Judgment is now awaited following the Supreme Court’s hearing of the appeal in Orsted West of Duddon Sands (UK) Ltd and others v HMRC (formerly Gunfleet Sands), on whether £40m of pre-construction development expenditure on four offshore wind farms – specifically environmental impact, metocean, geophysical and geotechnical design studies – constituted qualifying expenditure on the provision of plant and machinery under CAA 2001 s 11(4). The decision will be of interest beyond major infrastructure projects, as it should clarify the treatment of design and pre-development costs for capital allowance purposes, irrespective of scale.
A notable feature of the two-day hearing was the contrast in language. Counsel for HMRC, Ms Wilson KC (Pump Court Tax Chambers) used emphatic terms such as ‘avoidance schemes’, ‘perverse situation’ and ‘parasitical expenditure/items’. In contrast, Mr Jones KC (Gray’s Inn Tax Chambers), counsel for the taxpayer, referenced the legislative language of CAA 2001 and long-established precedent cases, principally Barclay Curle, Ben Odeco and McVeigh.
Ms Wilson spent considerable time describing capital allowances as a ‘proxy for depreciation’ and arguing that the studies ‘only provided data and informed the design ... but only if you have the plant in your sights’. She challenged whether the studies could properly be ‘connected’ to future assets that were unknown at the time, other than with the benefit of hindsight. HMRC argued that only costs incurred once the plant in question had been identified could constitute qualifying expenditure.
Ms Wilson commented that ‘capital allowances attracted lots of abusive tax schemes’ – a characterisation that does not reflect the way capital allowances are commonly applied in projects.
Mr Jones submitted that the studies went beyond ‘general information’ and were integral to the ‘cumulative design’ and installation of the wind farms, previously accepted as single-entity assets rather than distinct generating, cabling, transformer and distribution assets. He noted that there is no restriction in the CAA 2001 preventing ‘duality’: expenditure may have two or more purposes, provided one is as ‘plant’ to be used within the trade – here renewable energy generation, contributing to the Government’s stated objective of generating 43–50GW of offshore wind power by 2030.
He emphasised that the ‘final drawing emerges as part of the process’, rather than being determined, as HMRC contended, by a fixed ‘line’ of eligibility. As he put it: ‘If the final drawing and the physical process of making the item are part of the provision of plant, then why not the labour and materials of the stage that precedes it? To draw a line there seems to lack any reality or principle.’
By way of illustration, he referred to changes in the West of Duddon Sands turbine configuration layout following geotechnical findings, and concluded by pointing to HMRC’s own guidance on professional fees (Capital Allowances Manual at CA20070), which Mr Jones argued that fees of quantity surveyors, architects and similar professionals are intellectually necessary to facilitate installation and construction, and are not confined to the physical act of construction alone.
While we await the Supreme Court’s judgment, it is worth highlighting the broader commercial context of the litigation. Shortly after the Court of Appeal decision was challenged, Orsted divested a significant stake in these businesses. Whether coincidental or not, this illustrates the potential commercial consequences of uncertainty in HMRC policy and practice.
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The Supreme Court hearing in Orsted Sands
When does design become plant?
Judgment is now awaited following the Supreme Court’s hearing of the appeal in Orsted West of Duddon Sands (UK) Ltd and others v HMRC (formerly Gunfleet Sands), on whether £40m of pre-construction development expenditure on four offshore wind farms – specifically environmental impact, metocean, geophysical and geotechnical design studies – constituted qualifying expenditure on the provision of plant and machinery under CAA 2001 s 11(4). The decision will be of interest beyond major infrastructure projects, as it should clarify the treatment of design and pre-development costs for capital allowance purposes, irrespective of scale.
A notable feature of the two-day hearing was the contrast in language. Counsel for HMRC, Ms Wilson KC (Pump Court Tax Chambers) used emphatic terms such as ‘avoidance schemes’, ‘perverse situation’ and ‘parasitical expenditure/items’. In contrast, Mr Jones KC (Gray’s Inn Tax Chambers), counsel for the taxpayer, referenced the legislative language of CAA 2001 and long-established precedent cases, principally Barclay Curle, Ben Odeco and McVeigh.
Ms Wilson spent considerable time describing capital allowances as a ‘proxy for depreciation’ and arguing that the studies ‘only provided data and informed the design ... but only if you have the plant in your sights’. She challenged whether the studies could properly be ‘connected’ to future assets that were unknown at the time, other than with the benefit of hindsight. HMRC argued that only costs incurred once the plant in question had been identified could constitute qualifying expenditure.
Ms Wilson commented that ‘capital allowances attracted lots of abusive tax schemes’ – a characterisation that does not reflect the way capital allowances are commonly applied in projects.
Mr Jones submitted that the studies went beyond ‘general information’ and were integral to the ‘cumulative design’ and installation of the wind farms, previously accepted as single-entity assets rather than distinct generating, cabling, transformer and distribution assets. He noted that there is no restriction in the CAA 2001 preventing ‘duality’: expenditure may have two or more purposes, provided one is as ‘plant’ to be used within the trade – here renewable energy generation, contributing to the Government’s stated objective of generating 43–50GW of offshore wind power by 2030.
He emphasised that the ‘final drawing emerges as part of the process’, rather than being determined, as HMRC contended, by a fixed ‘line’ of eligibility. As he put it: ‘If the final drawing and the physical process of making the item are part of the provision of plant, then why not the labour and materials of the stage that precedes it? To draw a line there seems to lack any reality or principle.’
By way of illustration, he referred to changes in the West of Duddon Sands turbine configuration layout following geotechnical findings, and concluded by pointing to HMRC’s own guidance on professional fees (Capital Allowances Manual at CA20070), which Mr Jones argued that fees of quantity surveyors, architects and similar professionals are intellectually necessary to facilitate installation and construction, and are not confined to the physical act of construction alone.
While we await the Supreme Court’s judgment, it is worth highlighting the broader commercial context of the litigation. Shortly after the Court of Appeal decision was challenged, Orsted divested a significant stake in these businesses. Whether coincidental or not, this illustrates the potential commercial consequences of uncertainty in HMRC policy and practice.
