Orsted A/S, a large Danish renewable electricity generating group, and their UK subsidiaries have lost their case at the Upper Tribunal (UT) after a partial win at the First-tier Tribunal (FTT). The case concerned capital allowances and the meaning of the expression ‘on the provision of’ within the relevant section of the capital allowance legislation.
The taxpayers were four UK subsidiaries who had built offshore wind farms off the English coasts of Essex and Cumbria. When developing the offshore wind farms many studies were conducted to provide information on:
- Landscape, seascape and visual assessments – treated as non-qualifying expenditure by the FTT
- Benthos studies (on organisms living on the seabed) – treated as qualifying expenditure by the FTT as it led to safe installation
- Ornithology and collision risk studies – treated as qualifying expenditure by the FTT, safe installation
- Fish and shellfish studies – treated as qualifying expenditure by the FTT, safe installation
- Marine mammal studies – treated as qualifying by the FTT, safe installation
- Archaeology, wrecks and cultural heritage studies – treated as qualifying by the FTT, safe installation
- Noise assessment studies – treated as qualifying by the FTT in principle but duplicated the work of the marine mammal studies
- Telecoms and radar interference studies – treated as non-qualifying by the FTT
- Traffic, transport and access studies – treated as qualifying by the FTT, safe installation
- Socio-economic and tourism assessments – treated as non-qualifying by the FTT
- Metocean studies – treated as qualifying by the FTT where conducted after initial desktop review, as necessary for design
- Geophysical and geotechnical studies – treated as qualifying by the FTT, as necessary for design
The taxpayers had claimed capital allowances on all the studies and included claims on management time where it could be allocated to the studies. HMRC disagreed with this treatment and issued closure notices amending the tax returns to back out all the expenditure related to the studies. As detailed above the FTT agreed with the taxpayers that many of the studies were qualifying as they either led to safe installation or were necessary for design.
HMRC appealed to the UT holding that the FTT had erred in law by creating tests that were not supported by the authorities, case law heard in courts previously. The UT agreed, finding that both tests; expenditure being necessary for design or for safe installation was not supported by the previously decided case law.
The UT concluded that rather than apply tests the question for a tribunal was whether the expenditure was ‘on the provision of’ qualifying capital assets, that the generating assets (the wind turbines, array and export cables, monopiles and foundations) plainly were. The UT held that ‘on the provision of’ meant doing something, such as transport and installation of the generating assets that case law held were examples of expenditure on the provision of. The UT found that expenditure on the studies were incurred to enable the generating assets to be provided to the UK subsidiaries and the expenditure was not ‘on the provision of’ qualifying capital assets as they didn’t yet exist.
The UT remade the FTT’s decision, holding that all the studies were non-qualifying as they only enabled the capital assets to be provided to the taxpayers rather enabling the taxpayers to actually instal or transport the capital assets so they could be brought into use.
The UT also found that the expenditure was not revenue expenditure but clearly capital in nature but not qualifying for capital allowances. Any deduction of the costs incurred will now only be considered when the farms are scrapped or sold and a capital gain or loss is crystallised.
The decision can be found at: (1) GUNFLEET SANDS LIMITED (2) GUNFLEET SANDS II LIMITED (3) WALNEY (UK) OFFSHORE WINDFARMS LIMITED (4) ORSTED WEST OF DUDDON SANDS (UK) LIMITED v THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS [2023] UKUT 00260 (TCC) – GOV.UK (www.gov.uk)
This is a disappointing result for the renewables industry, the studies that were undertaken are industry standard to enable the safe installation and decommissioning of wind farms along with their efficient and profitable operation. Over £15m was incurred by the taxpayers on expenditure that was validly incurred for business purposes. The fact that the taxpayers cannot get a tax deduction for this expenditure will likely not encourage other developers to consider the UK a good place for carbon-zero investment. The UT have helpfully provided clarity on the meaning of the relevant legislation which should help developers ensure that their financial models are more accurate.
Please contact if you have any questions on capital allowances. The above case highlights that finding the cut-off between qualifying and non-qualifying can be a tricky decision, even for tribunals.
