Supreme Court confirms capital allowances not available for expenditure on windfarm

In Orsted West of Duddon Sands (UK) Ltd and others v HMRC [2026] UKSC 12, the Supreme Court, in allowing HMRC's appeal, held that expenditure incurred on studies and surveys informing the design and installation of windfarms did not qualify for capital allowances due to their "tangential" connection with the diminishing value of the windfarm assets.

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.

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 claims in respect of expenditure on the various studies. 

The Appellants appealed the closure notices 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 held 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 Court of Appeal, which disagreed with the UT's narrow interpretation and, in allowing the appeal, 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. 

HMRC appealed to the Supreme Court.

Supreme Court judgment

The appeal was allowed. 

The Supreme Court held that costs incurred in obtaining studies and surveys were not capital expenditure "on" the provision of the windfarms. 

The Court reiterated the UT's narrow interpretation of section 11, CAA 2001, noting that "on", in contrast to "in connection with" or "relating to" or "with a view to", required a close connection between the expenditure and plant provided. 

Lady Rose (with whom Lords Lloyd-Jones, Hamblen, Burrows and Richards agreed), noted that the concept of capital allowance is designed to reflect the depreciation of capital assets used in a taxpayer's business and the ultimate need for replacement. The preliminary surveys and studies, however, had only a tangential connection with the diminishing value of the windfarm assets. In the view of the Court, although installation and transport costs, whilst not directly impacting the value of the item of plant, have long been treated by the authorities as expenditure that can be included, this should be regarded as an exception to the rule, as opposed to an indication that such a rule does not exist. 

Comment

This judgment has significant implications for the capital allowances treatment of pre-construction expenditure. Taxpayers should consider reviewing historic claims to assess whether the Court's reasoning affects the availability of relief in respect of previously incurred costs.

The decision also highlights the importance of maintaining contemporaneous documentary evidence to demonstrate the connection between individual studies, surveys and other preparatory activities and the subsequent provision of qualifying plant and machinery. 

The judgment can be viewed here.