timescales needed”, Mr Matthews explained that he took a “purely pragmatic approach. He also explained that, because of the financial situation at that time banks were “hurriedly having to get all their property portfolios revalued” and although it might have been expected that because of the financial crisis valuers were desperate for work, that was not the case and they were, as he put it, “bombed out with valuation work to do.” 85. On 25 March 2011 the Co-op and the LLP, which had until then been dormant, entered into a loan agreement in which they were defined as the “Bank” and the “Borrower” respectively (the “Loan Agreement”). This included the following terms: 1 PURPOSE, DEFINITIONS AND INTERPRETATION … “Capital Account Deed” means the deed in relation to the Capital Account between (1) the Developer (2) the Borrower and (3) the Bank dated the date of this Agreement; … “Construction Amount” means the amount of £5,721,914 (five million seven hundred and twenty one thousand nine hundred and fourteen pounds); … “Contribution” means the equity contribution of £7,200,000 (seven million pounds) received from the subscribers to the Information Memorandum; … “Developer” means OVL (Bankfield LLP) [ie Cannock] … or such other developer acceptable to the Bank; … “Interest Period” means each period for the calculation of interest pursuant to Clause 4 (Interest Periods); “Loan” means £7,000,000 (seven million pounds) or (as the context may require) the principal amount owing to the Bank under this Agreement at any relevant time; … “Margin” means 3% (three per cent) per annum until the Margin Change Date [ie the date of practical completion], 2.75% (two pint seven five per cent) per annum from then for a minimum of 12 months and provided … … “Subscribers” means the group of investors who are providing the Contribution to assist with the Total Costs; “Subscribers Account” means the account nominated by the Bank into which the Loan is deposited on its initial drawdown along with the Contribution; … 4 INTEREST PERIOD 4.1 The first Interest Period shall begin on the date when the Loan is drawn and each subsequent Interest Period shall begin on the expiry of he preceding Interest Period with the final Interest Period ending on the date on which the loan is repaid in full. … 5 INTEREST 5.1 The Borrower shall, in respect of each Interest Period, pay to the Bank interest at a percentage rate per annum equal to the aggregate of:- (a) the Margin; (b) Bank Base rates; and (c) Mandatory Costs. A certificate by the Bank as to the amount of such cost shall be conclusive in the absence of manifest error. 5.2 Interest shall be calculated on a day to day basis on a year of 365 days and shall be payable on the last day of each Interest Period and on final repayment of the Loan. Any interest unpaid when payable shall be compounded. 5.3 At any time after an Event of Default has occurred, which has not been waived in writing by the Bank or remedied to the satisfaction of the Bank, the Bank shall be entitled to charge interest at a rate equal to the aggregate of the Margin plus 2% per annum above Bank Base rate and Mandatory Costs. In respect of each Interest Period as determined by the Bank (or other such rate as may be determined by the Bank and notified to the Borrower from time to time) on the aggregate of the Loan and any outstanding interest up to the earlier of (i) the date on which the Bank notifies the Borrower in writing that it is satisfied that such Event of Default has been remedied or waived and (ii) the date on which the loan is repaid and any other amounts outstanding under this Agreement have been paid in full interest shall be payable at the rate both before and after demand, court decree or judgment. … 11 EVENTS OF DEFAULT … Interest 11.2 Interest shall continue to be charged on the Loan until the Loan is repaid and the outstanding interest and other sums due are paid in full. … 13 PROPERTY COVENANTS Covenants 13.1 The Borrower undertakes that:- Loan: Property Value The Loan less the balance standing to the credit of the Capital Account on the relevant testing date (i) expressed as a percentage of Market Value (MV) shall not exceed 70% or (ii) expressed as a percentage of Market Value (MV) subject to Special Assumption shall not exceed 90% (whichever is the lower). 15 SECURITY 15.1 The obligation of the Borrower to the Bank under this Agreement shall be secured by:- (a) all existing security, if any, held by the Bank for the Borrower’s liabilities; (b) security in the Bank’s preferred form as follows:- (i) a first Legal Charge over the Property and its associated assets; (ii) a Debenture over the Borrower’s whole assets and undertaking; (iii) a limited resource Guarantee, provided by the Developer in respect of the Borrower’s obligations to the Bank; (iv) a Guarantee unlimited as to amount by London Luton Hotel in respect of the Borrower’s obligations to the Bank; (v) a Supplemental Debenture Charging the Borrower’s Interest in the charges over (1) the Construction Account (2) the Construction Costs Overruns Account (3) the FF&E Account and (4) the Interest Account granted by the Developer; (vi) a Legal Assignment of the Borrower’s rights, title and interest in the Development Agreement; and (c) all future security which the Bank may from time to time hold for the Borrower’s liabilities. 15.2 The obligations of the Developer [Cannock] to the Bank under its Guarantee in favour of the Bank shall be secured by:- (a) security in the Bank’s preferred form as follows:- (i) a first Legal Charge over the Construction Account; (ii) a first Legal Charge over the Capital Account; (iii) a first Legal Charge over the Interest Account; (iv) a first Legal Charge over the Construction Overruns Account; (v) a first Legal Charge over the FF&E Account; (vi) a Legal Assignment of the Developer’s rights, title and interest in the Building Contract; (vii) a Legal Assignment of the Developer’s rights, title and interest in the Building Contract Guarantee; and (viii) a Legal Assignment of the Developer’s rights, title and interest in the FF&E Supply Agreement; and (b) all future security which the Bank may from time to time hold for the Developer’s liabilities. 15.3 The obligations of London Luton Hotel to the Bank shall be secured by:- (a) security in the Bank’s preferred form as follows:- (i) a first legal charge over London Luton Hotel’s leasehold interest in the Property and its associated assets; (ii) a Debenture over London Luton Hotel’s whole assets and undertaking; (iii) a Guarantee unlimited as to amount by the Borrower in respect of London Luton Hotel’s obligation to the Bank; (iv) a Legal Assignment of London Luton Hotel’s rights, title and interest in the Hotel Contracts; and (vi) a first Legal Charge over the Working Capital Account; and (b) all future security which the Bank may from time to time hold for London Luton Hotel’s liabilities. 15.4 For the avoidance of doubt the Borrower acknowledges that all security held and to be held by the Bank shall unless the security document expressly states otherwise secure all the liabilities of the Borrower to the Bank of whatsoever nature. 86. In accordance with Clause 15.2 of the Loan Agreement, on 25 March 2011 Cannock and the Co-op executed a Deed of Charge over Credit Balances clause 2 of which provides: “For the purposes of and to give effect to this security the Charge shall operate as a release of the Deposit to the [Co-op] until the Secured Sums have been irrevocably and unconditionally paid and discharged in full.”

“ 16.5 [Cannock]/[LLP] Directions Each of [Cannock] and [the LLP] directs that the balance of the Subscribers Account at the date of this Deed be utilised as follows:- 16.5.1 £2,850,000 (two million eight hundred and fifty thousand pounds) will be utilised to assist with the purchase of the Property; and 16.5.2 simultaneously therewith the balance of the Subscribers Account shall be transferred or used as follows:- (a) the Stamp Duty Amount shall be used to pay SDLT in respect of the Property; (b) the Construction Amount shall be transferred to the Construction Account; (c) the Capital Amount shall be transferred to the Capital Account; (d) the Interest Amount shall be transferred to the Interest Account; (e) the Cost Overrun Amount shall be transferred to the Construction Cost Overrun Account; (f) the Bank Fees Amount shall be used by the Bank to pay its fees and the fees of its professional advisers; (g) the FF&E Amount shall be transferred to the FF&E Account; (h) the Working Capital Amount shall be paid to the Working Capital Account; and (i) the remaining balance shall be transferred to [Cannock] or as [Cannock] shall direct in and towards the discharge of the fees and other expenses detailed in Schedule 1 (Payments). 16.6 Payments from the Construction Account [Cannock] shall only make withdrawals of amounts standing to the credit of the Construction Account for payment to the Contractor during the Development Period and for payment of the VAT Bridge. … 16.9 Interest Account [Cannock] may only withdraw amount relating to the credit of the Interest Account to transfer sufficient amount to permit [the LLP] to comply with payment options under clauses 4 ( Interest ) and 7 ( Payments ) of the Facility Agreement. … Schedule 1 Payments Sponsors and IFA Fees Shakespeare Putsman Fees Hammonds Fees Freeholders Legals and costs Pre contract professional fees and Reports Project Management Bank Monitoring fees Valuation fee including TRI Title insurance Section 106 Payments Planning Consultant fees”

“Dear Sirs, £1,985,000 Loan Facility and £2,000,000 capital account We are pleased to confirm that [Cannock] (the “ Lender ”) has agreed to provide a loan of £1,985,000 to [the LLP] (the “ Borrower ”). In the event that sums are withdrawn from the Capital Account as referred to in the deed dated with today’s date and made between the Lender (1) the Borrower (2) and the [Co-op] (3) [ie the Intercreditor Deed], then such sums withdrawn shall be treated as having been added to the sums advanced pursuant to this letter and shall form part of the loan hereunder (together in aggregate the “ Loan ”).”

“4.1 without prejudice to paragraph 12 [which provides for interest on overdue amounts], interest shall accrue on the principle (sic) amount of the loan (being £1,985,000) outstanding from time to time at a rate equal to the interest rate applicable to the loan made available by Co-op to the Borrower (“ Co-op Loan ”) on or around the date of this letter (“ Co-op Interest Rate ”). For the avoidance of doubt, the agreement relating to the Co-op Loan (“ Co-op Loan Agreement ”). No interest is payable on any additional sums withdrawn from the Capital Account referred to above. 4.2 Accrued interest shall be rolled up and compounded quarterly and is payable in full at the same time as repayment of the principle (sic) amount of the Loan under paragraph 5 of this letter.”

“… to subscribe for an investment in the refurbishment of an existing commercial building adjacent to London Luton Airport, which will be converted to a 124-bedroom Ramada Encore hotel. Qualifying expenditure should attract relief under the Business Premises Renovation Allowance, providing higher rate taxpayers with significant relief on the cost of their investment. In addition, a limited recourse Loan Facility has been agreed with a major clearing bank to part fund the acquisition of the Property and the conversion of the Property to a hotel. An amount of £2,000,000 will be place on deposit by the Developer as additional security for the Bank.”

“The total subscription from investors is £15.5 million. This will fund the purchase of Property and all costs associated with the conversion works. Planning consent for the Works was granted by Luton Borough Council on 19 August 2010.” 91. In the ‘Risk Factors’ section of the IM, under the heading ‘Taxation’, there is the following warning: “This Memorandum has been prepared in accordance with current legislation and HMRC practice and its interpretation by the Fund’s advisers. HMRC practice and interpretation of the law may differ from that set out in this Memorandum. The allowances to be claimed are new and therefore the understanding of the regulations is based upon an interpretation rather than historical practice; as such, there may be a delay in agreeing the amount of the allowances with HMRC and/or the amount that is actually claimed may be materially lower than anticipated.” 92. The IM also explained the ownership of the hotel and the Developers Capital Account as follows: “A feature of an investment in the Fund is that investors, through the Fund, will own the company that operates the hotel as well as the Property itself. This means that should the hotel meet its projections (which have been analysed and commented on by TRI Hospitality Consulting, a major hotel consultancy …), the overall levels of return for investors will be higher than if the Property was leased to a third party on normal commercial terms. However, there is a risk that the hotel will fail to meet its trading projections, and consequently, that the Fund will be unable to meet its repayments to the Bank. This risk has more serious consequences in the first seven years following refurbishment, because if the Bank enforced a sale of the Property then investors would suffer a clawback of the tax reliefs. In order to mitigate this risk, the Developer has agreed to provide a cash deposit of £2 million in the Developer’s Capital Account at the Bank. This cash is not an asset of the Fund; however, the Developer has agreed that this account will be charged to the Bank. The Developer’s Capital Account can be accessed by the Bank should the Fund be unable to meet its payment obligations to the Bank. In the event such a drawdown occurs, the drawn funds from the Developer’s Capital Account will be deemed to be lent to the Fund and will create a secondary loan (without covenant tests) which will be repaid either from the ultimate sale proceeds of the Property of following a refinancing. Significantly, an balance in the Developer’s Capital Account will be taken into account in assessing the level if all financial covenant tests under the terms of the Loan Facility. This will provide a significant headroom on the agreed covenant tests.” 93. The IM also explained, under the heading ‘The Loan Facilities’ that: “The purchase of the Property will be financed through a combination of funds provided by Members and Loan Facilities including a Loan Facility from a major clearing bank. Limited recourse loan facilities have been agreed in principle, subject to documentation, to provide the Fund [the LLP] with fixed term loans of approximately £8,300,00, in total being approximately 54% of the Total Purchase Price. Total £ Minimum Subscription £ % Subscription into Fund 7,200,000 46,451 46.5 Loans to Fund 8,300,000 53,549 53.5 Total Property Cost 15,500,000 100,000 100.0 Loan Facilities A major UK bank will provide a limited recourse loan to the Fund of up to £8,300,000 which will be secured by a first charge over the Property and other assets of the fund and an assignment of rental income. The loan is interest only for 18 months following the practical completion of the hotel and then is scheduled to amortise (ie capital to be repaid) over the following 13.5 years. The Developer will pay the interest during the construction period which is expected to be 15 months. The initial term of the loan is eight years. All surplus trading income will be used to amortise the outstanding loan balance on a quarterly, in arrears, basis. There are no early redemption penalties. Loan interest will be charged at a margin of 3.00% over Bank Base rate (“Base”) during the construction period, 2.75% over Base for the first year of trading, and 2.5% over Base for the remainder of the term. If the loan provided by the Bank is less than £8,300,000 the Developer has agreed to make available a loan for the amount of the shortfall on the same terms as the Bank. Interest payable in such a developer loan will be at the same rate as the bank loan. However, the interest cannot be services from rental income, which is used to repay the bank loan, and will not therefore be rolled up and added to the developer loan and repaid following the sale of the Property or an earlier repayment of the bank loan or other refinance.” 94. Three individuals with a connection to Cannock, Mr Bantoft, Mr Tracey and a Mr Gotley invested in LLP as did Mr Lewis. When asked in cross examination about the relevance of people on both sides of a contract trying to agree a price, Mr Lewis explained: “Well, I would say it is relevant in a positive manner in the financial services industry, which this would be part of it, investors and advisers are actually quite comfortable when individual members who are party to the transaction have actually put some money up on the same basis as they have. So I view it as a positive not a negative. Having agreed that he had himself invested in the LLP Mr Lewis continued: “But let me be quite clear about how much was put in. I think this has to be put into some perspective. The investments of the four individuals I think we're talking about – four or five individuals – would have comprised no more than about 4 per cent. So these are not what I would call dominating or dominant shareholdings in the business, but they are a sign of – of, you know, being involved in the project.” 95. Although, as investment in the LLP was regulated under the Financial Services and Markets Act 2000, the IM was produced by Downing, it is clear from the emails sent to the LLP by Mr Bantoft of Cannock that he took a significant interest and played a part in its production. On 3 February 2011 Mr Bantoft wrote: “How are you getting on with my memorandum mark-up. I’m on a train most of tomorrow son would like to make a start on my drafting. Any chance of something today?”

“Attached is amended memo. Mike [Tracey] will update the financials to reflect the model on Monday. Mike – can you also fill in the section for the existing property size etc. on page 6. Pierre [Clarke of the LLP] – please insert the correct TRI graphs etc. The final version report won’t be out until later in the week but it’ll only have a changed P&L table. The main text won’t be affected. Pierre – I’m attaching under separate cover a series of photos, artists impressions etc. … for inclusion with the document. I’d suggest the artists impression of the hotel is used on the front cover. Could we have a unified document with all the above items completed for circulation close of Monday.”

“Memo with correct numbers. Could you please insert the various info as per Friday’s email.”

“Any idea when I’ll have the memorandum back?” 96. Mr Bantoft was also involved in attracting investors to the LLP. Mr Lewis, in evidence, agreed that Mr Bantoft was “keen to take a role beyond what was necessary.”

“Back in the office today – how is Luton going? The cash seems a bit slow but presumably a work in progress?”

“All fine. Know where it’s all coming from with names. Just logistics.” 97. Additionally, as his email of 13 January 2011 to Mr Lundy (an IFA) illustrates, Mr Bantoft, was involved in providing information to IFAs to market the project. He wrote: “I attach the design and planning pack for our 124 bed Ramada Encore at Luton Airport. We’ll be producing the BPRA memorandum by mid-February and we anticipate closing the deal in early March. It will be sponsored by Downing but I’m handling the allocations and am only making it available to a very few IFA’s who have been supportive in the past. The overall economics will be similar to Cumberland House [a previous project] with a likely net cash contribution of circa 6p. The deal will be approximately £15.5 million and I’m currently trying to gauge demand so I can provide reasonable allocations to each IFA. Could you please let me have your likely requirement at this stage with specific client names and likely amounts by early February.” 98. Mr Bantoft also engaged in correspondence with IFAs, eg from an email exchange with Mr Lundy on 28 February 2011 and the following email exchange between him and an IFA, Mr David Healy of Ward Consultancy plc, who had received a copy of the IM and had raised a query, originally with Mr Clarke of Downing: “ From: David Healy Sent: Thursday, March 10 2011 9:02 AM To: Pierre Clarke [of Downing] Cc: Stephen Bantoft, … Subject: RE: Luton BPRA Hi Chaps Can I have a breakdown of the development agreement. Thanks David From: Stephen Bantoft Sent: 10 March 2011 9:03 To: David Healy; Pierre Clarke Cc: , … Subject: RE: Luton BPRA No From: David Healy Sent: Thursday, March 10 2011 9:04 AM To: Stephen Bantoft, Pierre Clarke Cc: … Subject: RE: Luton BPRA Why? David A Healy From: Stephen Bantoft Sent: 10 March 2011 9:05 To: David Healy; Pierre Clarke Cc: … Subject: RE: Luton BPRA It’s my commercial IP. We don’t even release it to HMRC. It’s not something that an investor requires – they have the valuation report as their underpinning.” 99. Although Mr Lewis initially played down Mr Bantoft’s role in the preparation of the IM and fundraising as “just a bit of banter”, he accepted that Mr Bantoft, who he described as, “a very dominant character” who “obviously thought he was very important”, was “very keen” to take a role “beyond what was necessary.” 100. Mr Tracey described Mr Bantoft as having worked as a developer and a reviewer of projects and developments for 25 years who knew all the principal IFAs and that they wanted to know what Cannock was doing as they were happy with the developments it had previously provided. In evidence he agreed that: “… of course, there's a crossover of people asking Stephen [Bantoft] “What are you doing?" And him saying “This”, and all the time it's being promoted by Downing, but you can't away from that, and anything that Stephen could do to ensure the financial close of the transaction he would do. Whether he was treading on other people's feet or not, Stephen would just get on and do it.”

“A. … should not and did not include the cost of supplying and installing the FF&E for which a separate payment, over and above the Development Sum was made. B. The FF&E sum was paid in addition to the Development Sum by the [LLP] to [Cannock] and such sums were invoiced to and paid by the [LLP] on completion. The parties have understood and intended (and funds were paid accordingly) that the FF&E sum was payable in addition to the Development Sum. C. The Information Memorandum which recorded the terms of the transaction prior to completion of the Development Agreement set out that the FF&E Sum was payable in addition to the Development Sum. The Development Agreement did not reflect the agreed position and did not reflect the payments made on completion. 105. Clause 2 of the Deed of Rectification under the heading, “Development Sum, Works and FF&E Sum” confirms the parties agreement to rectify the Development Agreement by amending the definition of the “Development Sum” and “Works” as set out in the Deed of Rectification and also that a definition of “FF&E Sum”, which, as the Deed of Rectification states, “was accidently omitted from the [Development] Agreement”, be included and that the Development Agreement should be construed in accordance with the Deed of Rectification. Clause 2.2 provides: “The [LLP] and [Cannock] agree and confirm that there should have been a payment obligation at Schedule 2 of the [Development] Agreement at paragraph 3 to provide that the [LLP] was (and did) pay the FF&E Sum on the date of the [Development] Agreement.”

“… a sum equal to each quarter’s rent to be utilised in payment of a quarterly licence fee equal to each quarters interest charged to [the LLP] on the finance obtained from the [Co-op] to fund the Development Sum (as defined in the Development Agreement), incurred from and including the date hereof until and including the date that the [Property] opens for trade as an operational hotel.”

“6 REPAYMENT OF DEPOSIT The [LLP] shall release the Deposit in accordance with clause 5, above. Any remaining sums in the Deposit Account shall be paid to the LLP upon completion of the Lease.” 110. From 25 March 2011 until 10 October 2012 the LLP invoiced Cannock for “rent” requesting it be paid directly into the LLP’s Co-op bank account. The total amount paid by Cannock (excluding VAT) was £316,120. The difference between that amount and £350,000 to which the Licence Fee Deed refers was retained by Cannock. Costs Agreement 111. between Downing and Cannock (then OVL) under which it was agreed (at clause 3), ‘Contribution to Downing’s Costs’ that: “[Cannock] shall be responsible for the payment of costs and expenses of those parties set out in the Schedule (whether or not incurred by or on behalf of any party acquiring a legal interest in the Property) and such other costs incurred by Downing (or by Downing on behalf of any party with an interest in the Property) incurred in the course of the negotiation, preparation of the Transaction [ie the acquisition of the Property by the LLP, grant of a lease of the Property by the LLP to the Operating Company and entering into of management and franchise agreements and related equity raising and funding for the acquisition of the Property] and any other necessary documentation required pursuant to it, all which sums shall be payable within 3 working days of the Transaction.” 112. The costs set out in the Schedule to the Costs Agreement included, the Sponsors and IFA fees, all legal fees relating to the Transaction, Bank fees, Sanguine fees, TRI fees and Bank Monitoring fee. Disputed Expenditure 113. We now turn to the remaining sums, not considered above, that Cannock paid out of funds received from the LLP which HMRC contend is not “qualifying expenditure”. 114. £372,423.40 paid in respect of IFA fees. Mr Lewis explained that this figure can be broken down into £209,551.72 of IFA fees paid by Downing and reimbursed by Cannock and £162,871.68 of IFA fees paid directly by Cannock. It is not disputed that the LLP knew and intended that part of the Development Sum which it paid to Cannock would be used for this purpose. 115. Promoter fees of £310,000 – the evidence of Mr Lewis was that £50,000 was paid to Downing as a “consultancy fee” with the balance, £260,000, being paid to Blakes in accordance with the Profit Sharing Agreement of 15 November 2010 between Mr Bantoft, DCF and Blakes. As noted above (at paragraph 38(1)) it was agreed that because of the involvement of Mr Lewis in the BPRA part of the business that Blakes should get the “lions share” of these fees. 116. Under the Profit Sharing Agreement, upon consideration of £1, Mr Bantoft would ensure DCF was appointed as sponsor and Blakes as property adviser for the project with their fees being the aggregate of 2% of the gross proceeds of the fundraising plus all third party expenditure, other than DCF’s legal fees for the IM, in connection with the Project and 15% of all monies released from the Capital Account, and 15% of all payments (including interest) which Mr Bantoft or certain other entities receive in relation to various facilities which were made available to assist with the funding of the Project. In evidence Mr Lewis agreed that the sums total arising under these arrangements to which DCF and Blakes were entitled was in excess of £1 million. He also accepted that the LLP knew and intended that part of the Development Sum would be used to pay the Promoter fees 117. Legal fees of £153,409.89 – this is the balance of the total amount of legal fees paid after deduction of £34,999 which the LLP accepts is attributable to the acquisition of the Property and which therefore does not qualify for BPRA. This sum can be further broken down as follows: (1) a payment of £8,520.36 to Shakespeare Putsman (solicitors) which was described by Mr Tracey as being in respect of an “agreement with vendor” for the Property. The invoice for the transaction, dated 21 April 2010 describes the sum as an “interim bill re purchase of [the Property]” and includes disbursements for items including HM Land Registry fees. In evidence Mr Tracey agreed that the invoice related to the purchase of the Property; (2) a payment of £24,958.07 to Shakespeare Putsman. The invoice, dated 29 March 2011, refers to “our professional fees in connection with the purchase of [the Property]” and again includes disbursements including HM Land Registry fees. In evidence Mr Tracey described these fees as relating to “due diligence in relation to the purchase of the Property”; (3) a payment of £6,000 described by Mr Tracey as “completion legal fees of £5k+irrecoverable VAT. In evidence he agreed that this payment related to “the raising of finance and debt for the Property – for the purchase of the Property”; (4) a payment of £36,330.20 described by Mr Tracey as the Co-op’s “charges of solicitors costs re sale of [the Property].”

“The Development Agreement, like all agreements which have been entered into in relation to the Property, was negotiated at arm’s length. Thus, the Development Sum was the amount which the [LLP] was required to pay in order to secure the conversion of the Property into an hotel.” 133. Mr Davey contends that such an assertion is “fundamentally flawed” in that, as Mr Lewis accepted, there was no record of any negotiation between Downing, the LLP and Cannock. However, it is not disputed that prior to their transactions concerning the Property, Cannock and Downing had worked together and had an established business relationship (see paragraph 48, above). As such, it is perhaps not surprising that there were not drawn out detailed and documented negotiations between them leading to an agreement on the services to be provided by Downing and for what fee. 134. Moreover, as Mr Gammie argues, the notion of parties being “connected” is a statutory concept of which there are many examples, eg s 286 of the Taxation of Chargeable Gains Act 1992 which provides how, “the question of whether one person is connected to another” for the purposes of that Act is to be determined. Clearly, neither Cannock, Downing or the LLP are “connected” in a statutory sense and, as such, any transactions between them are to be regarded as being at “arm’s length” commercial transactions. 135. HMRC have also queried the independence of the Co-op and Mr Matthews in relation to the transactions citing in particular the valuations and reports of Edward Symmons and Gleeds in the light of the emails sent to Mr Matthews on 17 January 2011 by Mr Tracey asking him to “ensure” that Edward Symmons “can be appointed as [the] banks valuers” (see paragraph 69, above) and by Carl Ridgely of Edward Symmons on 2 February 2011, referring to “our customer”, Mr Bantoft seeking formal instructions from the Co-op to proceed with the valuation (see paragraph 76, above). 136. However, we fully accept the evidence of Mr Matthews (see paragraphs 83 and 84, above) that neither Edward Symmons nor Gleeds would take the risk of opening themselves up to a claim for breach of contract, professional negligence or professional misconduct or jeopardise their relationship with the bank for the sake of a “one-off” valuation and that if he had any doubt of the integrity or accuracy of the reports or their independence the Co-op would not have accepted the reports relationship between the bank notwithstanding the “very tight time frame” involved. 137. Turning then to the question of valuation, its relevance was conveniently summarised by Nugee J in Acornwood LLP and others v HMRC [2016] STC 2317 (“ Acornwood ”) where he said, at [66]: “I accept Mr Davey's submission. In the example he gave a person pays £1,000, and in return he gets his car washed and a promise to pay him back £900 in a year's time. You could attack that by saying that nobody in their right mind would pay £1,000 to have their car washed. You could call evidence that other people would wash the car for a few tens of pounds. And you could then draw the inference that the £1,000 could not have been spent on getting it washed and must have been spent on something else. But you do not need to attack it that way. You can attack it a different way, which is to say: 'Look at the contract. As well as the car washing you get the £900 back. That £900 back is worth £900 because you also get interest in the meantime. So you cannot have spent the £900 on getting the car washed.' Now it logically follows from that that what you were paying for the service of having the car washed is only £100, but you have not attacked it on the basis that you were paying over the odds for the car wash. You have simply attacked it on the basis you are getting something additional, which is not car washing, in return for the £1,000. I accept that there is a distinction between 'we are not relying on the valuation point to prove our case' and saying 'we accept that the services were worth 95', just as there is a difference between saying 'we are calling a car wash expert to tell you how much it costs to get your car washed and it is only £100, so the £1,000 must have been spent on something else' and saying 'we are not calling a car wash expert; we are relying on what it says in the contract about getting £900 back. It does not mean we accept that £1,000 is a market price for having had your car washed'.” 138. Although, for the reasons above, we consider the Edward Symmons valuation to be wholly independent it was not disputed that it established the anticipated value to the LLP of the completed conversion of the Property into a Ramada Encore hotel (ie the business) rather than value the Property as a building or particular works of renovation, conversion or repair. 139. Mr Davey contends that the consequence of this is that the Edward Symmons stabilised valuation figure does not provide the LLP with any support for its argument that the Development Sum was a reasonable sum to pay Cannock for the conversion work as it had no correlation with the costs of converting and renovating the Property. Therefore, he says that the report cannot be used to test the market value of the works undertaken or to determine the purpose for which the LLP paid the Development Sum to Cannock. Additionally, he says, relying on the expert evidence of Mrs Cochrane, that the Edwards Symmons valuation is an overvaluation. 140. Taking the overvaluation point first, given our conclusion that Edwards Symmons valuation was wholly independent and was provided for the benefit of the Co-op, we can see no reason to doubt the integrity of its valuation. Additionally, we accept Mr Gammie’s criticism of Mrs Cochrane who, when cross examined, was unwilling, for perfectly understandable reasons of client confidentiality, to provide any detail, even in general terms, of her experience of undertaking valuations that could stand comparison with type of transaction with which we are concerned in this appeal. This can be contrasted with the experience of the LLP’s valuation expert, Mr Harper (see paragraph 38(6), above) who was “overall” satisfied that the Edward Symmons report accurately reviewed the value of the hotel and who disagreed: “… with the Revenue’s statement that the valuation was inaccurate in that it constitutes or includes an overvaluation” 141. As to the correlation between the Development Sum and the renovation or conversion of the Property, Mr Davey contends that given the valuation was directed at valuing an operational business rather than the value of physical premises from which it operates and having regard to the approach of Nugee J in Acornwood , that there is no valid basis on which the LLP can advance the Edward Symmons valuation as any reliable indication of the market value of the conversion works acquired by the LLP. 142. However, we agree with Mr Gammie who contends that HMRC have confused costs with value which is irrelevant to investors. The question with which they are concerned is what do they get for their money with the answer being the Property converted into a Ramada Encore hotel. He says that it is clear from the IM that the price paid by the investors was that which the market was prepared to pay and that, although prepared for the Co-op, Edward Symmons would also have known that their valuation would provide the basis for the IM. 143. We now turn to the approach to be adopted in relation to the issues. 144. Having set out the legislative provisions above (paragraph 27) it is clear that for BPRA to apply there must be: (1) a “qualifying building” (s 360C); (2) “qualifying expenditure” must be incurred “on, or in connection with” the qualifying building (s 360A and s 360B); and (3) the “qualifying building” must ultimately comprise “qualifying business premises”(s 360D). In the present case it is not disputed that the Property is a qualifying building and that when completed it comprised qualifying business premises. The difference between the parties concerns whether the payment of the Development Sum by the LLP to Cannock was made “on or in connection” with the conversion renovation or repair to the Property. 145. HMRC submit that the focus of legislation is directed at expenditure on or in connection with physical works. This argument is based on the words used in the statute particularly “conversion”, “renovation”, “repair” in s 360B(1)(a)-(c), which Mr Davey contends are fundamentally physical in character. While, HMRC, in our view quite rightly, accept that qualifying expenditure is not limited solely to physical works it is nevertheless contended that the physicality of the words used is reinforced by the fact that s 360A(1) provides that allowances are only available in respect of a “qualifying building”, as defined in s 360C(1), “in relation to any conversion or renovation work”, with “work” being an inherently physical concept. As such, it is submitted that there must be a close connection between the expenditure and the conversion, renovation or repair of the building. 146. However, although s 360C does indeed refer to “conversion or renovation work ”

“It may be that in some contexts the substitution of the words “having to do with” will solve the entire problem which is created by the use of the words “in connection with”

“… if the payer knows that the payee is going to use the money in a particular way, and intends that the payee should do so—indeed has been responsible for devising the transaction in such a way as to make it essential that the payee does use the money in that way—then it is wholly unrealistic to say that the payer does not intend the money to be used for that purpose. And if that is what the payer intends, it is very difficult to see that the payer can have had any other object in making the payment. In this way what the recipient is going to do with the money, as the payer both knows and intends, is indeed the purpose of the payer. As Millett LJ said this is a consequence which is so inevitably and inextricably involved in the payment that it must be taken to be a purpose for which the payment was made.” 159. Having considered the relevant authorities, including Tower MCashback , and Acornwood , in relation to the meaning of incurred “on” for capital allowances purposes, the Tribunal (Judge Thomas Scott) in Marathon Oil observed, at [150], with emphasis as stated by the Tribunal: “… in my judgment the authorities support the proposition that in determining what expenditure is incurred “on”, it is necessary to determine the purpose or object of that expenditure.” 160. Mr Gammie, who accepts that the LLP knew and intended how the money transferred to Cannock would be used, contends that HMRC can derive no assistance from Acornwood which, he says, was concerned with a statutory provision that required the identification of the purpose served by particular expenditure. This can be contrasted with the present case in which the relevant statutory provision that turns on what the expenditure was incurred “on” or “in connection with”

“Section 24 refers to incurring expenditure on the provision of machinery or plant. It is true that in a strictly legal sense one can say that BMBF incurred expenditure on the provision of the pipeline. That is what the two Acquisition Agreements said: ''The Seller shall sell the Pipeline as beneficial owner, and the Lessor shall purchase the Pipeline…''. Each agreement provides for ''the Purchase Price for the Pipeline'', and the two purchase prices aggregate to over £91 million. However, in the light of the Ramsay authorities I consider that I have to interpret and apply the statute in a wider way. I have to ask: looking at the matter commercially (Lord Hoffmann's term), did BMBF incur expenditure of £91 million on the provision of the pipeline, or did it incur it on something else? I have to ask: on what did BMBF really incur its expenditure of £91 million? Was it really incurred on the provision of the pipeline, or was it really incurred on something else? Businessmen are familiar with situations under which, in order to get some advantage which the business wants, it is necessary to achieve it indirectly by buying some other item through which the advantage, which is what the money is really paid for, can be secured.” 162. However, neither the Court of Appeal nor House of Lords accepted such an approach as correct. 163. For example, in the Court of Appeal, Carnwath LJ (as he then was) noted, at [57], that: “The Judge thought that the pipeline transaction could be disregarded as simply “the fifth wheel of the coach”

“40. These statutory requirements, as it seems to us, are in the case of a finance lease concerned entirely with the acts and purposes of the lessor. The Act says nothing about what the lessee should do with the purchase price, how he should find the money to pay the rent or how he should use the plant. … 41. … The finding of the Special Commissioners that the transaction 'had no commercial reality' depends entirely upon an examination of what happened to the purchase price after BMBF paid it to BGE. But these matters do not affect the reality of the expenditure by BMBF and its acquisition of the pipeline for the purposes of its finance leasing trade.”

“If the lessee chooses to make arrangements, even as a preordained part of the transaction for the sale and lease back, which result in the bulk of the purchase price being irrevocably committed to paying the rent, that is no concern of the lessor. From his point of view, the transaction is exactly the same. No one disputes that BMBF had acquired ownership of the pipeline or that it generated income for BMBF in the course of its trade in the form of rent chargeable to corporation tax. In return it paid £91m. The circularity of payments which so impressed Park J and the Special Commissioners arose because BMBF, in the ordinary course of its business, borrowed the money to buy the pipeline from Barclays Bank and Barclays happened to be the bank which provided the cash collateralised guarantee to BMBF for the payment of the rent. But these were happenstances. None of these transactions, whether circular or not, were necessary elements in creating the entitlement to the capital allowances.” 164. Accordingly, Mr Gammie contends the only question to be determined is on what, or in connection with did the LLP incur expenditure in paying the Development Sum to Cannock? Posing and answering such a question is not, he says, at odds with authority in the shape of MCashback relying on the decision of the Special Commissioner in that case which was ultimately accepted by the Supreme Court that, “the gross capital expenditure has not been incurred” (see [2007] STC (SCD) 1 at [138]). 165. However, we agree with Mr Davey that it is necessary to adopt a realistic view of the facts taking account of all the relevant circumstances of the case so as to identify the true legal and tax effect of the transactions avoiding affording primacy to purported form over substance notwithstanding the label utilised by the parties to describe a particular transaction. This much is clear from authorities such as, for example, Street v Mountford [1985] AC 809 , AG Securities v Vaughan [1990] AC 417 and Booth v Buckwell [1980] STC 578. 166. In undertaking such a realistic appraisal of the facts it is necessary to consider the economic realities of the transactions and examine the extent that the Development Sum comprises qualifying expenditure. As Lord Hope observed in MCashback at [93]: “In Barclays Mercantile Business Finance v Mawson [2005] 1 AC 684 the House of Lords adopted a practical, commercial approach to the reality of the expenditure. Although the facts of this case lead to a different result, I would adopt the same approach here. As Lord Walker JSC’s exacting analysis has shown they do not support the LLPs case that the whole of the claimed expenditure was actually used to acquire the rights in the software. I agree that, in the circumstances of this case, we can and should reach our own conclusion as to the amount that should be allowed in respect of the claimed expenditure.” 167. Similarly in the present case, given that it is not disputed that the LLP knew and intended how the money it transferred to Cannock would be used, we have adopted a practical commercial approach to the reality of the expenditure and whether it was actually used on or in connection with the conversion or renovation of the Property. 168. Mr Gammie, however, contends that HMRC is wrong to equate the knowledge of the LLP with its intention of how the Development Sum should be utilised by Cannock. He gives an example of paying someone for services knowing that the person concerned intends to use the money for a Caribbean holiday. Clearly the payment is not incurred on the holiday even if it is known that it would be used for this purpose. The intention, in contrast to the knowledge, of the person making the payment is to secure the contracted services. 169. Despite being initially somewhat attracted to this argument it is clear from the Intercreditor Deed, to which the LLP was a party and which directs how the Development Sum was to be spent, that the LLP in addition to having the knowledge also intended how the Development Sum should be utilised. In the circumstances it is therefore necessary to consider what Mr Davey referred to as the “constituent elements” of the Development Sum which were paid by Cannock and whether these are “qualifying expenditure” as defined by the legislation. 170. We also consider that, by excluding £34,999 as relating to the acquisition of land from its BPRA claim, the LLP may have implicitly accepted such an approach despite its attempts to explain it away as a pragmatic compromise. 171. In respect of each of these elements it is HMRC’s case that the primary purpose of the LLP in making the payment was to increase its claim for BPRA. However, and perhaps not unsurprisingly, this is not accepted by the LLP which contends that even if these items of expenditure fall to be considered, they are clearly “qualifying expenditure” as defined in the legislation. The Interest Amount/Licence Fee (£350,000) 172. The Interest Amount is described in some of the documentation as a “Licence Fee”. 173. The sum of £350,000 was paid into the Interest Account by Cannock in accordance with the above agreements (ie clause 5 of the Co-op Loan Agreement, paragraph 1.2 of schedule 1 and schedule 2 of the Development Agreement, the Licence Deposit Deed, clause 16.5.2(d) and clause 16.9 of the Intercreditor Deed). Under clause 16.9 of the Intercreditor Deed Cannock was precluded from making any withdrawal for any purpose other than complying with clause 5.1 of the Licence Deposit Deed, namely to pay a sum equal to the quarterly interest that the LLP was required to pay to the Co-op. 174. HMRC contend that the £350,000 was paid for the sole purpose of inflating the BPRA claim and that this is plain because there was no commercial reason for it to have been paid to Cannock. Indeed the LLP could have retained the sum itself using it to meet the interest payments due to the Co-op. As such, HMRC argue, the payment cannot be qualifying expenditure as the required connection between it and the items listed in s 360B CAA is absent. 175. In support reliance is placed on the decision of the First-tier Tribunal, as upheld by the Upper Tribunal, in Acornwood where at [261] it states: “However one looks at the principal exploitation agreements, and despite their wording, it is plain that what the partnerships paid for included a guaranteed income stream. Such an acquisition had nothing to do with the partnerships’ trade in the exploitation of intellectual property rights but was something with an independent existence.”

“I am not satisfied that the policy of the statute really conforms with the taxpayer company's contention. Granted that its main purpose was to encourage investment in new machinery and plant, I am not convinced that to include interest charges and commitment fees would serve this purpose without giving rise to abuse.”

“… any incidents of ownership which amount to more than a 'mere legal shell' amount, in the context of the group/consortium relief provisions, to 'beneficial ownership'. In particular, a right to dispose of an asset and enjoy its fruits confers 'beneficial ownership' of that asset, whereas a complete absence of both rights 'bereft of the rights of selling or disposing or enjoying the fruits …' ( Wood Preservation [1969] 1 All ER 364 at 368 per Lord Donovan) deprives an owner of 'beneficial ownership'. So the seller of shares under a binding contract conditional only on the purchaser obtaining the benefit of a commercial contract for the company which was sold, which condition might only be waived by the purchaser, is deprived of beneficial ownership of the shares sold under the contract, because the seller could not, while waiting to see whether the condition was satisfied or waived, deal with the property; neither could it declare or pay a bonus on the relevant shares: 'the shares … were like a tree which the owner could not sell and could not cut down and of which he could enjoy none of the fruit' ( Wood Preservation [1969] 1 All ER 364 at 367 and 368 per Lord Donovan and Harman LJ respectively; the seller was 'tied hand and foot' see at 368 per Harman LJ). Similarly, a parent company of a subsidiary subject to a liquidation order is deprived of beneficial ownership of the shares in the subsidiary; custody and control of all of the subsidiary's property were, under the order, transferred to the liquidator and all power to deal with the subsidiary's assets passed to the liquidator ( Ayerst [1975] STC 345 at 348–349, [1976] AC 167 at 178–179 per Lord Diplock). Thus the parent company was '[deprived] of all possibility of enjoying the fruits of [the subsidiary's shares] or disposing of it for [its] own benefit.' (See [1975] STC 345 at 350, [1976] AC 167 at 179.).” 191. HMRC contend that Cannock is similarly deprived of enjoying the fruits of the Capital Amount as, under clause 3.5.3 of the Capital Account Deed the Co-op could withdraw the Capital Amount from the Capital Account. Were this to happen the Capital Amount would be returned to the Co-op without having been received by Cannock. As such at the time the Capital Amount was deposited in the Deposit Account there was a material risk that it would be withdrawn by the Co-op and set off against the LLP’s liability under the Co-op loan. 192. Although Mr Lewis and Mr Tracy, in evidence, explained that they did not understand the Capital Account Deed to operate in such a way, given our approach to the evidence (described at paragraphs 46 -47, above) and, as the Supreme Court put it in Wood v Capita Insurance Services Limited [2017] AC 1173 at [10], our task is “to ascertain the objective meaning of the language the parties have chosen to express their agreement”

“a reasonable amount of land, surrounding the building, which may include other buildings.”

“The word “curtilage” is defined in the Shorter Oxford Dictionary, 3 rd edition (1973) as “A small court, yard or piece of ground attached to a dwelling house and forming one enclosure with it” … What is within the curtilage is a question of fact in each case.”

“In my judgment, for one corporeal hereditament to fall within the curtilage of another, the former must be so intimately associated with the latter as to lead to the conclusion that the former in truth forms part and parcel of the latter. There can be very few houses indeed that do not have associated with them at least some square yards of land, constituting a yard or basement area or passageway or something of the kind, owned and enjoyed with the house, which on a reasonable view could only be regarded as part of the messuage … To the extent that it is reasonable to regard them as constituting one messuage or parcels of land, they will be properly regarded as all falling within one curtilage; they constitute an integral whole.” 214. Although we are concerned with direct tax, as opposed to VAT, provisions and the authorities cited above involve different legislation to that in the present case, we accept Mr Gammie’s argument that references to the Property must also encompass its curtilage and therefore be treated as a single parcel of land. Accordingly we find that any expenditure on items within the curtilage of the Property cannot be adjoining or adjacent to it. 215. We also note that Mr Davey was somewhat critical of the LLP’s witness, Mr Beresford, who gave evidence in relation to this expenditure as he was instructed in February 2016 and not in a position to provide any first hand evidence of fact but relied upon information provided by others. However, the same criticism can be levelled at Mr Huxley who, like Mr Beresford, gave evidence as a witness of fact and not as an expert. 216. Turning to the first category of expenditure under this heading, external tarmacking, landscaping and drainage, it is not disputed that these works were outside the footprint of the Property. HMRC therefore submit that such expenditure is on or connection with the development of land adjoining or adjacent to the Property, a qualifying building, and not qualifying expenditure by virtue of s 360B(3)(c). Contending that the areas on which the expenditure was incurred is within the curtilage of the Property, Mr Gammie says that it cannot be adjoining or adjacent to it. 217. Mr Gammie further contends that for the purposes of s 360C, “meaning of qualifying building” roads and carparks are “structures” and thus within the statutory definition. In support of his argument he referred to HMRC’s Capital Allowances Manual (CA31110) which states: “You should treat something as a structure if it has been artificially erected or constructed and is distinct from the earth surrounding it. Land that retains its character as land is not a structure, even if it has been cultivated or modified in some way. For example, grass tennis courts, grass football pitches, grass bowling greens and golf courses are not structures.” 218. The Manual confirms that it is permissible to refer to rating cases in relation to the construction of the term “structure”

“In my view it is a question of fact in each case; a gravel path though from repeated gravellings it is harder than the surrounding soil would not in my opinion be a structure, while the roads one is familiar with in Switzerland, the Tyrol and Italy, in parts built up on mountain sides, in parts cut out of solid rock would I think clearly be structures, as would the elaborate compositions of concrete, wood blocks and tarmac used for heavy motor traffic at the present day. Between the two there is every variety. … I think a structure is something artificially erected, constructed, put together, of a certain degree of size and permanence, which is still maintained as an artificial erection, or which, though not so .maintained, has not become indistinguishable in bounds from the natural earth surrounding. What degree of size and permanence will do is a question of fact in every case.” 219. The meaning of “structure” was also considered by the Court of Appeal in Cardiff Rating Authority v Baldwin’s Iron & Steel Company Limited [1949] 1 KB 385 where Denning LJ (as he then was) said, at 396-397: “ A structure is something which is constructed, but not everything which is constructed is a structure. A ship, for instance, is constructed, but it is not a structure. A structure is something of substantial size which is built up from component parts and intended to remain permanently on a permanent foundation; but it is still a structure even though some of its parts may be movable, as, for instance , about a pivot. Thus, a windmill or a turntable is a structure ” 220. We do not agree with Mr Davey, who submits, contrary to HMRC’s own guidance, that the term “structure” ordinarily implies a three dimensional building or assembly and therefore cannot include a car park. Under that a structure is something that is “artificially erected or constructed and is distinct from the earth surrounding” and in our view clearly can include a car park such as that constructed in the present case. Accordingly we find that it does come within the legislative definition of a “qualifying building” under s 360C(1) and that the expenditure is qualifying expenditure for BPRA purposes. It is therefore not necessary to consider whether the car park, which we consider to be a highly desirable facility for an airport hotel, is within the curtilage of the Property. 221. Given the similarity of the arguments in relation to the expenditure on drainage works (see paragraph 121(2), above) and mains service connections (see paragraph 121(4), above) we consider these items together. Mr Davey contends that these cannot be allowable on the basis that, being situated externally to the Property, they fall within s 360B(3)(c). Additionally, he submits that as these are below ground and external to the Property they are an extension to a qualifying building and not allowable by virtue of s 360B(3)(b). 222. In support of this additional submission Mr Davey relies on the definition of “building” at s 21(3). This provides: In this section, “building” includes an asset which— (a) is incorporated in the building, (b) although not incorporated in the building (whether because the asset is moveable or for any other reason), is in the building and is of a kind normally incorporated in a building, or ( c ) is in, or connected with, the building and is in list A. List A Assets treated as buildings 1. Walls, floors, ceilings, doors, gates, shutters, windows and stairs. 2. Mains services, and systems, for water, electricity and gas. 3. Waste disposal systems. 4. Sewerage and drainage systems. 223. Mr Davey says that it is clear, and demonstrated by the need for a specific deeming provision in s 21(3), that a building does not, as a matter of ordinary language encompass below ground drainage or mains services. However, if this is correct it must follow that a building does not encompass walls, floors, ceilings, doors, gates, shutters, windows and stairs either. In our judgment s 21, which precludes expenditure on a building from being expenditure on plant and machinery does not provide any assistance in the present case where we are concerned with the BPRA provisions of the CAA and not those relating to plant and machinery. 224. In our judgment the drainage works and mains services do not amount to an extension. Although considering the expression “extension” in the context of the extension of a right, Lord Elenborough said, in Brooke v William Clarke (1818) 1 B & Ald 396 at 148: “The word extension imports the continuance of an existing thing,”