The Supreme Court (SC) decision in Orsted West of Duddon Sands (UK) Ltd v HMRC (formerly Gunfleet Sands) has overturned the Court of Appeal’s (CoA) decision that certain pre-construction expenditure incurred in the development of offshore windfarms could qualify as capital expenditure under section 11 of the Capital Allowances Act 2001 (CAA 2001).
The Supreme Court’s decision
The SC held that preliminary expenditure, such as geotechnical surveys, environmental impact assessments and metocean studies, was not expenditure ‘on’ the provision of plant or machinery and, accordingly, did not qualify for relief under the capital allowances regime.
The SC considered the issue before it to be one of statutory interpretation. In particular, it focused on the use of the word ‘on’ in the phrase ‘expenditure on the provision of plant or machinery’, concluding that this wording imposes a narrow test requiring a close connection between the expenditure and the plant provided. The SC contrasted this wording with other statutory formulations that connote a broader nexus, such as ‘in connection with’, ‘relating to’ or ‘with a view to’.
The SC examined the leading authorities of Barclay Curle and Ben-Odeco and considered that these cases supported a narrower construction of the phrase ‘on the provision of’. In particular, the SC noted that the House of Lords considered whether excavation works to build a dry dock in Barclay Curle was already finely balanced, and clarified that the plant in Barclay Curle included the excavation and concrete as expenditure on these aspects was ‘on’ the provision of plant (such as pumps) which were necessary for the dry dock.
The SC considered there was a ‘limiting curve’ to what can properly be regarded as expenditure ‘on’ the provision of plant. Applying the principles derived from the leading authorities, the SC concluded that the preliminary expenditure in issue fell “well outside the limiting curve”.
Implications of the decision
The SC’s decision is likely to come as a surprise to practitioners and to those in the industry more broadly. It significantly narrows the scope for obtaining capital allowances in respect of expenditure which is clearly essential to the delivery of large infrastructure projects. ‘On the provision of’ may now seem to be limited to transportation and installation expenditure.
Although the case concerned survey and environmental assessment costs, taxpayers will likely be reflecting on the wider implications for other categories of essential large‑scale project expenditure.
The decision also leaves a number of practical questions unanswered. Unlike the CoA, which articulated a clearer ‘bright line’ approach, the SC declined to set out a more generally applicable test for determining when expenditure will fall on the right side of the ‘limiting curve’. The SC confined its judgment to the pre-construction expenditure in dispute. In particular, the SC deliberately refrained from expressing a view on whether later-stage preparatory costs (such as the production of final technical drawings used during installation) might qualify as expenditure ‘on the provision of plant’. HMRC historically have not challenged later stage expenditure such as this, and it is not clear whether this case will result in a change of HMRC’s position on other expenditure generally.
Overall, this area is likely to remain contentious, with continued scope for dispute between taxpayers and HMRC, and a key area for ‘Advance Tax Certainty’ rulings. This may also lead taxpayers to explore alternative routes to tax relief outside the capital allowances regime.
Taxpayers should consider revisiting their previously submitted returns in light of the SC’s decision and potentially seek advice on their amendment and disclosure obligations.