Capital allowances and windfarms

In an important decision for large scale capital projects, the Supreme Court has overturned the decision of the Court of Appeal which had allowed a claim for 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 and others v HMRC [2026] UKSC 12. The Supreme Court has held that expenditure "on the provision" of plant should be given a restricted meaning, limited only to expenditure directly on the provision, including installation, of the plant and not on broader reports and surveys which enabled or contributed to the project as a whole.

The decision will be a disappointment to those operating in the sector and also 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 may 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". The Court of Appeal upheld the taxpayer's appeal on the basis that "on the provision" of plant should not be construed narrowly and extended to the cost of design of the plant as well as costs of installation, and that eligible expenditure also extended to costs of studies which informed such installation or design.

Supreme Court decision

The Supreme Court has held that the phrase "on the provision" of plant should be given its ordinary meaning and that ordinary meaning indicated a restrictive approach was necessary. "[T]he requirement that the expenditure must be "on" the provision of plant indicates a narrow test, requiring a close connection between the expenditure and the plant provided. There are many statutory provisions in relation to tax and other topics that use other phrases to connote a much looser nexus such as "in connection with" or "relating to" or "with a view to". Those phrases do not mean the same as "on". Parliament has used a different test here and, in my judgment, it requires a close connection."

The leading authority, Inland Revenue Commissioners v Barclay, Curle [1969] 1 WLR 675 concerned expenditure incurred in creating a dry dock. The expenditure in dispute was the cost of excavating the earth to create a basin, and on lining that basin with concrete. The majority concluded that the dry dock was "plant" and that the excavation works and the concrete lining were "on" the provision of plant. That case made clear that expenditure beyond the actual purchase price of the plant can fall within the provision, particular the cost of transporting the plant and installing it where it will be used. However, that decision was not authority for the proposition argued for by the taxpayer that all costs necessarily incurred to provide the windfarms would qualify as expenditure "on" the provision of plant. The taxpayer submitted that Lord Reid in that case was treating the excavation as something necessary to the provision of the plant and that was why it qualified. That was a misreading, however, and the decision emphasised how integral the lined excavated basin was to the dry dock. It treated the lined basin as part of the plant itself, rather than as necessary to the provision of some other items as plant.

The Court noted that this narrow approach means that the "primary cost is the purchase price, whether that be for an off the shelf item or a commissioned bespoke item. The authorities have always made clear that other costs can be included and have referred to the costs of transporting the plant to the site and of installing it as being costs that can be so included. Those costs are inherent in the concept of the plant being "provided" as the House of Lords held in Barclay, Curle. The "limiting curve" as Lord Wilberforce put it in Ben-Odeco is around the plant and the provision of it. The costs, commonly incurred, of carrying out studies and surveys which provide the business with advice about how to choose or design plant fall, in my view, well outside the limiting curve".

The Court found support from the basic premise of capital allowances as reflecting "the gradual deterioration of the asset through the wear and tear as it is used in the business and the ultimate need to replace it when it wears out. That also militates against the broad scope of section 11 to include these surveys and studies which have only the most tangential connection with the diminishing value of the physical asset comprised in the windfarm assets". Whilst the Court noted that the same argument could be made with regard to transport and installation costs, but these should be seen as the exception that proves the rule.

On the question of whether, and if so to what extent, expenditure on design might qualify for capital allowances, the Court preferred not to express an opinion. It was noted that HMRC reserved its position on "whether the cost of producing the final technical drawings and specifications which are then "made real" by the manufacturer could be recoverable". That question would be fact sensitive and was not an issue in this appeal. Equally, HMRC were "prepared to accept that if further surveys and studies were carried out during the final stages of fabrication or during the course of the installation of the windfarm, they may qualify as being "on provision" either because they are part and parcel of the production process or because they are part of installing the windfarm". But none of the environmental and metaocean studies the subject of this appeal met that description. These reports and studies were not incorporated into the components making up the windfarm.

Comment

The decision of the Supreme Court adopts a 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 the design,  manufacture and/or installation is not sufficient.

It is important, however, to note that this is clearly a decision that is on the government's radar. The Corporate Tax Roadmap (published in 2024) stated that: "A core pillar of our Growth mission is to encourage investment in renewable energy and major infrastructure projects, and the government is therefore keen to understand the impact of the tax rules on the costs of such investments" and promised a consultation (to be published in 2024) on the treatment of predevelopment costs. The Court of Appeal decision in this case initially delayed the publication of that consultation and it is to be hoped that the government will now swiftly move to resurrect the consultation process on this important topic.