Supreme Court rules in favour of HMRC in question of whether windfarm survey costs qualified as deductible capital allowance

Orsted West of Duddon Sands (UK) Ltd and other companies of which the ultimate parent was a Danish company, Orsted A/S, appealed to the First-tier Tribunal after the Court of Appeal ruled substantively in favour of HMRC. The appellant argued that the surveys were a necessary part of the process of fabricating a bespoke plant and thus should qualify as relevant capital expenditure.

The appeal was heard by Lord Lloyd-Jones, Lord Hamblen, Lord Burrows, Lady Rose, and Lord Richards. Elizabeth Wilson KC, Angharad Parry KC and Joshua Stevens appeared for the appellant, and Michael Jones KC for the respondent.

Incurred in design

In early 2018 HMRC opened enquiries into the respondents’ claims for capital allowances, based on a position that survey costs were not “capital expenditure on the provision of plant” per section 11(4) of the Act. While HMRC accepted that the generation assets of the windfarm treated as a single item was “plant”, and that the expenditure was capital in nature, it did not accept that the costs incurred in obtaining the surveys and studies to investigate the environment were incurred “on” the provision of the windfarms.

The FTT judge held that, provided that the appellant could show the data was taken into account in the modelling process for the necessary design of the windfarm, it was directly related to that design and thus qualified as relevant capital expenditure. The Upper Tribunal identified several errors in the approach of the FTT and proceeded to remake the decision in HMRC’s favour, holding that applying the strict and narrow principles in the legislation none of the surveys and studies constituted expenditure qualifying as “on provision of plant”.

Orsted appealed to the Court of Appeal, which allowed their appeal in large part. In the leading judgment, Newey LJ disagreed with the UT’s conclusion that the provisions should be construed strictly, finding that the natural reading of the words would extend to costs incurred in designing the plant. While the studies and surveys in dispute did not themselves contain designs, they informed the design of the generation assets and therefore could constitute qualifying expenditure.

HMRC relied on the case of Ben-Odeco v Powlson (Inspector of Taxes) (1978), which involved a taxpayer who incurred commitment fees and capitalised interest on large loans it needed to finance the construction of an oil rig. The House of Lords held by a majority of four to one that the expenditure incurred in financing did not qualify. The main point emphasised in Ben-Odeco was that there was a lack of proximity between the expenditure and the plant itself, and the present case was a similar scenario.

Outside the curve

In a judgment with which the other judges agreed, Lady Rose said of the ordinary meaning of the words in section 11(4): “I agree with the Upper Tribunal that the requirement that the expenditure must be ‘on’ the provision of plant indicates a narrow test, requiring a close connection between the expenditure and the plant provided. There are many statutory provisions in relation to tax and other topics that use other phrases to connote a much looser nexus such as ‘in connection with’ or ‘relating to’ or ‘with a view to’. Those phrases do not mean the same as ‘on’. Parliament has used a different test here and, in my judgment, it requires a close connection.”

She added: “The authorities have always made clear that other costs can be included and have referred to the costs of transporting the plant to the site and of installing it as being costs that can be so included. Those costs are inherent in the concept of the plant being ‘provided’. The ‘limiting curve’ as Lord Wilberforce put it in Ben-Odeco is around the plant and the provision of it. The costs, commonly incurred, of carrying out studies and surveys which provide the business with advice about how to choose or design plant fall, in my view, well outside the limiting curve.”

Criticising the scope that Orsted wished to apply to the provision, Lady Rose said: “It is not helpful to say that any study or survey that ‘informs’ or ‘feeds into’ the design of the plant must be regarded as being spent ‘on the provision of’ the plant. This is much too broad, especially if one then goes further to say that the data produced by the study do not have to actually lead to a change in the design proposed up to that point in order for the cost of gathering it to be covered.”

She explained further: “To maintain, as Orsted does, that the cost of a survey which shows that there is no unexploded ordnance on the seabed at the proposed site is just as much qualifying expenditure as that spent on a survey that discloses something that prompts the developer to reconfigure the placement of the turbines shows how broad the test they propose would be.”

Lady Rose concluded: “As is often the case with taxing provisions, in the vast majority of instances they are applied to the satisfaction of HMRC and taxpayers without any difficulty. It is almost always clear that something either is or is not expenditure on the provision of plant or machinery. But even the simplest and most commonly used word— ‘on’ in the present case—has a penumbra of meaning that generates disputes in unusual fact patterns. I do not regard these studies and surveys as close to the boundary between what should be regarded as ‘on’ plant and what is too far away from the plant itself to be so regarded.”

HMRC’s appeal was therefore allowed.