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HMRC slammed over tax probe into Newcastle datacentre campus investors

HM Revenue and Customs said it is committed to clamping down on abuses of the UK tax system, following criticism of its decision to recoup tax relief payments to datacentre investors

HM Revenue and Customs (HMRC) has come under fire for attempting to recoup tax relief payments made to investors in a North East datacentre campus that has sat empty for several years.

The campus, at Cobalt Business Park, comprises three datacentres, two of which were financed via a scheme overseen by private equity house Harcourt Capital in April 2011 that made use of the government’s Enterprise Zone incentives.

According to a BBC News report into the saga, a number of celebrities – including Arsenal manager Arsene Wenger, Manchester United player Wayne Rooney and comedian Jimmy Carr – were among the 675 people who invested an average of £117,000 each in the scheme.

This raised about £79m of investment for the project, which cost £264m in total. However, under the terms of the Enterprise Zone rules at the time, backers were entitled to claim back 50% tax relief on the total figure, generating a return of £131m.

It is now understood that HMRC has begun pursuing some of the scheme’s participants to pay some of this money back.

The Enterprise Zone incentives were introduced by the government to encourage developments within “derelict” areas of the UK and boost regeneration, but the rules on how much tax relief investors would be entitled to was scaled back in April 2011.

In a statement to Computer Weekly, Harcourt Capital said the workings of the datacentre scheme complied with HMRC’s tax legislation, yet the department was now seeking to reclaim some of the tax relief paid out to investors.

Computer Weekly understands that HMRC opened an inquiry into the scheme in 2012, but progress is thought to have stalled until 2015.

“HMRC appears now to be backtracking on the agreements reached with industry in the 1990s and is seeking to challenge those Enterprise Zone investments that are still under inquiry,” the statement said.

“We are seriously concerned that HMRC’s actions are treating investors who fundamentally supported successive governments’ efforts to successfully regenerate derelict areas of the country extremely unfairly.”

Pursuit of investors

The statement also calls on HMRC to halt its pursuit of investors, as it actions may put off others from investing in similar regeneration-focused schemes.

“Unless this decision is reversed, there will be no confidence in any future government policy to incentivise investment in regeneration, job creation or research and development,” the statement said.

“This is because the move suggests the government will simply seize back any tax incentives a few years after allowing them, or just not honour them in the first place.”

Computer Weekly contacted HMRC to comment on this story, and a spokesperson said the department was committed to clamping down on any “abuse” of the tax system.

“We don’t talk about identifiable schemes,” the spokesperson said. “The Enterprise Zone allowance was designed to provide support to economically deprived areas of the UK. HMRC will not tolerate any abuse. When we find evidence of abuse, we crack down to make sure the relief works as Parliament intended.”    

Empty datacentre space

Since the Cobalt datacentre campus was built, the sites have remained unoccupied, which was raised as a matter of concern in 2013 by the head of the Public Accounts Committee, Margaret Hodge.

At the time, Hodge said the fact that the sites had been empty for two years – at that point – would fuel the perception that the scheme was aimed at tax avoidance.

“It is deeply depressing to find greedy individuals exploiting a perfectly proper government objective, to line their pockets,” she said in an article by the Guardian in June 2013. “Enterprise zones aimed to create jobs, not to enable rich people to get more money back in tax than they invested.”

According to Harcourt, the site is about to welcome its first occupants later this month, on the back of a separate investment in a 40km metro fibre network in Newcastle.  

“The multi-duct network is the first of its kind to be built in the city and connects the campus to multiple long-haul and international carriers, ensuring that clients in the datacentres have low-latency, high-capacity connectivity to London, Europe and the US,” the Harcourt statement said.

The fibre network is owned by Stellium Datacentres, a company set up in February 2016, which now oversees the management of the Cobalt datacentres after acquiring its principal assets. Its CEO is datacentre industry veteran Noel Meaney.

Read more about datacentre investment projects

In a statement to Computer Weekly, Stellium stressed that it was not involved in HMRC’s investigation, and was unable to comment on the reasons why the facilities had lain dormant for so long before it acquired them.

“The team made the decision to create Stellium after being impressed with the existing buildings, the surrounding business park and the thriving digital economy in the North East,” the statement said. “They are looking forward to applying their experience and track record to make a success of this brand-new venture.

“As Stellium was not involved with the site prior to its acquisition, it cannot comment on the sales approach, capability or ability of the previous owners.”

Struggle to find clients

Speaking to Computer Weekly, Steve Wallage, managing director of datacentre-focused analyst house Broadgroup Consulting, said it was not unusual for datacentre campuses outside of the M25 to struggle to find new clients.

But there are some exceptions to this, and the improved network connectivity to the Cobalt site is a step in the right direction.

“We have seen success stories, such as NGD in Newport, and much depends on the specific location, business model and management team,” said Wallage.

“The Newcastle site has struggled in the past, despite high sales efforts by one of the big property agents, but it is much better positioned now with the involvement of Noel Meaney and investment in local telecoms.”

Read more on Datacentre capacity planning

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