Significant tax decision on pre-construction costs in major projects
- Bryan Crawford
- Mar 18
- 5 min read
Case: Orsted West of Duddon Sands (UK) Ltd & Ors ("Orsted") v The Commissioners for HMRC ("HMRC")
Court: Court of Appeal
Date of Judgment: 17 March 2025
Subject: Capital allowances on pre-operational expenditure on offshore windfarm studies for capital allowances and revenue deductions following rejection by Upper Tribunal
Issue: Whether the expenditure was 'on the provision of' plant and machinery in accordance with the Capital Allowances Act ("CAA") 2001 section 11
Decision: Appeal (mostly) allowed with permission to provide further evidence to support claim for 'scoping documents'
Executive Summary
The Court of Appeal has largely allowed Orsted's appeal regarding capital allowances, finding that expenditure on most of the pre-construction studies were incurred "on the provision of" the generation assets and thus qualified for allowances under section 11 CAA 2001.
The court upheld the lower tribunals' rejection of Orsted's claim for revenue deductions under section 61 of the Corporation Tax Act 2009 (CTA 2009), deeming the expenditure to be capital in nature. Finally, the court upheld the lower tribunals' view that HMRC was not precluded from revisiting the "qualifying expenditure" figures in the tax returns, even though they were not directly amended in the closure notices.
The questions and decisions will have significant implications for other major construction projects because most large infrastructure projects require extensive, complex and costly preparatory work.
Main Themes and Arguments
Interpretation of "on the provision of" plant (Section 11 CAA 2001):
The central issue was whether expenditure on various pre-operational studies (environmental impact assessments, metocean studies, geotechnical investigations, etc.) could be considered capital expenditure incurred "on the provision of" the offshore windfarm generation assets (wind turbines and associated infrastructure).
The court emphasized that while the purchase price is clearly included, the phrase "on the provision of" can extend to other expenditure necessary for the plant to be provided for the purposes of the trade, including installation.
Drawing on the precedent of Barclay, Curle & Co Ltd v Inland Revenue Commissioners, the court highlighted Lord Reid's view that expenditure "which must be incurred before the plant can be provided, cannot be too remote."
The court distinguished Ben-Odeco Ltd v Powlson, where financing costs were deemed not to be expenditure "on the provision of" the asset itself. The focus should be on expenditure on the plant, not on the provision of money to acquire the plant.
The court rejected the Upper Tribunal's strict and narrow interpretation focusing solely on the physical supply. Lord Justice Newey stated, "When considering how much had been spent on providing such plant, it would, I think, be appropriate to take the costs of designing it into account."
The court found that studies providing information that informed the design and installation of the windfarms could qualify. For example, regarding metocean studies, the FTT's finding was quoted: "Without these metocean studies the specific design of the wind turbines could not be undertaken and so they could not have been fabricated. They would have been useless for the purpose for which they were intended namely the generation of electricity."
Studies related to environmental impact, noise assessment, and navigational safety were also deemed to influence design and installation, and their costs were considered incurred "on the provision of" the generation assets. For instance, on landscape, seascape and visual assessments, the court noted: "It seems to me that, in the circumstances, the studies influenced the design of the generation assets and that the expenditure on them was ‘on the provision of’ those assets."
The court invited further submissions on the treatment of expenditure on "scoping documents."
The socio-economic and tourism studies and desktop metocean studies were no longer contended by Orsted to qualify for capital allowances.
Pre-Construction (Operational Studies) Decision Summary
Preliminary Study | FTT Decision | UT Decision | Court of Appeal |
Scoping | No | No | Permission to provide further evidence to support a claim. |
Landscape, seascape and visual assessments | No | No | Yes |
Benthos studies | In Part (insofar as they related to safe installation at one site only) | No | Yes |
Ornithology and collision risk | No | No | Yes |
Fish and shellfish studies | Yes | No | Yes |
Marine mammal studies | Yes but removed because of double counting | No | Yes |
Archaeology, wrecks and cultural heritage studies | Yes | No | Yes |
Noise assessment studies | Yes | No | Yes |
Telecoms and radar interference studies | No | No | Yes |
Traffic, transport and tourism studies | Yes (for installation only) | No | Yes |
Socio-economic and tourism studies | No | No | Claim withdrawn |
Metocean studies (Desk-top) | No | No | Withdrawn |
Metocean studies (Detailed) | Yes | No | Yes |
Geophysical and geotechnical studies | Yes | No | Yes |
Project management (design and procurement) | Yes (in principle) | Yes (with clarification and more limitation) | No change |
Revenue Deduction under Section 61 CTA 2009
Orsted argued that if the expenditure did not qualify for capital allowances, it should be deductible as pre-trading revenue expenditure:
The court upheld the lower tribunals' rejection of this claim, finding that the expenditure was capital in nature.
Drawing on cases like ECC Quarries Ltd v Watkis and Tucker v Granada Motorway Services Ltd, the court reasoned that the expenditure was made "once and for all" and "with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade."
Lord Justice Newey stated: "Regardless of whether the expenditure was ‘on the provision of plant’ within the meaning of section 11, it will have been made to enhance the value of the leases which Orsted was taking, of the windfarms which they were proposing to construct (including their generation assets) and of the businesses on which they were proposing to embark. These were lump sum payments with a view to enduring advantages."
The court clarified that expenditure not qualifying for capital allowances is not automatically revenue expenditure.
HMRC Powers to Amend
Conclusive Determination of Qualifying Expenditure (Paragraph 88, Schedule 18 FA 1998):
Orsted argued that because HMRC did not directly amend the "qualifying expenditure" figures in the closure notices, these amounts were "conclusively determined" and could not be revisited by the FTT.
The court rejected this argument, agreeing with the FTT and Upper Tribunal.
Drawing on the principles established in R (on the application of Investec Bank (UK) Ltd) v Revenue and Customs Commissioners, the court emphasized that the "matter in question" in an appeal can be broader than the specific adjustments made in the closure notice.
Lord Justice Newey quoted Rose LJ in Investec: "the outcome of any particular appeal may be that the tax liability is something different from the figure for which either side was contending."
The court reasoned that the amendments made by HMRC (regarding writing down allowances) were inherently linked to the underlying "qualifying expenditure." It would be illogical for the writing down allowances to be adjusted without the corresponding "qualifying expenditure" being subject to review.
The court concluded that the FTT has the power to adjust elements of a tax return beyond the specific amendments made in the closure notice if necessary to give effect to its conclusions on the "matter in question" and ensure the correct amount of tax is paid. "As I see it, section 50 is intended to empower the FTT to carry its conclusions on the ‘matter in question’ into effect and so to ensure that the taxpayer pays the correct amount of tax."
Conclusion
The Court of Appeal:
Allowed Orsted's appeal regarding capital allowances for most of the pre-operational studies, finding that the expenditure was incurred "on the provision of" the generation assets.
Dismissed Orsted's appeal regarding revenue deductions, upholding the finding that the expenditure was capital in nature.
Dismissed Orsted's appeal regarding the conclusive determination of "qualifying expenditure", confirming that the FTT had the jurisdiction to revisit these figures.
The parties were invited to submit further written arguments specifically on the treatment of expenditure on the scoping documents for capital allowances.