Capital allowances and windfarms

In an important decision for large scale capital projects, the Court of Appeal has overturned the decision of the Upper Tribunal denying capital allowances on expenditure on environmental and technical studies in advance of designing and installing wind turbines on an offshore windfarm: Orsted West of Duddon Sands (UK) Ltd, Gunfleet Sands Ltd and others v HMRC [2025] EWCA 279. The Court of Appeal rejected arguments that expenditure “on the provision” of plant should be given a restrictive meaning, limited only to expenditure directly on the provision, including installation, of the plant. Rather, the normal meaning of the phrase indicated that it should also encompass the costs of designing the relevant plant and the Court accepted that qualifying expenditure in that context can also extend to studies which may not themselves contain the designs but which inform the design of the relevant plant.

The decision will be a relief to those operating in the sector and is also clearly welcome from an environmental and net zero perspective. The relevant expenditure in this case was significant (some £48m) and failure to allow capital allowances on such expenditure would discourage investment into this vital part of the energy industry.

Background

The taxpayer was involved in the development of a number of windfarms off the UK coast. The taxpayer sought to obtain capital allowances in relation to the wind turbines themselves and the arrays of electrical cabling together with their installation. CAA 2001 s.11 provides for capital allowances to be available for capital expenditure “on the provision” of plant or machinery. In particular, the taxpayer argued that the development of an offshore windfarm necessarily involved a number of steps including the carrying out of various environmental and metaocean surveys and assessments, including ones that informed and enabled the design of the individual wind turbine foundation locations and foundations.

The environmental impact studies broadly involved determining the potential impact of the windfarm on particular environmental topics and identifying potential mitigations. These included issues such as landscape, seascape and visual assessments, ornithology, fish and marine mammal studies, and noise, telecoms and traffic assessments. The metocean studies were studies of sea depth, wind conditions, wave conditions, tidal conditions and current conditions obtaining and generating data for a number of purposes, including determining optimal layout of the site. Geophysical surveys provided information on seafloor features and rock/soil properties.

The first question was what amounted to the plant in this case. Was it the individual wind turbines or the broader array of generation assets? This was relevant as, in principle, it could impact on whether expenditure incurred by the taxpayer had been on the "provision" of that plant. The Upper Tribunal (UT) held that it had been open to the FTT to find that the "generation assets" (wind turbine and electrical arrays) at each windfarm were a single item of plant, rejecting HMRC’s argument that each wind turbine was a separate item of plant.

The FTT had held that most of the studies and assessments qualified for capital allowances, taking the view that expenditure on the provision of plant included expenditure which was necessary and directly related to the design of the plant or its installation. In contrast, the Upper Tribunal held that the phrase “on the provision” of plant should be given a restricted meaning. In particular, whilst expenditure on installation is covered on the basis that installation may be regarded as part of providing the plant, that process only covers the physical process, but not "the intellectual effort entailed in planning and advising on how and when the installation activity should be carried out". Expenditure on ensuring the installation was safe and effective is merely advice which puts the taxpayer in the position of being able to install the plant, but not expenditure on the provision of the plant (in the form of installation). Equally, the UT rejected the argument that design costs must be included in provision of plant. The designs and the surveys and assessments that went into the designs were such as to put the taxpayer into the position to provide plant. Provision of the plant is what happened when those designs are then turned into the plant.

Court of Appeal

The Court of Appeal rejected the argument, accepted by the UT, that the words “on the provision” of plant should be construed strictly and narrowly. “If, as a matter of ordinary language, a taxpayer incurs expenditure “on the provision of” plant from which, potentially, it will earn taxable profits, it is not obvious that Parliament should not have wished all such expenditure to be eligible for capital allowances.”

For example, where plant is bespoke, the Court of Appeal considered that “on the provision of”, read naturally, would extend to costs incurred in designing the plant. Indeed, the Court noted that this was consistent with HMRC’s own guidance that fees on, for example, surveys, architects and structural engineers can qualify for plant and machinery allowances and that in relation to the (separate) issue of structures and buildings allowances HMRC’s manual indicated fees relating to design of a building will be treated as incurred “on the construction” of a building.

In this case, the costs were on step removed from the design, in that they were largely incurred on studies which informed the design of the generation assets and elements in them. However, the Court held that these too can also qualify for capital allowances. Equally, in relation to installation, the expenditure in this case was not directly on physical installation but on the costs of studies that informed how installation should be effected. Equally, th Court held that such costs can potentially also be said to be incurred “on the provision of” the plant.

The Court indicated that costs incurred in deciding, not how an item of plant should be designed, but whether to acquire plant at all would not qualify, however. (The Court raised the issue of the correct treatment of expenditure both on whether plant should be bought and how it sould be designed if the project goes ahead, but declined to offer a firm view on the correct treatment in such cases, should they arise.)

Summing up the situation, the Court suggested that it is clear that: “…expenditure will not qualify for capital allowances under section 11 of CAA 2001 unless it related to plant or machinery which was in fact acquired or constructed and did not arise from characteristics or circumstances particular to the specific taxpayer. On the other hand, it appears to me that section 11 encompasses costs of design as well as costs of installation, and that the eligible expenditure will extend to costs of studies which informed such installation or design. While, therefore, I am not going to attempt a provide an exhaustive account of when capital allowances are available, it seems to me that they can be claimed where (a) the taxpayer can demonstrate that, looking at matters objectively and with the benefit of hindsight, expenditure informed the design of plant or machinery or how it was to be installed, (b) the expenditure related to plant or machinery which was in fact acquired or constructed and (c) the expenditure did not arise from characteristics or circumstances particular to the specific taxpayer.”

Turning to the particular reports and surveys carried out in this case, the Court held that all those that in some way informed the design and construction of turbines or the wind farm would qualify for capital allowances. These included landscape, seascape and visual assessment studies, ornithology and collision risk studies, fish and shellfish studies, marine mammal studies, archaeology, wrecks and cultural sites studies, noise assessments, telecoms and radar interference studies, metocean studies and geophysical and geotechnical studies. The taxpayer had dropped its claims in respect of socio-economic and tourism studies and a desktop metocean study. The question of expenditure on “scoping documents” was left to be dealt with by further written submissions.

Was the expenditure capital?

Whilst not strictly necessary to do so, the Court also went on to consider whether the expenditure (if not qualifying for capital allowances) was capital or revenue in nature. The taxpayer had argued that if the expenditure was not on the provision of plant, then it was revenue in nature as there was no other relevant capital asset to which it could properly be attached. HMRC argued that the expenditure was capital, being part of the set up costs which resulted in capital infrastructure and premises. Both the UT and the FTT held that the expenditure was capital. The division between capital and revenue expenditure depends on its own test which is different to the test of whether expenditure is on the provision of plant. Items can clearly be capital and not meet the provision of plant test, and that was the case here. Like the FTT and UT, the Court considered that the expenditure was clearly capital in nature. The expenditure was made once and for all with a view to bringing into existence an asset for the enduring benefit of the trade.

Comment

The decision of the Court of Appeal adopts a much less narrow approach to whether expenditure can qualify for capital allowances where it is not directly on the purchase, manufacture or installation of plant and machinery. In effect, the fact that the expenditure is to allow or inform that manufacture and/or installation is sufficient, unless it is specific to the particular taxpayer.

In an ESG context, the decision is clearly welcome, confirming that expenditure which is clearly necessary to the safe and economic functional design and installation of wind turbines and the windfarms they form part of should qualify for capital allowances.

Of course, this may not be the end of the matter as HMRC may seek leave to appeal to the Supreme Court. However, this is a decision that is on the government’s radar. The Labour manifesto promised to give businesses greater clarify on what qualifies for allowances and the Corporate Tax Roadmap promised a consultation to be published “shortly” on the treatment of predevelopment costs.