Orsted v HMRC: Supreme Court narrows the scope of capital allowances for offshore wind development costs

This article was written by Hilary Barclay, Tom Passingham and Charlotte Colvin.

The Supreme Court has handed down its decision in Orsted West of Duddon Sands (UK) Ltd & Ors v Revenue and Customs Commissioners. It unanimously allowed HMRC’s appeal, holding that expenditure on various surveys and studies undertaken in developing offshore windfarms did not qualify for plant and machinery capital allowances. 

Background 

Orsted group companies incurred substantial costs on environmental, technical and site-specific studies and surveys (Surveys) in developing the Gunfleet Sands, Walney and West of Duddon Sands offshore windfarms. The Surveys mainly supported the environmental impact assessment and wider planning process. 

HMRC accepted that the “plant” here comprised the windfarm “generation assets” taken as a single item, rather than each individual turbine, and that the expenditure on the Surveys was capital in nature. However, it did not accept that the Survey costs (of nearly £50m) qualified as capital expenditure “on the provision of plant”. 

The First-tier Tribunal (FTT) had allowed Orsted’s appeals in part in 2022. It held that spending on some of the Surveys directly related to the design as the windfarms could not operate without them, so should qualify as capital expenditure on the provision of plant. 

Both Orsted and HMRC appealed the FTT’s decision, which the Upper Tribunal (UT) overturned. The UT held that, applying a strict and narrow test, none of the Survey expenditure should qualify as either on the provision of plant or part of the installation of the plant. The Surveys were instead held to be advice on the type of plant to use, or on how and when to install it. 

Orsted appealed to the Court of Appeal, which in turn overturned the UT’s decision, holding that the relevant Surveys qualified for relief. 

The Supreme Court’s Decision

The Supreme Court disagreed with the Court of Appeal; it held that the word “on” imposes a narrow test and requires a “close connection” between the expenditure and the plant provided. If Parliament had intended a broader test, “in connection with” or “relating to” would have been used instead. 

The court further held that transport and installation costs qualified for capital allowances as they were inherent to the provision of plant. However, Surveys were more tangential in nature.

The Court’s reasoning

Orsted had referred to Inland Revenue Commissioners v Barclay Curle & Co Ltd (Barclay Curle). The disputed expenditure in that case was the cost of excavating and lining land to create a dry dock, which costs were allowed as the excavation was integral to the dry dock. 

However, the Supreme Court distinguished Barclay Curle; it did not follow that all costs related to the provision of plant should qualify for allowances.

The Supreme Court held that Ben-Odeco Ltd v Powlson (Ben-Odeco) supported HMRC’s argument that a narrower interpretation should be used. In that case, a taxpayer had borrowed to finance the construction of an oil rig, which the court had held did not qualify for relief. 

The Supreme Court adopted the limiting curve referred to in Ben-Odeco, which focused on how far-removed expenditure is from the provision of plant. 

On this basis, it was held that a wider reading of the legislation would risk “scooping up expenditure” which should fall outside the specific provisions. 

We note that the Supreme Court did not conclude whether technical drawings and specification or other fabrication-related expenditure would qualify for capital allowances.

Key takeaways

Many in the energy and large-scale infrastructure sectors will be disappointed by the outcome of this case. 

Large-scale projects increasingly require extensive surveys and studies before works can commence, as part of the planning process. These essential costs risk failing to qualify for capital allowances on the basis that they are not directly related to provision of plant. 

Careful consideration will need to be given to the segregation of costs and reviews of expenditure. 

This case will have a significant impact on developers' financial modelling and may disincentive future development.

The Government is aware of these business concerns and in its Corporate Tax Roadmap 2024 suggested that it would launch a consultation on the issue. The process was subsequently paused following the Court of Appeal’s decision, though comments were invited from affected businesses. Those operating in relevant industries should keep a close eye on developments in this area.

If you would like to discuss any of the topics raised in this article, please get in touch with Hilary Barclay or Tom Passingham.