The recent Court of Appeal (CoA) decision in Orsted West of Duddon Sands (UK) Ltd v HMRC (formerly known as Gunfleet Sands) considered whether environmental and technical study costs for offshore windfarms could qualify as capital expenditure under section 11 Capital Allowances Act 2001. This case provides crucial guidance for taxpayers with large infrastructure projects which involve preliminary expenditure.
Whether the preliminary expenditure was ‘on the provision of’ plant
The CoA held that preliminary expenditure (such as geotechnical surveys, environmental impact assessments and metocean studies) connected to a new windfarm development was expenditure ‘on the provision of’ plant or machinery.
The CoA rejected the Upper Tribunal’s (UT) strict interpretation of the phrase ‘on the provision of’ and held that the phrase should be interpreted as a matter of ordinary language. Although the CoA did not seek to provide an exhaustive definition of when expenditure would meet the criteria of being ‘on the provision of’ plant, the decision provides several principles which serve as useful guidance to taxpayers.
The CoA held that costs incurred for designing or installing plant was ‘on the provision of’ plant. Therefore, by extension, costs which inform the design or installation of the plant would also meet the criteria.
The CoA noted that for expenditure to be eligible, it is required that the project should have actually gone ahead. In other words, preliminary expenditure on aborted expenditure would not be eligible. The court also made a distinction between preliminary expenditure which informs whether a project should go ahead and preliminary expenditure which informs how a project is to go ahead, with the former not being eligible. Although not a live issue in this case, the court suggested that an apportionment may be appropriate in cases where expenditure was shown to answer both questions of ‘whether’ and ‘how’.
The CoA considered the fact pattern of each study claimed and found that, based on the First-tier Tribunal’s (FTT) findings of facts, every claim (except for scoping expenditure, on which the court required more information) was eligible as it could be shown that the expenditure was on how to design or install the windfarm assets.
It is noted that the taxpayer had conceded its claim for expenditure on socio-economic and tourism studies and therefore the court did not opine on this expenditure.
Whether a revenue deduction was available
The CoA also considered the issue of whether the expenditure would be eligible as a revenue deduction under section 61 Corporation Tax Act 2009 in the alternative to capital allowances. Although the CoA was not strictly required to consider this issue as it had already made a positive decision for the taxpayer, the CoA upheld the FTT and UT’s decision that the expenditure was capital and not deductible under section 61.
Whether HMRC’s error in amending the returns precluded later correction following a closure notice
The final issue was whether the FTT was procedurally precluded from amending the taxpayer’s return to give effect to its decision as HMRC had failed to issue a closure notice which appropriately amended the relevant part of the taxpayer’s return. The CoA upheld the FTT and UT’s decision that the FTT had the power to amend the return and noted that the statute gave the FTT power to ensure the taxpayer pays the right amount of tax.
Final points
HMRC have applied to appeal the decision to the Supreme Court, so this may not be the end of the story.
This decision is a welcome one for taxpayers involved in large-scale projects which incur significant costs before physical construction begins. The CoA’s decision is a nuanced one and taxpayers should carefully consider the purpose of their preliminary expenditure and also ensure claims are well-documented. In particular, where there are dual purposes, taxpayers may need to consider whether apportionment may be appropriate.
There are practical compliance issues if a company with an existing trade (unlike the taxpayer in the case) incurs costs on preliminary survey expenditure and it is required to file tax returns before it is known whether the related project will go ahead. Choices appear to be: (i) claim allowances assuming it will go ahead and if it doesn’t, re-file open returns/invite HMRC to raise discovery assessments; or (ii) do not claim initially assuming the project will not go ahead, but if it does then amend the earliest open return to claim allowances, on the basis that the plant or machinery is owned in that period.
Finally, it is noted that the issue as to whether the windfarm constituted a single asset or multiple assets was not appealed to the CoA. The UT had upheld the decision of the FTT that the windfarm had constituted a single item of plant.
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