Introduction

The landmark judgment in Orsted West of Duddon Sands (UK) Ltd & Ors v Revenue And Customs ([2025] EWCA Civ 279) addresses the complex issue of whether certain pre-operational studies and technical investigations conducted by offshore windfarm operators qualify for capital allowances. The appellants, a group of companies under Ørsted A/S involved in constructing multiple offshore windfarms, sought to claim deductions for expenditures incurred on technological, environmental, and engineering studies carried out prior to the windfarms becoming operational.

Central to the appeal was the question of whether these costs were “incurred on the provision of” the generation assets – the wind turbines, array cables, and associated installations – in terms of the Capital Allowances Act 2001 (CAA 2001). The case is significant not only because of the high volume and technical nature of the expenditure but also because of its potential implications for capital-intensive projects, particularly large-scale infrastructure developments.

Summary of the Judgment

The judgment confirmed that for capital allowances to be available under section 11 of CAA 2001, expenditure must be considered as “on the provision of” plant or machinery. Although the First-tier Tribunal (FTT) had initially found that some of the studies qualified for allowances, the Upper Tribunal reversed that determination, arguing that none of the expenditure could be attributed to the tangible supply or installation of plant.

On appeal, the Court of Appeal provided a nuanced analysis, rejecting the strict narrow interpretation that confined qualifying expenditure solely to the purchase price and physical installation costs. Instead, it held that studies and technical investigations that inform the subsequent design, installation, and safe operation of the generation assets could indeed fall within the ambit of “expenditure on the provision of plant.” Consequently, the Court concluded that most of the disputed studies – including those relating to environmental, benthic, metocean, and geotechnical investigations – were integral to the design and construction of the bespoke generation assets for the windfarms and were therefore capital in nature.

Additionally, the Court declined to treat the expenditure as deductible revenue expenditure under section 61 of the Corporation Tax Act 2009, affirming that the expenditure was aimed at acquiring enduring assets rather than simply preparatory or decision-making costs.

Analysis

Precedents Cited

The decision heavily relies on seminal cases that have shaped the interpretation of “expenditure on the provision of plant”:

• Inland Revenue Commissioners v Barclay, Curle & Co Ltd [1969] – This case established the idea that expenses such as concrete work and excavation, which are necessary for the installation of plant, can qualify for capital allowances. The Court found that every integral component contributing to the operational functionality of an asset may be considered part of the plant.
• Ben-Odeco Ltd v Powlson [1978] – The House of Lords in this case considered costs beyond the mere acquisition price – such as commitment fees and financing costs – and limited their inclusion to those directly related to the provision of the plant itself.
• McVeigh v Arthur Sanderson & Sons Ltd [1969] – Although less persuasive in the current context, this decision tackled the issue of design expenditure and whether it could be attributed to the final physical structure. The present judgment distinguishes between pure design costs used for decision-making and design costs that are essential to the actual creation of the asset.
• Samarkand Film Partnership and JD Wetherspoon decisions – These cases provided an alternative perspective by accepting that expenditure could be indirectly attributable to asset procurement, even if not directly linked to the physical installation process.

The Court contrasted these cases with HMRC’s interpretation and stressed that a broader, more natural interpretation of “provision” should apply—one that recognizes the necessary intellectual and preparatory work when dealing with bespoke infrastructure projects.

Legal Reasoning

The pivotal element in the Court’s reasoning was the interpretation of the term “on the provision of” within section 11 of CAA 2001. The Court emphasized that:

• The law should be read in its natural language; that is, expenditure incurred in order to design, plan, and ensure the safe and effective installation of bespoke plant may be integral to the “provision” of that plant.
• Expenditures merely supporting the decision on whether to acquire plant (analogous to deciding on restaurant furniture) should be distinguished from those that directly influence the manufacture, installation, or integration of the asset.
• The traditional strict division between capital and revenue expenditure must be reconciled with modern practices in large-scale capital projects, where preparatory work and technical studies are indispensable.
• The Court rejected characterizing such studies as too remote simply because they do not result in physical components. Instead, where the studies provide the data and design inputs necessary for the plant to “come into being” and function as intended, they are considered part of the capital expenditure.

In dealing with the imprecise boundaries of “directly related” versus “in connection with” the provision of plant, the Court endorsed a purposive and holistic approach. It noted that if a survey, for example, was undertaken to detect unexploded ordnance ahead of turbine installation, the expenditure should be treated as contributing to the safe and precise installation of the windfarm’s generation assets—even if no subsequent modification of design was needed.

Impact

The decision has far-reaching implications:

• Broader Capital Allowance Claim Scope: Taxpayers involved in large infrastructure projects may now argue more effectively that expenditures on preparatory and technical studies should count towards capital allowances, thereby reducing their effective tax burden.
• Infrastructural Investment Incentives: The ruling encourages investment in innovative and bespoke projects where substantial initial research, design, and safety investigations are indispensable.
• Future Case Law: This holistic approach to the provision of plant might influence future disputes about what constitutes qualifying expenditure, thereby providing a more flexible framework that aligns with modern project complexities.
• Legislative Reassessment: HMRC’s narrow interpretation may prompt legislative or administrative reviews with respect to guidance provided in the Capital Allowances Manual.

Complex Concepts Simplified

To clarify some of the legal concepts:

• "Provision of Plant": This refers not only to the purchase or physical installation of tangible assets but also to the necessary preparatory work (such as design, engineering studies, and technical surveys) that enables the asset to be effectively operational.
• "Qualifying Expenditure": These are costs which, when incurred in connection with acquiring or constructing an asset used in a business, are eligible for tax relief through capital allowances. The new interpretation allows inclusion of costs that were once thought peripheral.
• Capital vs. Revenue Expenditure: Capital expenditure involves costs that create an enduring benefit (e.g., constructing a windfarm), while revenue expenditure is typically more short term and relates to day-to-day operations. The case confirms that the studied expenditures, even if not physical in themselves, are capital in nature because they create a long-term functional asset.

Conclusion

In summary, the Court of Appeal’s assessment in Orsted West of Duddon Sands v Revenue And Customs marks a significant shift in interpreting capital allowances for companies involved in complex, capital-intensive projects. By endorsing a broader view of “expenditure on the provision of plant,” the Court acknowledged that sophisticated preparatory studies—including design, environmental, technical, and safety surveys—are integral to the physical realization of bespoke windfarms.

The judgment not only clarifies the application of section 11 of the Capital Allowances Act 2001 but also reinforces established legal principles found in Barclay, Curle and Ben-Odeco. It creates a more balanced framework that ensures taxpayers are not penalized for the necessary intellectual and technical work inherent in modern infrastructural investments.

Ultimately, this decision is poised to influence future cases by expanding the scope of what may be considered qualifying capital expenditure, promoting a tax environment more conducive to large-scale infrastructural and renewable energy projects.