Orsted West of Duddon Sands (UK) Limited & Ors v The Commissioners for HMRC

For capital allowances, expenditure is on the provision of plant where, viewed objectively and with hindsight, it informed the plant’s design or installation. The plant must actually be acquired or constructed, and the expenditure must not reflect circumstances peculiar to the taxpayer. The rule can cover bespoke design costs and studies, even where a study causes no eventual design change. It does not cover expenditure incurred only to decide whether to acquire plant.

Capital and revenue classification is a separate inquiry. Expenditure may be capital without qualifying under section 11 of the Capital Allowances Act 2001, and so may not be deductible as pre-trading revenue expenditure. On an appeal against a closure notice, the tribunal may make consequential changes to unamended return entries where they fall within the closure notice’s matter in question.

Four companies operating offshore windfarms appealed against the Upper Tribunal’s decision, reported at [2023] UKUT 00260 (TCC). The Upper Tribunal had held that the windfarms’ generation assets were plant, but that none of the environmental and technical study costs was expenditure on the provision of plant. It also rejected deductions for the expenditure as pre-trading revenue expenditure and upheld the ability to revisit certain return figures.

The Court of Appeal considered three issues: whether the studies were expenditure on the provision of plant under section 11 of the Capital Allowances Act 2001; whether any non-qualifying expenditure was deductible under section 61 of the Corporation Tax Act 2009; and whether figures left unamended in the companies’ returns had become conclusively determined under paragraph 88 of Schedule 18 to the Finance Act 1998.

1. Capital allowances. The appeals succeeded in relation to the construction of section 11 of the Capital Allowances Act 2001. The words on the provision of were not to be applied by a strict and narrow rule. They can include expenditure beyond purchase, transport and physical installation costs. In the case of bespoke plant, they can include design costs and studies which inform the design or installation.
2. The relevant inquiry is objective and may be made with the benefit of hindsight. Expenditure qualifies where it informed the design of plant or how it was to be installed, the plant was in fact acquired or constructed, and the expenditure did not arise from circumstances particular to the taxpayer. A study may qualify even if it produces no eventual change. Expenditure incurred only to decide whether to acquire plant does not qualify.
3. Applying those principles, the costs of the landscape, seascape and visual, benthos, ornithology and collision-risk, fish and shellfish, marine mammal, archaeology, noise, telecoms and radar, traffic, transport and tourism, detailed metocean, and geophysical and geotechnical studies were incurred on the provision of the generation assets. The socio-economic and tourism studies and desktop metocean studies were no longer pursued. The position on scoping documents was unresolved, and written submissions were invited.
4. Revenue deduction. The expenditure was capital in nature even where it did not qualify under section 11. It was incurred once and for all with a view to enduring advantages connected with the leases, proposed windfarms and businesses. The separate capital-versus-revenue analysis therefore excluded deductions under section 61 of the Corporation Tax Act 2009.
5. Conclusive determination. The scope of an appeal is determined by the matter in question identified from the closure notice and surrounding circumstances, not merely by the particular numerical amendment. Under sections 48 and 50 of the Taxes Management Act 1970, read with the necessary modifications, the First-tier Tribunal could revise return entries which HMRC had not amended where that was consequential on its conclusions and necessary to determine the correct tax liability. The relevant figures had therefore not become conclusively determined under paragraph 88 of Schedule 18 to the Finance Act 1998.

The appeals were allowed to the extent stated above, with written submissions invited on the scoping documents.

1. Court of Appeal (Civil Division): appeals allowed in part. The court held that most study costs qualified for capital allowances, rejected the revenue-deduction argument, upheld the tribunal’s jurisdiction to revise consequential return entries, and invited written submissions on scoping documents.
2. Upper Tribunal (Tax and Chancery Chamber): in [2023] UKUT 00260 (TCC), held that the generation assets were plant but that none of the disputed study expenditure was on the provision of plant; it rejected the section 61 claim and upheld the conclusions concerning conclusive determination.
3. First-tier Tribunal: in [2022] UKFTT 35 (TC), held that each windfarm’s generation assets constituted a single item of plant, allowed capital allowances for some study expenditure, rejected deductions under section 61, and held that the relevant return figures were not conclusively determined.