Don’t get ‘court’ out with your capital allowances claim

Supreme Court rules in favour of HMRC in £48m capital allowances claim 

After over a decade of dispute and multiple court hearings in a case which deliberated the use of the word “on” in the context of capital allowances, the Supreme Court has delivered a clear ruling in favour of HMRC, deciding that certain expenditure on items commissioned by a company are too remote to be treated as expenditure ‘on the provision’ of plant and machinery for capital allowances purposes.

So, what happened?

Several group companies claimed capital allowances on roughly £48 million of expenditure incurred while planning and designing offshore wind farms. The disputed items included landscape and ecological surveys, metocean and geotechnical studies and other reports used to prepare environmental impact assessments and regulatory consents. The tax dispute began with HMRC enquiries in 2011 and progressed through the First‑tier Tribunal, Upper Tribunal, Court of Appeal and finally the Supreme Court.

The ‘taxing’ questions

The central issue was the meaning of the phrase “on the provision of plant”. The Court held that the ordinary meaning of the word “on” requires a close connection between the expenditure and the plant itself. The judges concluded that terms such as “in connection with” or “relating to” imply a looser link than “on”, and that the surveys did not meet the narrower test.

Summary

The Supreme Court has ruled that the environmental and technical surveys carried out before offshore wind farms became operational do not qualify as expenditure on the provision of plant and machinery and confirms a narrow interpretation of the word “on.”

Why it matters for you

• A narrow test has been confirmed; expenditure must have a close connection to the plant to qualify for capital allowances.  
• Supplier pricing is irrelevant. How a supplier bundles costs does not determine a purchaser’s qualifying expenditure.  
• Potential claimants should reassess pre‑construction and feasibility costs when preparing capital allowances claims. 
• Expenditure is less likely to qualify for relief unless it can be shown to be incurred directly on the provision of the plant. Historical claims should be reviewed from a tax risk perspective and future projects need to be scrutinised to carefully analyse the likely tax benefits stemming from planned expenditure.

As always, the devil is in the detail so please reach out to your usual Dafferns contact if you would like to discuss further.