Background
The landmark Gunfleet Sands Case (now known as Orsted West of Duddon Sands (UK) Ltd and others v HMRC) highlights the importance of understanding how Capital Allowances apply to large infrastructure projects such as offshore windfarms. The Court decided that pre-construction environmental surveys and technical studies don’t qualify for plant and machinery allowances (PMAs).
Just like many complex developments, significant expenditure is often incurred at the early stages of the project on surveys and studies to assess environmental conditions, characteristics of the seabed, marine and bird life, telecoms and other technical and regulatory matters. Much of this work carried out to obtain the necessary consents before construction can begin.
The dispute focused on section 11 (4)(a) of the Capital Allowances Act 2001 (CAA 2001), the requirement that the expenditure must be incurred “on the provision of plant”.
What is this case about?
In this case, Ørsted sought to treat a portion of its pre‑development costs, including expenditure on surveys and initial studies undertaken as part of a wider environmental impact assessment, as capital expenditure on plant and machinery. Ørsted argued that these early-stage costs were capital in nature and incurred “on the provision of plant” for the purposes of section 11(4)(a) of the Capital Allowances Act 2001 (CAA 2001).
The First-tier Tribunal initially decided in favour of the taxpayer, concluding that much of the early‑stage expenditure did qualify for relief under the Capital Allowances Act 2001. However, the Upper Tribunal later allowed HMRC’s appeal, determining that none of the disputed expenditure met the conditions required to qualify for Capital Allowances. The Court of Appeal later overturned this decision, allowing Ørsted’s appeal and holding that all of the disputed expenditure did in fact qualify. This outcome prompted HMRC to take the matter further, appealing to the Supreme Court.
The Supreme Court outcome
The case before the Supreme Court centred on whether the costs of pre‑construction surveys and studies constituted capital expenditure “on the provision of plant” within the meaning of section 11(4)(a) of the Capital Allowances Act 2001.
The Supreme Court held that the phrase “on the provision of plant” sets a narrow test, noting that the word “on” demands a close and direct connection to the plant itself. The Court contrasted this with other areas of tax legislation that use broader wording such as “in connection with” or “relating to”, which imply a less stringent test. It went on to clarify that while design fees may still qualify as expenditure on the provision of plant, costs that merely inform the design do not.
Environmental and other preliminary surveys, which provide information, advice or assist in deciding whether to proceed with construction, were found to fall outside the scope of qualifying expenditure. Such costs were considered not to form part of the plant itself, nor of its installation.
The Supreme Court concluded that the costs were too far removed from providing the windfarms themselves.
What does the Supreme Court’s ruling mean for you?
The Supreme Court’s decision is particularly relevant for large‑scale infrastructure and energy projects, where substantial expenditure is often incurred on pre‑construction surveys and studies. The ruling confirmed that, even where such activities are essential to a project’s development, the related costs will not automatically qualify for Capital Allowances.
While the Supreme Court ultimately upheld HMRC’s appeal, the judgment did not close the door entirely on all forms of pre‑construction expenditure. The Court stopped short of determining whether technical drawings or specifications prepared by the developer, and used directly in the manufacture of an asset, could qualify for relief. By declining to rule on this broader category of final technical drawings involved in asset creation, the decision leaves open the possibility that pre‑fabrication drawings, where they can be shown to form an integral part of the installation process may still potentially qualify.
Specialist buildings
Legislation and case law have determined that certain expenditure on specialist buildings, such as slurry stores/silos for temporary storage, may be eligible for higher rates of plant and machinery allowances if they serve an active purpose integral to the business operation, constituting business apparatus.
How Leyton can help
While the Supreme Court’s ruling provides helpful clarification, it also reinforces the need for a considered and well-documented approach when preparing Capital Allowances claims (particularly for large and complex infrastructure projects).
These areas of uncertainty mean that businesses should assess such expenditure carefully, ensuring that the nature and purpose of each cost can be clearly demonstrated and evidenced.
In practice, this needs a detailed understanding of how different types of pre-construction activity are treated, and where the line is drawn between qualifying and non-qualifying expenditure. This is where our specialist team of Capital Allowances experts can help. They’ll give you the advice and support you need to ensure you are making the most of your business investments. Get in touch today.
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