The Upper Tribunal (UT) recently considered a case that earlier in the year had been heard before the First Tier Tribunal (FTT) – a case that involved the construction of offshore windfarms at various locations around the UK coastline for a taxpayer with a trade of generating and selling electricity. 

As part of the development, the taxpayer had spent £48m on various environmental studies prior to the installation of the plant and machinery and had claimed them as qualifying for plant and machinery allowances.  One of the main issues that had to be considered was whether such costs qualified for capital allowances.

Both parties had appealed a number of decisions reached by the FT and the UT concluded the following:

  • The FTT had incorrectly applied the test when determining whether expenditure was on the provision and installation of the plant.  The FTT had decided that where studies were necessary for the ‘safe and effective installation’ of assets, they should qualify but the UT disagreed and considered this test to be too broad.  They concluded that expenditure needs to be on the provision, including the installation, of the plant.  Studies to enable the project to go ahead, such as scoping, noise assessment, environmental impact studies, fish and shellfish studies and geo-technical studies did not qualify.  The UT acknowledged that the studies had assisted in the design of the plant but that ‘Provision of plant is what happens when those designs are then turned into plant.’  Consequently capital allowances were denied.
  • The UT concluded that the FTT was entitled to reach the decision that the electricity generating assets, including the turbines and cables, were a single item of plant.  HMRC contested this and argued that it should be approached on a piecemeal basis.  The UT noted that it would be always be possible to break an asset down into smaller parts, but the FTT had ultimately taken the right approach and the question of whether the generation assets constituted a single item of plant was one of fact.
  • The taxpayer had argued that if the expenditure was not on the provision of plant, then it should be deemed to be revenue as there was no asset against which to attribute it to.  The UT agreed with the FTT that the expenditure was capital and there was no automatic reason why a revenue deduction should be available if the expenditure was not on the provision of plant or machinery.

It will be interesting to see whether the tax payer appeals on the UT conclusion.

Lovell Consulting Commentary

Unless this decision is appealed, there are implications for the taxpayer.

The UT findings will narrow the scope of what can be claimed as qualifying for capital allowances not only for similar electricity generating projects but they will also have implications for other projects where surveys and studies are required.

It is surprising to note that in reaching the decision on the studies and surveys, the UT did not reference the case of JD Wetherspoons PLC v HMRC.  This landmark case, heard in the UT in 2012 concluded that related on-costs such as preliminaries and  professional fees, where not attributable to a particular item of qualifying plant, could be pro-rated in line with the overall project spend. 

Finally, it is disappointing that such decisions reached by the UT will reduce tax incentives to taxpayers seeking to support the environment.

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