Capital allowances for windfarm design and survey costs

This case (Gunfleet Sands Limited and others v HMRC) involves expenditure by four subsidiaries of Orsted A/S which were involved in developing UK offshore windfarms. HMRC had accepted that the turbines and cabling costs themselves qualified, but disagreed on the treatment of various ancillary studies, with a total cost of nearly £50 million. The First-tier Tribunal (FTT) considered two main issues relating to capital allowances: firstly, whether the windfarms should be viewed as one item of plant (‘the generation assets’) or on a component-by-component basis, and secondly, whether the studies qualified as being ‘on the provision of’ plant and machinery under section 11 of the Capital Allowances Act 2001 (CAA2001). These factors have wider application for similar expenditure incurred on other asset types.

In this judgment the FTT first tackled whether the windfarms should be viewed together as single items of plant or whether the turbines, cables, substations etc. should be looked at individually. In deciding this issue, the FTT looked primarily to Cole Brothers and Barclay Curle and divined the principle that individual components ‘directed towards a single purpose’ could be treated as a single asset. In this case, the FTT described the windfarm as akin to a power station and determined that, as a whole, it was directed towards the generation of electricity from wind, and therefore should be considered a single item of plant.

The next question was whether preliminary studies qualify as being ‘on the provision of’ the plant. Three categories were identified:

• Studies proposing no mitigations and therefore having no impact on the design/construction of the assets;
• Studies impacting the design/construction but the changes proposed were not ‘necessary’ (e.g. they related to the type of lighting on the wind turbines); and
• Studies impacting the design/construction in a way that impacted the operational ability or effectiveness.

The analysis focused on the impact of the studies and whether they actually created a difference in the design or method of construction. For example, noise assessment studies were found not to qualify partly because they recommended mitigations already covered by marine mammal studies which qualified. The FTT drew a distinction between necessary and unnecessary design - a new test driven by the Ben-Odeco case and the fact that expenditure must directly relate to the fabrication, installation or construction of plant.

The case also decided the question of whether the expenditure deemed ineligible could qualify for a revenue deduction on the basis that it did not relate to a capital asset. The FTT rejected this approach, noting that expenditure can be capital and relate to an asset without qualifying for capital allowances. This is unsurprising given a number of costs, such as legal fees and financing costs, are routinely treated this way albeit these costs are more closely related to expenditure eligible for capital allowances.

This case tackles a complex area of capital allowances legislation – the allocation of indirect costs – and suggests additional fees may qualify dependent upon the effect of the expenditure. To apply the ‘necessary design’ test seems to us a heavy burden on claimants given the FTT accepted that ‘design’ is an ambiguous word. It remains to be seen how the tests introduced here could be applied in practice, particularly where fees relate to a number of different assets, such as architects’ fees for a building.