Orsted claimed capital allowances for the cost of environmental, metocean, geophysical and geotechnical studies used to design offshore windfarms. The Supreme Court held that such studies were not expenditure ‘on the provision of plant’, because the phrase requires a close connection between the expenditure and the plant itself.
Background
The respondents, members of the Orsted group, own and operate four offshore windfarms off the English coast: Gunfleet Sands Phase 1, Gunfleet Sands Phase 2, Walney 1 and 2, and West of Duddon Sands. Each windfarm comprises ‘generation assets’ (the wind turbines and the array cables connecting them to an offshore substation) and ‘transmission assets’. It was common ground that the relevant ‘plant’ was the generation assets of each windfarm, treated as a single item. It was also agreed that the disputed expenditure was capital rather than revenue in nature.
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While planning and designing the windfarms, Orsted spent considerable sums on surveys and studies. Most were carried out to prepare the environmental impact assessment (EIA) needed for regulatory consents, such as consent under section 36 of the Electricity Act 1989. These included:
- landscape, seascape and visual assessments;
- benthos studies;
- ornithology and collision risk studies;
- fish and shellfish studies;
- marine mammal studies;
- archaeology, wrecks and cultural heritage studies;
- noise assessments;
- telecoms and radar interference studies;
- traffic, transport and tourism studies;
- socio-economic assessments.
Further metocean, geophysical and geotechnical studies were carried out in phases. These informed matters such as foundation dimensions, the choice of turbine and cable routes. A scoping document preceded the EIA studies.
HMRC issued closure notices disallowing the expenditure. The amendments totalled about £22.6m for Gunfleet, £0.9m for Gunfleet II, £15.6m for Walney and £9.0m for WoDS.
Lady Rose observed that Orsted plainly needed the information in the reports in order to design and build the windfarms. The question was:
whether that is enough for one to be able to say that the expenditure on those reports and studies was “on” the provision of the windfarm.
The issue
The single issue was whether the costs of the studies were ‘qualifying expenditure’ under section 11(4) of the Capital Allowances Act 2001. The relevant condition was that:
it is capital expenditure on the provision of plant or machinery wholly or partly for the purposes of the qualifying activity carried on by the person incurring the expenditure
Section 11(4)(b), which concerns ownership, and the qualifying activity condition were accepted as satisfied.
The decisions below
First-tier Tribunal
The FTT (Judge Popplewell) applied a ‘necessity’ test. It distinguished designs which ‘go to the heart’ of the windfarm, without which it could not generate electricity, from designs that were merely peripheral. Studies that ‘directly relate to the necessary design, construction or installation’ qualified. The FTT therefore allowed the appeals in part, with results varying by study and by windfarm.
Upper Tribunal
The Upper Tribunal held that the FTT had applied the wrong test. In its view, Barclay, Curle laid down no general necessity requirement, and the word ‘on’ signals a closer connection than ‘in connection with’ or ‘directly related to’. Applying a strict and narrow construction, it held that none of the studies qualified. They were advice on the type of plant to use or on how and when to install it.
Court of Appeal
The Court of Appeal (Newey LJ, with whom Zacaroli LJ and Sir Launcelot Henderson agreed) rejected a narrow construction. Newey LJ held that allowances may be claimed where:
(a) the taxpayer can demonstrate that, looking at matters objectively and with the benefit of hindsight, expenditure informed the design of plant or machinery or how it was to be installed, (b) the expenditure related to plant or machinery which was in fact acquired or constructed and (c) the expenditure did not arise from characteristics or circumstances particular to the specific taxpayer.
On that test, all the disputed studies, including the scoping studies, qualified. HMRC appealed.
The parties’ arguments
Orsted
Mr Jones, for Orsted, advanced the following arguments:
- Unlike the ‘wholly, exclusively and necessarily’ test in section 336 of ITEPA 2003, section 11(4) contains no restrictive language, so a looser link was intended.
- Barclay, Curle shows that, where designing the plant was broadly necessary before it could be provided, all expenditure on surveys feeding into the design qualifies.
- Ben-Odeco turned on the financing costs being particular to that taxpayer.
- Equal treatment required parity with a taxpayer buying plant off the shelf, whose purchase price includes the manufacturer’s design and research costs.
- The policy of capital allowances is to incentivise investment and to tax only true profits.
- HMRC’s Capital Allowances Manual was inconsistent with HMRC’s stance.
HMRC
Ms Wilson, for HMRC, made the following submissions:
- The word ‘on’ requires a close connection.
- An expansive reading would undercut the balance struck by the provisions on buildings, structures and alterations (sections 21 to 25).
- Capital allowances serve to reflect the depreciation of capital assets.
HMRC reserved their position on whether the cost of final technical drawings and specifications could qualify. They accepted that studies carried out during fabrication or installation might qualify.
The Court’s reasoning
Ordinary meaning: a close connection
Applying the orthodox approach to statutory construction summarised in R (O) v Secretary of State for the Home Department, Lady Rose held:
Looking first at the ordinary meaning of the words used in the context of section 11(4)(a), I agree with the Upper Tribunal that the requirement that the expenditure must be “on” the provision of plant indicates a narrow test, requiring a close connection between the expenditure and the plant provided.
Parliament had chosen ‘on’ rather than looser phrases such as ‘in connection with’, ‘relating to’ or ‘with a view to’. The comparison with section 336 of ITEPA 2003 did not help. HMRC accepted that qualifying expenditure need not be the bare minimum, which is why the FTT’s necessity test was wrong.
Barclay, Curle properly understood
Lady Rose rejected Orsted’s reading of Barclay, Curle. She noted that the House of Lords had found the question there difficult, which would have been unnecessary if the test were as broad as the Court of Appeal held. The majority treated the lined, excavated basin as itself an integral part of the dry dock, and so as plant:
You cannot buy a hole in the ground off the shelf or commission the manufacture in a factory of a bespoke hole in the ground which you can then install. The excavation works were expenditure on the provision of the plant because the plant included the lined basin and the lined basin was part of the overall dry dock.
Cheshire Cavity Storage was consistent with this. The taxpayer failed there because the cavity was not plant, not because of any issue about proximity.
Ben-Odeco
Ben-Odeco ‘strongly supports’ the narrower construction. Equal treatment was one factor in that case, but the central point was the lack of proximity between the financing costs and the provision of the plant. Lord Russell framed this as a question about the effect of the expenditure.
The off-the-shelf comparison
Lady Rose rejected the argument that equal treatment with off-the-shelf purchasers required a broad construction:
The fact that the price of a capital item is set by the supplier to recoup an aggregation of its own capital and revenue costs says nothing, in my judgment, about whether the price is qualifying capital expenditure in the hands of the taxpayer who purchases the item.
Lord Russell had made the same point in Ben-Odeco.
The limiting curve
Drawing these threads together, Lady Rose held that the primary cost is the purchase price. Transport and installation costs may be added because they are inherent in the concept of the plant being ‘provided’. She concluded:
The “limiting curve” as Lord Wilberforce put it in Ben-Odeco is around the plant and the provision of it. The costs, commonly incurred, of carrying out studies and surveys which provide the business with advice about how to choose or design plant fall, in my view, well outside the limiting curve.
Context and purpose
Nothing in the wider context or purpose of the provision supported a broader reading:
- Other allowance provisions: Lady Rose did not find the plant/setting distinction helpful on these facts. She accepted, however, that an expansive reading risked scooping up expenditure properly falling within sections 21 to 25.
- Depreciation: Relying on Lord Nicholls in Barclays Mercantile v Mawson, she treated the depreciation rationale as significant. She stated:
I found the link between the annual allowance and the erosion the value of the plant through wear and tear to be a useful pointer to the narrowness of the concept.
Installation and transport costs were ‘the exception that proves the rule’.
- Incentive purpose: Following Lord Russell in Ben-Odeco, Lady Rose regarded the breadth of the phrase as ‘a very blunt instrument’ for incentivising investment. Government has used more targeted measures for renewable energy. She held:
One cannot rely on the broad purpose of a provision to define where the precise boundary lies between what is caught and what is not caught.
- True profits: The ‘true profits’ argument failed because accounting treatment does not determine the construction of taxing statutes (Ben-Odeco).
Design and the ‘informs’ test
‘Design’ has a wide spectrum of meanings, from an artist’s impression to final fabrication drawings. The Court rejected the Court of Appeal’s test:
It is not helpful, therefore, to say that any study or survey that “informs” or “feeds into” the design of the plant must be regarded as being spent “on the provision of” the plant. This is much too broad, especially if one then goes further to say that the data produced by the study do not have to actually lead to a change in the design proposed up to that point in order for the cost of gathering it to be covered.
The claim that a survey finding no unexploded ordnance qualifies just as much as one prompting reconfiguration showed how broad Orsted’s test was.
Lady Rose expressly left open whether the costs of final technical drawings and specifications could qualify, as that issue did not arise. She noted HMRC’s acceptance that studies carried out during fabrication or installation might qualify, but none of the present studies fell into that category.
Other authorities and materials
- McVeigh v Sanderson: of limited assistance. The patterns there were impressed onto existing plant, whereas the reports here were not incorporated into the windfarm components.
- Samarkand: a ‘very slender thread’. At most it showed that the question is highly fact-sensitive.
- HMRC’s Manual: consistent with HMRC’s stance and, in any event, not normally relevant to statutory interpretation.
- Final investment decision: neither party favoured using it as the dividing line. HMRC noted that its timing was liable to manipulation.
Conclusion
I do not regard these studies and surveys as close to the boundary between what should be regarded as “on” plant and what is too far away from the plant itself to be so regarded. They do not fall within the statutory wording and I would therefore allow the appeal.
Practical significance
The decision is now the authoritative statement on the scope of ‘on the provision of’ plant in section 11(4)(a) CAA 2001. Its main implications are as follows:
- A narrow test: the Court confirmed that a close connection with the plant itself is required. It rejected both the FTT’s necessity test and the Court of Appeal’s broad ‘informed the design’ test.
- What qualifies: qualifying expenditure centres on the purchase price, together with costs inherent in provision, such as transport and installation.
- What does not qualify: pre-construction environmental, consenting and site-investigation studies that merely advise on how to choose or design plant fall outside the regime. This holds even where they are commercially indispensable to large infrastructure projects.
- Open questions: the Court left open whether final fabrication drawings and specifications can qualify. Studies forming part of fabrication or installation may still qualify.
- Interpretive approach: the judgment reinforces that broad incentive policy, accounting treatment and HMRC guidance cannot widen the statutory wording. It also links the scope of plant and machinery allowances to the depreciation rationale.
For developers of energy and other major projects, substantial preparatory expenditure will therefore not enter the plant and machinery pool under the general rule in section 11(4).
Verdict: The Supreme Court unanimously allowed HMRC’s appeal (Lady Rose, with whom Lord Lloyd-Jones, Lord Hamblen, Lord Burrows and Lord Richards agreed). It held that the expenditure on the disputed studies and surveys was not capital expenditure ‘on the provision of plant’ within section 11(4)(a) of the Capital Allowances Act 2001. That expenditure therefore did not qualify for plant and machinery capital allowances.
