Gunfleet Sands Limited – FTT Generates Decision
In Gunfleet Sands Limited and others v HMRC, the First Tier Tax Tribunal (FTT) considered whether Capital Allowances claimed on expenditure for studies and project management prior to the construction of the Windfarms was on the provision of plant. There were four appellant companies; who were all members of the same group, each who owned and operated an offshore windfarm to generate electricity for sale.
Single Plant Entity
The first issue considered was whether the windfarms comprised of a single item of plant and machinery for capital allowances purposes. This is relevant as the appellants had claimed the fees for studies and project management in relation to the windfarms on the basis it was “on the provision of plant”. If the windfarms were considered a single item of plant, it would avoid the need to assess each component (the turbines, substations etc.) individually.
The appellants suggested there is no particular test in whether a given system should qualify as a single system or if each part should be viewed as distinct items and it is a question of fact and degree on a case by case basis. Evidence to support this was provided from historical cases. Cole Brothers Limited v Philips (Inspector of Taxes) and Urenco Chemplants Limited v HMRC and whether parts are directed towards a single use. Likewise in the IRC v Barclay Curle & Co 1969 case, capital allowances were claimed on individual items of plant, but it did not prevent the Dry Dock (in which the smaller items of plant were installed) as being considered a single item of plant.
Unsurprisingly the FTT found that each windfarm did qualify as a single item of plant. The purpose is to generate electricity, increase the voltage and then feed it to the National Grid. The generation of electricity occurs from the wind turbines and array cables, whereas the increase in voltage is done by the substations. The configuration of all the turbines in a windfarm needs to be designed to ensure the maximum amount of electricity is generated from the overall site. The FTT found the evidence clearly shows the windfarms are designed at the lowest cost to achieve the optimal electric generation which requires all wind turbines to operate as a single item. The supervisory control and data acquisition system (SCADA) provides a way to control the whole windfarm as a single entity similar to that of a power station. The FTT stated it would be “commercial madness” if to repair one single turbine all of them had to be shut down and this function therefore, does not make them all individual items of plant.
The windfarms were likened to production lines; there are different components but all are directed towards a single purpose. Whilst each turbine can generate electricity individually and be brought into operation in groups or singularly, their nature and function is to generate electricity which is the sole purpose of the windfarm. The site can therefore be considered as comprising as a single item of plant. The FTT stated if they were wrong about this, then every wind turbine and array cable would still qualify for capital allowances, but each as an item of plant.
Allowable Design Fees
The second issue considered related to various expenditure such as geophysical and geotechnical studies, project management and design and procurement which HMRC had disputed and denied allowances for. However, it is established that expenditure on plant and machinery in s.11 CAA 2001 can include more than cost, for example, transport and installations costs. Qualifying expenditure can also extend to expenditure ensuring the operation of the plant as per JD Wtherspoon Plc v HRMC. But the key point in question was whether the expenditure directly related to the plant. HMRCs argument centred around the costs being incurred on environmental studies for obtaining statutory consents however, legislation does not stipulate expenditure on plant may have some other effect or purpose.
It was deemed up to the appellants to prove the studies directly related and evidence was required to show that if not for the design, the windfarms and turbines would not be able to carry out their function i.e the generation of electricity. The judge reviewed the expenditure based on this principal of ‘necessary and unnecessary’ fees. The FTT found many of the fees did not qualify but 7 overall did. These included for marine mammal studies and shellfish studies showing they had a precise physical relationship between the turbines and site enabling the function of them to generate electricity. The project management expenditure (including preliminaries and overheads) was also allowable for claiming to the extent the expenditure related to matters which in turn qualified for allowances.
The appellants raised an alternative argument that if the expenditure was not deemed as capital expenditure and they were denied capital allowances then they could obtain tax relief via a pre trading expense (S61 CTA 2009). However, the FTT decided the expenditure falls within section 53 CTA 2009 i.e. capital expenditure, and therefore the expenditure cannot be claimed as revenue.
Additional points raised in the tribunal related to closure notices and amendments to tax written down values instead of qualifying expenditure in the tax returns. These points highlight the importance of being thorough and engaging specialists who know what to look out for.
Lovell Consulting View
The Capital Allowances points in this case emphasise the importance of using a Capital Allowances specialist and submitting a detailed capital allowances analysis to substantiate a claim. The FTT used a wide range of case law to refer to specific points and the case shows that you cannot take a blanket approach to projects, i.e. categorising everything as either qualifying or non-qualifying. The tax payer won parts but lost on others when it came to associated costs, such as noise assessment and collision risk study fees as no direct relationship to construction could be evidenced. This case does not just apply to windfarms, but to all construction projects, highlighting the need to review on a case by case basis. A Capital Allowances specialist will take the time to segregate these costs and apply Capital Allowances legislation and case law appropriately to achieve the best result and minimise the risk of any HMRC enquiry.