A business’s ‘non-qualifying’ costs in a project can tell you a lot about their appetite to risk and approach to tax.
- Bryan Crawford
- May 2
- 4 min read
When presented with a tax computation for review, the most important category of expenditure that frequently reveals hidden behaviours and compliance risk is what has been treated as ineligible for a tax deduction – the ‘non-qualifying’ costs.
In our value add, success driven worlds, no-one likes delivering the news that you have not paid the right amount of tax but that is a frequent challenge for anyone that reviews capital allowances and related tax computations where mis-categorisations and over enthusiastic positions are common.
The next time a tax adviser presents you with their claim for capital allowances, ask them what they have treated as non-qualifying?
Why ‘Non-Qualifying’ Costs Matter?
Because every major project or businesses has them, and HM Revenue & Customs (HMRC) is always on the lookout for taxpayers that seek to make claims which go beyond their interpretation of the legislation.
This was one of the issues in the recent case of Orsted West of Duddon Sands (UK) Ltd v HMRC over the various feasibility, investigation and scoping studies required for the design and construction of the offshore wind farm and whether they were “on the provision of plant or machinery wholly or partly for the purposes of the qualifying activity"?
The Upper Tribunal initially adopted a "strict and narrow application" of the words "on the provision of" and rejected most of the costs whereas the Court of Appeal held (mostly) in the taxpayer’s favour. HMRC has recently made a procedural application to the Supreme Court to appeal this decision so this is very much a live and ongoing issue.
Even despite this broader interpretation by the Court of Appeal, certain types of expenditure would still be non-qualifying for capital allowances. For example, costs incurred in deciding whether to acquire plant at all, as opposed to designing or installing plant that is intended to be acquired, would not qualify. The example given is the cost of advice on what kind of furniture to buy for a restaurant; this expenditure is on deciding whether to buy plant, not on its provision.
These are the messy costs that can frequently sit hidden in an Engineering, Procurement and Construction (EPC) contract or get tagged inconsistently in accounting systems because they fall outside the main body of work which ultimately determines their tax treatment – they are one of the most common areas of mistakes in claims, ripe for scrutiny and hotly debated with HMRC.
Project Costs Hiding in Expenses
Project expenditure that is capital in nature for tax purposes which does not meet the specific requirements for capital allowance (e.g. research and development, plant or machinery, structures and buildings allowances etc.) will normally be non-qualifying whether it sits on the balance sheet or in profit and loss.
Examples from case law illustrate this distinction:
In ECC Quarries Ltd v Watkis, expenditure on unsuccessful planning applications was capital because it aimed to secure a permanent alteration to the land, transforming it into a potentially profit-making asset with an enduring advantage. Money spent seeking to acquire such an intangible capital asset is also capital.
In Tucker v Granada Motorway Services Ltd, a lump sum payment to vary a lease was capital expenditure because it was a once-and-for-all expense on a capital asset (the lease) to make it more advantageous.
Even expenditure like the interest costs in Ben-Odeco, which did not qualify as "on the provision of plant" for capital allowances, was acknowledged to be capitalised, indicating its capital nature.
Whereas, expenditure that is revenue in nature which is ‘capitalised’ in a businesses accounts will be deductible for tax as it is charged to the profit and loss account (i.e. amortised) which can mean relief is spread over many years, if at all (depending on depreciation policies).
There is no rule of tax law that the ‘right’ time to deduct revenue expenditure for tax
purposes is the year in which it is incurred or the year in which there is a legal liability to pay it (Threlfall v Jones [1993] 66TC77, Herbert Smith v Honour [1999] 72TC130).
Beware the capital project with 100% qualifying costs or fixed asset ledgers that have hardly any of the typical upfront costs you would normally associate with a large project (e.g. feasibility, investigative studies, planning and legal costs).
Some Final Thoughts on Managing Tax Risk
A sharper focus on non-qualifying costs can not only improve claim accuracy but also reveal the true tax posture of a business. It distinguishes those merely pursuing tax savings from those actively managing tax risk.
Some questions to ask when reviewing capital allowances projects: -
What project costs are being treated as non-qualifying?
Are the projects costs (from inception to completion) all accounted for in the project ledger that the claim analysis reconciles to?
What are the non-qualifying costs and is their treatment consistent and reasonable?
For plant and machinery claims, has the question of “on the provision of” been clearly drawn in costs that overlap feasibility, scoping, design and construction?
Have any interim claims been made, and are the tax positions taken consistent?
Does the claim include any estimates, if so are they disclosed?
Does the claim include sufficient details for HMRC to identify the qualifying items and understand their source treatment?
Are there any uncertain tax treatments?
Are there statements to explain methodology and entitlement basis?
Are there any abortive projects (is there tax treatment correct)?
Are there any other project costs paid out of operational budgets sitting in the profit and loss account (e.g. legal, surveying fees etc.) – are these being treated correctly?
Does the claim identify the correct dates of expenditure or periods of claims for tax filing?
If the claim includes 'capitalised' repairs, has accounting treatment been checked or discussed to ensure relief?
Understanding non-qualifying costs and the underlying details of claims is not just a technical task - it’s a strategic one.
