The Orsted West Supreme Court ruling and capital allowances on pre-construction costs

The Supreme Court has unanimously held that millions of pounds of pre-construction environmental studies and technical survey costs, incurred in developing offshore wind farms, were not expenditure “on the provision of plant” for capital allowances purposes.

The decision overturns last year’s favourable Court of Appeal ruling and significantly narrows the scope of qualifying expenditure. It exposes businesses to potentially higher post‑tax development costs and underlines the importance of early, integrated tax and accounting advice.

The claimants own and operate offshore wind farms in UK waters. In planning and designing the wind farms, they incurred substantial pre‑development expenditure on surveys and studies examining seabed conditions, wind resources, environmental impacts and other site‑specific factors relevant to the projects’ design and construction.

The expenditure was capitalised, and capital allowances were claimed under section 11(4) of the Capital Allowances Act 2001 as “expenditure on the provision of plant and machinery”.

HMRC accepted that the wind farms themselves constituted “plant” and that the survey costs were capital in nature. The sole issue before the Supreme Court was whether the survey costs were incurred “on the provision of plant”, as required by the statute.

HMRC appealed the Court of Appeal’s decision in respect of the survey costs to the Supreme Court.

The Supreme Court unanimously allowed HMRC’s appeal and held that the survey costs did not qualify for capital allowances.

The court held that the statutory phrase “on the provision of plant” requires a “close and direct” connection between the expenditure and the plant provided. The ordinary meaning of “on” denotes a narrower test than expressions such as “in connection with” or “relating to”. 

Even expenditure that is essential from a regulatory or engineering perspective does not qualify if it lacks the requisite proximity. The respondents’ reliance on the House of Lords decision in Barclay, Curle was rejected. That case turned on the fact that the excavated and lined dock basin was treated as an integral part of the plant itself. It did not establish any general principle that all costs necessarily incurred to enable the provision of a plant qualify for allowances.

The court dismissed the argument that the capital accounting should influence the tax analysis, reiterating that generally accepted accounting principles do not govern the calculation of taxable profits or the interpretation of statutory language.

The court accepted that renewable energy investment is encouraged by government policy, and capital allowances are designed to incentivise investment. However, it emphasised that a statute’s broad purpose cannot override the specific and deliberately narrow wording chosen by parliament.

By contrast, the court considered Ben Odeco v Powlson strongly supported HMRC’s position. In that case, financing and other preparatory costs were held not to qualify, due to a lack of proximity to the plant, a rationale the court found equally applicable to the survey costs.

The court also accepted HMRC’s submission that a more expansive interpretation would distort the balanced structure of the capital allowances regime by drawing in costs more appropriately dealt with under other statutory provisions.

As capital allowances are intended to reflect asset depreciation, and the surveys and studies bore only a remote connection to the wind farms’ diminishing value, the court concluded that the survey costs failed to qualify.

The ruling is final and cannot be appealed further. While it provides long‑awaited certainty, the decision significantly narrows the scope of qualifying capital expenditure for large infrastructure, energy and construction projects.

We now await further news on the consultation on the tax treatment of pre-development costs, which the government committed to publishing at the Autumn Budget 2024 but was delayed following the Court of Appeal decision in this case.

Businesses can no longer assume that surveys, feasibility studies or other pre-construction costs, however essential to the development, will qualify simply because they are capitalised and enable plant or machinery to be built.

The judgment reinforces a strict proximity test and places renewed importance on assessing whether expenditure forms part of the plant itself or is incurred directly on its provision, rather than being merely connected with it. This is likely to affect a wide range of capital‑intensive projects beyond the renewables sector.

It is notable that the court expressly declined to determine whether or not certain technical drawings might qualify for capital allowances, leaving scope for future litigation in relation to more direct design‑related costs.

In light of this decision, S&W is currently considering potential options and alternative approaches. The judgment reinforces the importance of obtaining early, integrated tax and accounting advice when planning major capital projects.

For further information, or support in relation to the Supreme Court’s decision and its implications, please contact your usual S&W adviser.

Approval code: NTEH7042617