UK: Windfarm pre-construction expenses did not qualify for capital allowance; anti-avoidance provision of Ireland treaty inapplicable; ring-fence taxation for services related to oil extraction (court decisions)
Recent decisions of Supreme Court, Court of Appeal, and First-tier Tribunal
The Supreme Court on April 15, 2026, held in Orsted West of Duddon Sands (UK) Ltd v. HMRC that the taxpayer’s pre-construction expenses incurred in the development of offshore windfarms (e.g., geotechnical surveys, environmental impact assessments, and metocean studies) were not expenditures “on” the provision of plant or machinery and thus did not qualify for relief under the capital allowances regime.
The court focused on the use of the word “on” in the phrase “expenditure on the provision of plant or machinery” and concluded that this wording imposes a narrow test requiring a close connection between the expense and the plant provided. The court contrasted this wording with other statutory formulations that connote a broader nexus, such as “in connection with,” “relating to,” or “with a view to.”
Read an April 2026 report prepared by the KPMG member firm in the UK
The Court of Appeal held in HMRC v Burlington Loan Management DAC that an Irish-resident company’s acquisition of a loan from a seller that could not qualify for exemption from UK withholding tax on interest under Article 12 of the UK-Ireland income tax treaty was not a transaction described in Article 12(5) of the treaty, which denies relief when a main purpose of a transaction is to “take advantage” of Article 12.
The Court of Appeal agreed with the First‑tier Tribunal and Upper Tribunal that Article 12(5) did not apply on the facts. The court determined that “taking advantage” of a treaty provision is not the same as simply obtaining its benefit. Drawing on its earlier decision in VietJet Aviation, the court stated that, in this context, to take advantage of Article 12 means “obtaining the benefit of the article in a way that is contrary to the object and purpose of the treaty.” Applying that approach, the court accepted that the taxpayer entered into the transaction expecting to benefit from the exemption from UK withholding tax, but found that that expectation alone was not abusive. The taxpayer was a long‑established Irish‑resident investor, acquiring loans as part of its ordinary business, and it dealt with the seller at arm’s length. In the absence of “anything more,” that was consistent with, rather than contrary to, the object and purpose of the treaty.
Read an April 2026 report prepared by the KPMG member firm in the UK
The First-tier Tribunal held that income earned by a UK company from providing services to a group company with “ring fence activities” were “oil extraction activities” subject to the ring fence per s277 and s279 CTA 2010, and as a result subject to higher rates of corporation tax as well as the supplementary charge to corporation tax and the energy profits levy.
The court agreed with HMRC’s position that the fact that the services involved the company’s employees physically extracting oil (even though it was not the beneficial owner of the oil extracted) and that the two companies were associated (s271 CTA 2010) was sufficient to mean that the services company was subject to ring fence taxation. The court rejected the taxpayer’s argument that the wider administrative, IT, procurement, engineering, and technical support services were not sufficiently related to the oil extraction activities such that its income from those services should not subject to the higher rates of tax.
Read an April 2026 report prepared by the KPMG member firm in the UK