Duddon Sands v HMRC (Gunfleet Sands)

Landmark Capital Allowances Case: Orsted West of Duddon Sands v HMRC (Gunfleet Sands)

A recent Court of Appeal ruling in Orsted West of Duddon Sands v HMRC has significant implications for businesses claiming capital allowances, particularly in the infrastructure and renewable energy sectors. The case revolved around whether preliminary studies and surveys carried out before the construction of offshore windfarms qualified for capital allowances.

Background of the Case

The appellants Orsted West of Duddon Sands (UK) Ltd, operated offshore windfarms and had incurred substantial costs on studies such as environmental impact assessments, geotechnical investigations, and design-related surveys. They sought to claim capital allowances on these expenditures, arguing they were integral to the provision of plant and machinery.

While the First-tier Tribunal (FTT) ruled that some of these costs were eligible, the Upper Tribunal (UT) later disagreed, taking a strict approach in applying case law denying capital allowances on all study-related expenditures. Orsted appealed to the Court of Appeal, which ultimately delivered a pivotal ruling.

Key Issues in Dispute

The primary legal question was whether the cost of studies and surveys qualified as expenditure “on the provision of plant or machinery” under Section 11(4) of the Capital Allowances Act 2001 (CAA 2001). The courts examined:

• Whether design-related studies were essential to the provision of the windfarm assets.
• The threshold for allowable costs, distinguishing between costs related to the creation of assets and general preparatory expenses.
• The relevance of prior case law, including Barclay, Curle & Co Ltd v IRC and Ben-Odeco Ltd v Powlson, in defining qualifying expenditure.

Court of Appeal Decision

The Court of Appeal overturned the Upper Tribunal’s ruling, determining that:

1. Design-related expenditure is integral to the provision of plant – Studies and surveys that directly contribute to the creation of wind turbines, substructures, and electrical systems are allowable. Particularly wind turbines “were bespoke items of plant which had to be designed before they could be constructed” (see point 56).                                             

Note: The case of Barclay, Curle & Co Ltd was used as it was comparable to this case

• Physical creation of assets is not the sole criterion – The court rejected HMRC’s argument that only costs tied to physical construction qualify, extending the scope of allowable expenses to essential pre-construction design work.
• In addition to the various studies and surveys qualifying for capital allowances, expenditure “relating to landscape, seascape and visual assessment; ornithology and collision risk; noise; and telecoms and radar interference studies” were all considered qualifying (see point 95).

Impact on Capital Allowances Claims

This ruling sets an important precedent, particularly for renewable energy projects, large infrastructure developments, and businesses investing in capital-intensive assets. The decision clarifies that:

• Project design costs may qualify for capital allowances if they are integral to the asset’s function. Expenditure on a transaction that is aborted will not qualify.
• Businesses should document expenditure carefully, ensuring a clear link between studies and the provision of plant.
• Future capital allowances disputes may hinge on the distinction between preparatory and asset-specific costs, influencing tax planning strategies.

What Businesses Should Do Next

Companies engaged in capital projects should:

• Review past and current capital allowances claims to assess whether design-related expenditure qualifies.
• Seek professional advice to maximise available capital allowances whilst mitigating potential HMRC disputes.

Lovell Consulting’s View

The Orsted West of Duddon Sands v HMRC case reinforces the principle that capital allowances extend beyond physical construction costs to include essential design work and demonstrates that there is still subjectivity in determining what expenditure on the provision of plant is. This decision and sources such as the capital allowance manual (in this particular case CA20070) are instrumental in providing greater clarity and opportunities for businesses to optimize tax relief on capital investments.

Lovell Consulting have significant expertise on wind farms, solar farms, battery farms and waste to energy plants.

For expert guidance on capital allowances, contact our specialists today.