Court of Appeal confirms pre-construction costs qualify for capital allowances

In Orsted West of Duddon Sands (UK) Ltd and others v HMRC [2025] EWCA Civ 279, the Court of Appeal (CoA) held that expenditure incurred in designing windfarms and on studies informing their installation qualify for capital allowances.

Background

Orsted West of Duddon Sands (UK) Ltd, Gunfleet Sands II Ltd, Gunfleet Sands Ltd and Walney (UK) Offshore Windfarms Ltd (the Appellants) owned and operated windfarms for the generation and sale of electricity. In 2000 and 2003 the Crown Estate invited tenders to develop certain areas of sea bed as windfarms. The Appellants made successful bids and secured the contracts.

The Appellants claimed capital allowances for expenditure incurred in the construction of the wind farms. HMRC disputed the capital allowances claims arguing that certain pre-construction development expenditure on preliminary studies, such as environmental impact studies, water level studies and geophysical studies, did not qualify for capital allowances under section 11, Capital Allowances Act 2001 (CAA 2001).

Section 11, CAA 2001, provides that expenditure is qualifying expenditure if: "it is capital expenditure on the provision of plant or machinery … ". HMRC argued that section 11 should be construed narrowly and only apply to the acquisition, transportation and installation of plant or machinery, as opposed to design and preliminary studies.

HMRC therefore issued closure notices denying the capital allowances in respect of expenditure on the various studies. The Appellants appealed to the First-tier Tribunal (FTT).

The FTT held that some of the expenditure qualified for capital allowances, but not all. Both parties appealed to the Upper Tribunal (UT). The UT considered that the FTT had erred in its interpretation of the phrase "on the provision of". It agreed with HMRC that it should be construed narrowly and concluded that none of the studies qualified for capital allowances.

The Appellants appealed to the CoA, primarily on the issue of the meaning of the phrase "on the provision of".

 CoA's judgment

The CoA disagreed with the UT's narrow interpretation and held that where the relevant plant and machinery was bespoke, expenditure on design costs and costs of studies informing the design, should qualify for capital allowances. 

The CoA concluded that capital allowances can be claimed where: 

(a) the taxpayer can demonstrate that, looking at matters objectively and with the benefit of hindsight, expenditure informed the design of plant or machinery, or how it was to be installed; 

(b) the expenditure related to plant or machinery which was in fact acquired or constructed; and 

(c) the expenditure did not arise from characteristics or circumstances particular to the specific taxpayer.

Comment

Questions such as were raised in this appeal are becoming more acute as very large infrastructure projects require extensive and costly preparatory work and this decision provides much needed clarification and guidance on the types of preparatory work that can qualify for capital allowances. Large infrastructure projects often involve many years of planning and investigation and this decision is likely to be closely scrutinised by businesses involved in such projects. 

Unsurprisingly given the amount of tax at stake, HMRC has applied to the Supreme Court for permission to appeal. 

The judgment can be viewed here.