UT decision on eligibility of surveys & studies for capital allowances
The UT has narrowed the scope for claiming capital allowance on studies connected to windfarm developments
CA claims for windfarm studies restricted
Earlier in the year, the First-tier Tribunal (FTT) considered a number of issues surrounding a capital allowance claim made in connection with the development of UK offshore windfarms by subsidiaries of Orsted A/S. The Upper Tribunal (UT) has now considered the case and, while it approved the FTT’s decision on a number of issues, it took a different position on the eligibility of surveys and studies, narrowing the scope of potential claims for similar expenditure.
In this case (Gunfleet Sands Limited and others v HMRC), the UT considered a number of appeals from both parties against the FTT’s judgment which fell into four categories:
- Whether the windfarm should be treated as a single item of plant or split into components
- Whether the FTT’s approach on studies and surveys was correct
- Whether a revenue deduction was available for expenditure not qualifying for capital allowances
- Whether HMRC’s error in amending the returns precluded later correction following a closure notice
Whether the windfarm should be treated as a single item of plant or split into components
On the first issue, the FTT had determined that the windfarm should be viewed as a single item of plant, being ‘directed towards a single purpose’. HMRC appealed on the grounds that this placed too much focus on the business purpose. The UT pointed out that it would always be possible to break an asset down further into components (or indeed aggregate components to a larger asset), so there is no hard and fast rule. Ultimately, it found that the FTT was entitled to reach the conclusion it did, finding that there was no meaningful difference between the test applied and the ‘single operational function’ referred to in Barclay Curle.
Whether the FTT’s approach on studies and surveys was correct
The second issue related to the treatment of costs relating to environmental impact studies, sea and sea-bed technical studies and geo-technical surveys. The UT started from the position that only expenditure ‘on the provision of plant’ would qualify in this case and that this only applied to “the purchase price, the actual installation cost or actual fabrication cost and ‘parasitical’ items such as transport or basic installation”. The FTT had determined that where studies were necessary for the ‘safe and effective installation’ of the assets, this should qualify. The UT considered this test was too broad and the focus should remain on the statutory language.
While the UT accepted that the studies informed the design of the plant, its view was that “the effect of the expenditure is to create designs which put one in the position to provide plant. Provision of plant is what happens when those designs are then turned into the plant.” As such, it determined that none of the studies considered were expenditure on the provision of plant.
Whether a revenue deduction was available for expenditure not qualifying for capital allowances
On the third issue, the UT agreed with the FTT that there was no automatic reason why a revenue deduction should be available if the expenditure was not on the provision of plant or machinery, as there is no restriction on expenditure being capital without qualifying for capital allowances.
Whether HMRC’s error in amending the returns precluded later correction following a closure notice
The final issue concerned a technical argument made by some of the taxpayers that HMRC had issued a closure notice and amended the returns of these entities but had amended the writing down allowances rather than the overall qualifying expenditure, which hadn’t been reduced. The UT dismissed this appeal, noting that all parties understood this to be a transcription error which was clear in contemporary correspondence, and that the FTT had the power to amend the figures as they were within the scope of the appeal made, in order to meet the principle of ensuring the taxpayer pays the right amount of tax.
While much of the UT’s judgment is not particularly surprising, the comments on the studies could have wider impacts on what design fees can qualify for capital allowances in other contexts.
