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Tribunal confirms that certain studies and project management costs relating to offshore windfarms qualify in part for capital allowances

30 March 2022. Published by Alexis Armitage, Senior Associate

In Gunfleet Sands Ltd & Others v HMRC [2022] UKFTT 35 (TC), the First-tier Tribunal (FTT) held that capital allowances were available in part for certain expenditure incurred on studies and project management in relation to offshore windfarms, pursuant to section 11(4)(a), Capital Allowances Act 2001 (CAA 2002).

Background

Gunfleet Sands Ltd, Gunfleet Sands II Ltd, Walney (UK) Offshore Windfarms Ltd and Orsted West of Duddon Sands (UK) Ltd (the Appellants) are all members of the same group of companies whose parent company is Orsted A/S, a Danish incorporated and resident company. Each of the Appellants own and operate an offshore windfarm and are engaged in the business of the generation and sale of electricity. The Appellants collectively incurred expenditure of approximately £48m in relation to the construction of offshore wind farms. In particular, expenditure was incurred on environmental impact, metocean, geophysical and geotechnical studies, and on project management relating to the design and construction of the windfarms. 

Under section 11(4)(a), CAA 2002, capital allowances are available for expenditure "on the provision of plant or machinery". 

Whilst HMRC accepted that plant and machinery capital allowances were available on the fabrication and installation of the wind turbines and the electrical array cables which connected them (also known collectively as the 'generation assets'), it denied capital allowances on the studies and project management costs on the basis that the expenditure was too remote from, and was not on the provision of, the generation assets, which represented plant. The Appellants appealed HMRC's decision. 

FTT decision

The appeals were allowed in part. 

The key issue for the FTT to determine was whether the expenditure in dispute was "on the provision of plant", pursuant to section 11(4)(a). The Appellants argued that each windfarm was a single item of plant and the expenditure on the studies was reflected in the design, construction and installation of the relevant windfarm and on the design, fabrication and installation of each wind turbine and was therefore incurred on the provision of plant. HMRC's position was that the Appellants had not demonstrated, on the available evidence, that the studies influenced design, construction and installation, and in any event, expenditure on design was too remote to qualify.

The FTT agreed with the Appellants that each windfarm was a single item of plant. The component parts were directed towards a single purpose, "to generate, step up and then convey electricity to the National Grid". The FTT then considered whether the "provision of plant" extended to design of the plant. The FTT drew a distinction between "necessary design",  without which the windfarms could not carry out their functions and would be operationally useless, and "unnecessary design", without which they could continue to generate electricity. Expenditure on studies which directly related to necessary design qualified for capital allowances. 

The FTT applied these principles to the various elements of the studies relating to each windfarm. In some instances, the FTT concluded that the expenditure did not qualify for allowances, but it identified a number of elements which did qualify, including the detailed metocean studies and geophysical and geotechnical studies. To the extent that project management costs related to those studies that qualified for capital allowances, they also qualified.

Those costs that did not qualify for capital allowances could not be deducted from profits as pre-trading revenue expenditure, as they were capital in nature.

Comment 

There have been a number of recent cases which have considered the quantum of capital allowances available on infrastructure projects  (see, for example, Urenco Chemplants Ltd v HMRC [2022] UKUT 022 (TC), in which the Upper Tribunal considered the "on the provision of plant or machinery" test, and Inmarsat Global Ltd v HMRC [2021] UKUT 59 (TCC) (our blog on Inmarsat can be read here)) and this case illustrates the difficulties in practice in assessing which costs qualify for allowances. Given the size of the Appellants' claims, it would not be surprising if they sought to appeal the unsuccessful parts of the FTT's decision to the Upper Tribunal. 

The decision can be viewed here.