Orsted West of Duddon Sands (UK) Ltd & Ors v Revenue And Customs

Factual and Procedural Background

The appellants, a group of companies collectively referred to as "Orsted," own and operate offshore windfarms. The dispute concerns whether Orsted can claim capital allowances or make deductions from taxable profits based on expenditure incurred on various studies and surveys conducted prior to the windfarms becoming operational.

Orsted secured leases for multiple offshore windfarm sites following Crown Estate tenders, undertaking extensive preparatory work including environmental impact assessments and multiple technical studies (landscape, benthos, ornithology, fish and shellfish, marine mammals, archaeology, noise, telecoms, traffic, socio-economic, metocean, geophysical, and geotechnical studies) necessary for obtaining statutory consents and designing the windfarms.

The First-tier Tribunal (FTT) held that some of the study costs qualified for capital allowances, while the Upper Tribunal disagreed, ruling that no capital allowances or deductions were permissible for these costs. Orsted challenged the Upper Tribunal’s decision in this Court.

The procedural history includes Orsted appealing HMRC closure notices denying capital allowances, with the FTT and Upper Tribunal delivering conflicting decisions on the scope of qualifying expenditure and whether certain amounts in tax returns were conclusively determined.

Legal Issues Presented

1. Whether expenditure on the various studies was "on the provision of" the generation assets (wind turbines and array cables) within the meaning of section 11 of the Capital Allowances Act 2001 (CAA 2001) and thus qualified for capital allowances.
2. Whether the expenditure was deductible as pre-trading revenue expenditure under section 61 of the Corporation Tax Act 2009 (CTA 2009).
3. Whether amounts of qualifying expenditure stated in the tax returns of three appellants (Gunfleet, Gunfleet II, and Walney) had been conclusively determined for the purposes of paragraph 88 of schedule 18 to the Finance Act 1998 (FA 1998).

Arguments of the Parties

Appellant's Arguments

• The expenditure was incurred "on the provision of" the generation assets, which constitute "plant" under section 11 of CAA 2001, and thus qualifies for capital allowances.
• Certain costs, such as those related to checking for unexploded ordnance, qualify as installation expenditure.
• Design costs and studies providing information that informed the design and installation of bespoke plant components qualify as capital expenditure.
• Precedents such as Barclay, Curle, McVeigh, Samarkand, JD Wetherspoon, and HMRC’s Capital Allowances Manual support a broad interpretation of qualifying expenditure.
• If expenditure does not qualify for capital allowances, it should at least be deductible as revenue expenditure under section 61 of CTA 2009.
• Amounts of qualifying expenditure in tax returns that were not amended by HMRC’s closure notices are conclusively determined and cannot be revisited by the tribunal.

Respondent's Arguments

• The Upper Tribunal’s strict and narrow interpretation of "on the provision of" should be upheld, focusing on the actual supply and physical installation of plant, excluding intellectual planning and preparatory work.
• Costs of design, planning, and preparatory studies do not constitute expenditure "on the provision of plant" but rather expenditure incurred to place Orsted in a position to install plant.
• Expenditure is capital in nature but does not qualify for capital allowances unless it meets the statutory test.
• HMRC’s amendments to tax returns, including closure notices, define the scope of appeals and the figures conclusively determined. The tribunal cannot amend parts of returns not amended by HMRC.
• Section 50 of the Taxes Management Act 1970 (TMA 1970) and relevant statutory provisions limit the tribunal’s power to alter unamended return entries.

Table of Precedents Cited

Court's Reasoning and Analysis

The Court examined the statutory framework of section 11 of the Capital Allowances Act 2001, focusing on the phrase "on the provision of" plant or machinery. It reviewed leading authorities, particularly Barclay, Curle and Ben-Odeco, which establish that qualifying expenditure extends beyond the purchase price to necessary preliminary works and installation costs, but excludes expenditure related solely to financing or preparatory intellectual efforts.

The Court rejected the Upper Tribunal’s narrow interpretation that excludes design and preparatory studies from qualifying expenditure. Instead, it concluded that where plant is bespoke, costs incurred in designing the plant and studies informing its installation and design can qualify as expenditure "on the provision of" plant. The Court found that the studies in this case, including environmental, technical, and detailed metocean and geotechnical studies, directly informed the design and installation of the generation assets, thus qualifying for capital allowances.

The Court distinguished between expenditure incurred to decide whether to acquire plant (which does not qualify) and expenditure incurred to design or install plant that was in fact acquired, which does qualify. It also held that costs of studies undertaken to ensure safe and effective installation (such as surveys for unexploded ordnance) qualify even if they did not lead to changes in design.

Regarding revenue deductions under section 61 of CTA 2009, the Court agreed with the FTT and Upper Tribunal that the disputed expenditure was capital in nature and not deductible as pre-trading revenue expenditure.

On the issue of conclusive determination of qualifying expenditure figures in tax returns, the Court analyzed the statutory provisions governing company tax returns, closure notices, and appeals. It referred to the Court of Appeal’s decision in Investec, concluding that the tribunal has jurisdiction to revise figures in tax returns not amended by HMRC if necessary to give full effect to its conclusions on the matter in question. The Court found that HMRC’s failure to amend certain qualifying expenditure figures in closure notices was a secretarial error, and the tribunal was entitled to adjust those figures accordingly.

Holding and Implications

The Court ALLOWED the appeal in part, holding that:

• Expenditure on the various studies (excluding socio-economic, tourism, and desktop metocean studies, with scoping documents to be further considered) was incurred "on the provision of" the generation assets and thus qualifies for capital allowances under section 11 of CAA 2001.
• The expenditure is capital in nature and not deductible as pre-trading revenue expenditure under section 61 of CTA 2009.
• The figures for qualifying expenditure in the tax returns of Gunfleet, Gunfleet II, and Walney were not conclusively determined by HMRC’s closure notices and could be revised by the tribunal to give effect to its conclusions.

The Court invited the parties to submit further written arguments on whether expenditure on scoping documents qualifies as incurred "on the provision of" the generation assets.

No new precedent was set beyond the application of established principles. The decision clarifies the scope of qualifying expenditure for capital allowances in complex infrastructure projects involving bespoke plant and extensive preparatory studies and confirms the tribunal’s jurisdiction to adjust tax return figures beyond those specifically amended by HMRC where appropriate.