Supreme Court Reverses Orsted: A Final Narrowing of Pre-Construction Capital Allowances

Windfarm Array

Case: Orsted West of Duddon Sands (UK) Limited (and others) v Commissioners for His Majesty’s Revenue and Customs

Court: The Supreme Court of the United Kingdom

Citation: UKSC 12 [2026]

Date: 15 April 2026

Subject: Capital allowances for pre-construction environmental surveys and studies

Issue: Whether capital expenditure incurred on environmental surveys and reports (such as those required for Environmental Impact Assessments) qualifies as expenditure "on the provision of plant" under section 11(4) of the Capital Allowances Act 2001

Decision: Appeal allowed (unanimously in favour of HMRC); the expenditure does not qualify

Executive Summary

This landmark ruling from the Supreme Court effectively overturns the previously significant pro-taxpayer decision by the Court of Appeal regarding pre-construction costs for major infrastructure projects. The Court was asked to determine if millions of pounds spent on environmental studies - covering everything from bird migration to seabed archaeology - could be considered part of the cost of "providing" the windfarms for tax purposes. While lower courts had reached conflicting conclusions, the Supreme Court has now established a narrower, stricter interpretation of the law, ruling that such preparatory studies are too remote from the physical plant to qualify for capital allowances.

Case Background

The respondents (collectively "Orsted") own and operate several large offshore windfarms. To design these windfarms and obtain the necessary regulatory consents, Orsted commissioned a vast array of studies, including assessments of landscape impact, benthos (seabed flora/fauna), ornithology, noise, and maritime archaeology. Orsted argued that because these windfarms were bespoke and could not have been designed or constructed without the data from these surveys, the costs were part of the expenditure "on the provision" of the plant (the wind turbines and cables). HMRC disagreed, leading to a long legal battle that spanned the First-tier Tribunal, Upper Tribunal, and Court of Appeal.

Case for the Appellant (HMRC)

The Key Arguments:

• Narrow Statutory Meaning: HMRC argued that the word "on" in the phrase "expenditure on the provision of plant" requires a close connection between the spending and the plant itself, rather than a loose nexus like "in connection with".

• Remoteness: Drawing on the Ben-Odeco precedent, HMRC contended that the studies provided information or advice about the environment, which is "more remote in purpose" than the actual acquisition or installation of the plant.

  
  

• Statutory Balance: HMRC cautioned that an expansive reading of the rules would "scoop up" expenditure that Parliament intended to be covered by other, more specific (and often less generous) tax provisions.

  
  

• Depreciation Logic: Capital allowances are intended to reflect the wear and tear of an asset over time; environmental reports do not depreciate in value as a physical turbine does.

  
  

Case for the Respondent (Orsted)

The Key Arguments:

• Bespoke Necessity: Orsted argued that for complex, bespoke infrastructure, the design and the surveys informing that design are integral to the provision of the plant.
  

• The "Off-the-Shelf" Comparison: They pointed out that if a turbine were bought "off-the-shelf," the supplier’s design costs would be built into the price, and the entire price would qualify for allowances. They argued there should be no tax disadvantage for commissioning bespoke plant where these costs are separated.
  

• Incentivising Investment: Orsted emphasised that the broad purpose of capital allowances is to incentivise investment in major projects, particularly in green energy.
  

• Accounting Practice: The costs were capitalized for accounting purposes as part of the project’s cost, which Orsted argued should inform the tax treatment.
  

Key Findings/Arguments

The Supreme Court unanimously rejected the broader "informed the design" test previously adopted by the Court of Appeal.

• The "On" Test: The Court held that "on" indicates a strict requirement for proximity,. While purchase price, transport, and installation costs are covered, studies providing "advice about how to choose or design plant" fall outside this "limiting curve".
  

• Distinguishing Barclay, Curle: The Court clarified the famous Barclay, Curle dry dock case. In that instance, the excavation was part of the plant itself (the hole was the dock). In contrast, Orsted's surveys were preliminary information-gathering exercises, not physical components or integral parts of the windfarm structure.
  

• Rejection of Pricing Logic: The Court dismissed the "off-the-shelf" argument, noting that the build-up of a supplier's price (which includes their own overheads and revenue costs) is irrelevant to whether a purchaser’s independent expenditure qualifies as a capital allowance.
  

• Policy Limitations: While capital allowances do incentivise investment, the Court ruled that the "broad purpose" of a statute cannot be used to ignore the specific, narrow wording chosen by Parliament.

Decision Table Summary

Preliminary Study	FTT Decision	UT Decision	Court of Appeal	Supreme Court (Final)
Scoping	No	No	Yes	No
Landscape, seascape and visual assessments	No	No	Yes	No
Benthos studies	In Part	No	Yes	No
Ornithology and collision risk	No	No	Yes	No
Fish and shellfish studies	Yes	No	Yes	No
Marine mammal studies	Yes but removed because of double counting	No	Yes	No
Archaeology, wrecks and cultural heritage	Yes	No	Yes	No
Noise assessment studies	Yes	No	Yes	No
Telecoms and radar interference	No	No	Yes	No
Traffic, transport and tourism studies	Yes (for installation only)	No	Yes	No
Socio-economic and tourism studies	No	No	Withdrawn	Withdrawn
Metocean studies (Desk-top)	No	No	Withdrawn	Withdrawn
Metocean studies (Detailed)	Yes	No	Yes	No
Geophysical and geotechnical studies	Yes	No	Yes	No
Project management (design and procurement)	Yes	Yes (with limitation)	No change	Restricted*

*While the door appears firmly shut on preliminary and planning-stage costs, the Court notably reserved its position on whether final technical drawings (those used directly by a manufacturer to fabricate the plant) might qualify, leaving a "small window" for future litigation on more direct, construction-phase design costs.

By overturning the Court of Appeal’s broader "informed the design" test and restoring a "narrow test" requiring a "close connection" between expenditure and the plant, the Court has shifted the burden of proof back onto the taxpayer to demonstrate proximity which means taxpayers should expect to scrutinise these costs more closely.

Conclusion

This judgment brings much needed - though perhaps unwelcome - clarity to the infrastructure sector. By reversing the Court of Appeal's more liberal stance, the Supreme Court has confirmed that pre-construction environmental and planning costs are generally not eligible for plant and machinery capital allowances.

Key Implications:

• Higher After-Tax Costs: Developers of major projects (windfarms, power plants, etc.) can no longer rely on section 11(4) to recoup the significant costs of Environmental Impact Assessments and related surveys.
  

• Clearer Boundaries: The decision reinforces a strict boundary between the physical "provision" of an asset and the intellectual or preparatory work required to decide how or where to provide it.
  

• Future Design Costs: The Court notably reserved its position on whether final technical drawings (those used directly by a manufacturer to fabricate the plant) might qualify, leaving a small window for future litigation on more direct design costs.