19/03/2025

On surveys and studies: Court of Appeal rules on capital allowances in large-scale infrastructure projects

On 17 March 2025, the Court of Appeal handed down its much-anticipated judgment in Orsted West of Duddon Sands v HMRC (“Gunfleet Sands”) [2025] EWCA Civ 279. The Court of Appeal has held that pre-construction expenditure on surveys and studies in offshore windfarms qualifies for capital allowances under section 11 of the Capital Allowances Act 2001.

This case is the first judicial consideration of capital allowances in the context of offshore windfarms, and is highly significant for all large infrastructure projects, both in the fields of renewable energy and more broadly. Angharad Parry acted for HM Revenue & Customs since the First-tier Tribunal proceedings.

The case turned on the meaning of the phrase “capital expenditure on the provision of plant or machinery” within s.11. Was expenditure on surveys and studies, which the taxpayers argued provided information for design, “on the provision of plant and machinery”?

The First-tier Tribunal considered that expenditure on certain studies and surveys qualified, whilst others did not. The Upper Tribunal then held that prior case law authorities led to a strict and narrow interpretation of the words “on the provision of” must be interpreted strictly and narrowly, and the Upper Tribunal disallowed expenditure on all the pre-construction studies and surveys.

The Court of Appeal has now adopted a different approach, disagreeing with the Upper Tribunal. Lord Justice Newey, with whom Lords Justice Henderson and Zacaroli agreed, did not follow the Upper Tribunal’s interpretation. Instead, he put forward a three-part test for when expenditure might qualify for capital allowances under s.11 [76] – namely when:

“(a) the taxpayer can demonstrate that, looking at matters objectively and with the benefit of hindsight, expenditure informed the design of plant or machinery or how it was to be installed,
(b) the expenditure related to plant or machinery which was in fact acquired or constructed, and
(c) the expenditure did not arise from characteristics or circumstances particular to the specific taxpayer.”

On the basis of this test, the majority of the survey and study expenditure claimed by the taxpayer was found qualifying.

In its Corporate Tax Roadmap of October 2024, the government has indicated an upcoming consultation on predevelopment costs and referred in that context to the ongoing litigation in Gunfleet Sands. Given the importance and likely upswing in large infrastructure projects, the topic remains hugely significant and of interest to lawyers, tax practitioners and those in industry.

Angharad Parry was led by Elizabeth Wilson KC of Pump Court Tax Chambers, has acted for HMRC since the First-tier Tribunal. Angharad was responsible for presenting the technical factual aspect of the case and at the First-tier undertook cross-examination of factual and technical witnesses over two weeks.