The Upper Tribunal (UT) has now considered last year's First-tier tax (FTT) tribunal decision on the capital allowances treatment of certain costs associated with offshore windfarms and whilst it agreed with FTT on a number of issues it took a different view on the eligibility of preliminary studies and surveys, narrowing the scope for this claim and potential claims for similar expenditure on other projects.
The UT decision concerned the following issues: -
Whether the windfarm should be treated as a single item of plant or split into components.
Whether the FTT’s approach on roughly £48 million of studies and surveys was correct.
Whether a revenue deduction was available for expenditure not qualifying for capital allowances.
Whether HMRC’s error in amending the returns precluded later correction following a closure notice.
Single or multiple component plant assets
UT acknowledged that FTT was wrong to consider the whole "windfarm" as plant but that did not undermine the fact that FTT's final conclusion that the "generation assets" (wind turbines and offshore cable arrays - not the onshore subs-station or cables) performed a single operational function and could be regarded as a single item of plant.
"Even if the FTT did incorrectly identify a business purpose test, then that would be an
immaterial error because the FTT ultimately took the right approach of considering whether
there was a single operational function (here generating electricity), reaching a finding on that issue was open to it"
Project Planning and Design
Although UT concluded that FTT erred in law when it made up a new distinction between necessary and unnecessary design when determining the capital allowances treatment of the considerable (£48 million) preliminary studies needed to construct the offshore windfarms; its re-made decision on this issue, found that none of the disputed environmental impact or other technical studies qualified as "on provision of plant".
In doing so UT took a strict and narrow view of the legislation which could have a significant impact on the capital allowances treatment of feasibility and planning claims for other projects.
'In summary, the application of the strict and narrow principle encapsulated in the legislation, means that design of plant and the data inputs to that design, do not constitute provision of plant and that (even at the level of generation assets – i.e. the level favourable to taxpayer and against HMRC’s case) none of the disputed environmental impact or other technical studies qualify as “on provision of plant”. None of the studies were provision of the plant (the generation assets), in that expenditure on them was not expenditure on the actual making or construction of the plant, its actual installation, or actual transport of it. Nor were they expenditure of a similar nature.'
Preliminary Study | FTT Decision | UT Decision |
Scoping | No | No |
Landscape, seascape and visual assessments | No | No |
Benthos studies | In Part (insofar as they related to safe installation at one site only) | No |
Ornithology and collision risk | No | No |
Fish and shellfish studies | Yes | No |
Marine mammal studies | Yes but removed because of double counting | No |
Archaeology, wrecks and cultural heritage studies | Yes | No |
Noise assessment studies | Yes | No |
Telecoms and radar interference studies | No | No |
Traffic, transport and tourism studies | Yes (for installation only) | No |
Socio-economic and tourism studies | No | No |
Metocean studies | No - Desktop Yes - Detailed | No |
Geophysical and geotechnical studies | Yes | No |
Project management (design and procurement) | Yes (in principle) | Yes (with clarification and more limitation) |
Revenue Tax Deduction for Non-Qualifying Costs
The UT agreed with the FTT that there was no automatic reason why a revenue deduction should be available if the expenditure was not on the provision of plant or machinery, as there is no restriction on expenditure being capital without qualifying for capital allowances.
Procedural Tax Computation Amendment
The final issue concerned a technical argument made by some of the taxpayers that HMRC had issued a closure notice and amended the returns of these entities but had amended the writing down allowances rather than the overall qualifying expenditure, which hadn’t been reduced. The capital allowances code has a strict provision on the mechanisms for making claims, the period of 'initial allocation' and how subsequent year's allowances are to be calculated.
The UT dismissed this appeal, noting that all parties understood this to be a transcription error which was clear in contemporary correspondence, and that the FTT had the power to amend the figures as they were within the scope of the appeal made, to meet the principle of ensuring the taxpayer pays the right amount of tax.
For further details please contact bryan.crawford@furastaconsulting.com.