UK Supreme Court Denies Capital Allowances for Survey Costs

In a decision that has attracted considerable interest, the Supreme Court has overruled the Court of Appeal in the case of Ørsted West of Duddon Sands (previously known as Gunfleet Sands).

The Supreme Court has unanimously decided that expenditure on environmental surveys and studies carried out during the planning and design of offshore windfarms is not capital expenditure "on the provision of" plant, overruling the Court of Appeal and concluding that expenditure requires a close connection with the plant itself to qualify for plant and machinery capital allowances.

A striking feature of this dispute has been the level of disagreement at each level of the courts on what appears, on its face, to be a straightforward question of statutory construction. Taxpayers will be disappointed that it has now been determined that such expenditure will not qualify for capital allowances but the decision at least gives greater certainty in respect of expenditure similar to that discussed in this case. However, the decision is highly fact sensitive and other types of pre-construction expenditure, e.g. final technical drawings or surveys carried out during fabrication or installation, will need to be assessed on a case-by-case basis to determine where the boundary lies for qualifying expenditure.

For taxpayers engaged in major infrastructure projects, the immediate priority is to review existing capital allowance claims and prospective positions in light of this decision, and to ensure that future project budgets and financial models reflect the unavailability of allowances on most pre-construction activities.

Background

The Ørsted group owns and operates several offshore windfarms off the English coast. In the course of planning and constructing those windfarms, the group incurred substantial sums on a wide range of pre-construction environmental and technical surveys and studies, most of which were required to support the environmental impact assessment necessary to obtain planning consent

Ørsted claimed capital allowances on these costs (totalling approximately £46m of expenditure), arguing they constituted capital expenditure "on the provision of plant" under section 11(4)(a) of CAA 2001. The parties were agreed that the generation assets of each windfarm were treated as a single item which constituted "plant", and that the expenditure was capital in nature. The sole question was whether the costs were incurred "on" the provision of that plant.

A narrow statutory test

The Court held that the costs of obtaining surveys and studies are not capital expenditure "on" the provision of the windfarms. The word "on" in the legislation connotes a narrow test, requiring a close connection between the expenditure and the plant provided, and contrasts with the looser language Parliament has used elsewhere e.g. "in connection with", "relating to", or "with a view to", none of which appear in section 11(4).

The Court found that the primary qualifying cost is the purchase price of the plant (whether off-the-shelf or bespoke), together with certain specific costs such as transport and installation. Studies and surveys that provide advice about how to choose, design, or locate plant fall "well outside" the boundaries of qualifying expenditure.

Furthermore, there is no principle that all costs necessarily incurred to provide plant qualify for allowances; this was a misreading of the case of Barclay, Curle (concerning dry dock excavation costs) which in fact was decided on the basis that the lined excavated basin was itself an integral part of the plant and not simply necessary preparatory works.

The Supreme Court emphasised that capital allowances are designed to reflect the gradual deterioration of an asset through wear and tear and the ultimate need to replace it. The surveys and studies, the Court held, had only a tangential connection with the diminishing value of the windfarm assets, which further militated against their inclusion. In assessing this question, there seemed to be very little discussion as to whether the surveys and studies would need to be refreshed before replacement plant was installed which might be thought to form an important part of this analysis. If, on replacement of the assets at the end of their useful life, refreshed surveys and studies would need to be obtained, the expenditure incurred on the existing surveys or studies might also need to be depreciated in a similar manner to wear and tear, but it appears that this argument was not raised or considered before the Supreme Court or in their subsequent decision.

Practical Implications

This is a significant decision that will affect taxpayers across a range of sectors. The following points should be noted.

• Pre-construction survey and study costs will not attract capital allowances. The Supreme Court was emphatic that these costs do not fall close to the boundary of what qualifies as expenditure "on" the provision of plant. Any taxpayer that has been claiming, or has been intending to claim, capital allowances on similar pre-construction expenditure should revisit those claims without delay. Given this decision overrides the Court of Appeal decision to the contrary, it is likely that a significant number of taxpayers will have incorrectly made claims relying on that decision which will need to be reversed.
  
  Capital allowances claims for preparatory work and routine professional fees will require more careful and nuanced judgement going forward. Such costs cannot be claimed merely because they relate to a qualifying project or asset, and simple pro rata apportionments are unlikely to be appropriate.The acceptance that the expenditure was capital in nature means that there is also no corporation tax deduction available for these types of costs. This impact will apply in particular to major infrastructure projects that require extensive and costly preparatory work, significantly increasing the net-of-tax cost of developing these projects
• Some categories of design expenditure may still qualify. Importantly, HMRC reserved its position on whether the cost of producing final technical drawings and specifications which are actually used in the manufacture of the plant could be recoverable, and the Supreme Court expressed no view on this. Similarly, HMRC were prepared to accept that surveys and studies carried out during the final stages of fabrication or during installation may qualify as being "on provision", either as part and parcel of the production process or as part of installing the plant.
  
  The boundary between these potentially qualifying costs and the clearly non-qualifying pre-construction expenditure at issue here will need to be assessed carefully on a case-by-case basis.
• M&A transactions require careful scrutiny. Purchasers conducting tax due diligence on infrastructure or energy assets should scrutinise whether capital allowance pools include expenditure on pre-construction surveys and studies, as such claims may now be vulnerable to challenge by HMRC. The allocation and treatment of these costs may affect the value of capital allowance pools and, consequently, the tax attributes being acquired and financial models will need to take this risk into account.
• HMRC's advance tax certainty service. Taxpayers with projects involving at least £1 billion of qualifying project expenditure may wish to consider using HMRC's advance tax certainty service, which launches in July 2026, to ascertain HMRC's view on the eligibility of particular cost categories.

Consultation on predevelopment costs

The Government's Corporate Tax Roadmap previously promised a consultation on the tax treatment of predevelopment costs, which was delayed following the Court of Appeal's decision in this case. The Supreme Court's decision provides further impetus to the need for the Government to provide clarity - and potentially relief - for expenditure on predevelopment costs that do not currently fall within the statutory wording.