Case Law Updates

In a favourable outcome for wind farm owners, investors, and stakeholders interested in capital allowances, the Court of Appeal (CoA) has ruled that they are eligible to claim capital allowances for expenses incurred on studies and surveys conducted prior to the operational launch of their wind farms.

Key Points:

• The Court of Appeal has ruled that expenditure on studies and surveys carried out before wind farms become operational can qualify for capital allowances.
• The expenditure must be incurred to inform the design of the generation assets and their installation.
• The expenditure is not “too remote” from the provision of the plant, but rather an essential part of the process.
• The figures given for “qualifying expenditure” in tax returns can be revisited even if HMRC has not amended them in closure notices.
• The FTT has power to make adjustments to a return to give effect to its conclusions on the “matter in question”, even if it means revising entries in a return which HMRC has not amended.

Last year a capital allowances case arose around an aspect of the capital allowances legislation relating to Section 11 Capital Allowances Act 2001 (CAA 2001). The case tackles a complex area of capital allowances legislation, what can be classified as “Qualifying Expenditure On the Provision of Plant”.

The case of Gunfleet Sands Limited and others v HMRC [2022] TC08387 is centered around the development of UK offshore wind farms by four subsidiaries of Orsted A/S. His Majesty’s Revenue and Customs (HMRC) had accepted that the turbines and cabling costs themselves qualified for capital allowances but denied expenditure, of approximately £48 million, for the various studies (environmental and geophysical) and project management incurred by the companies. As we move towards more green energy options, the case raises a lot of important points of principle for other claims, as installation of turbines can involve substantial amounts of expenditure and thus capital allowances.

Hot on the heels of the SSE Generation case, we have another energy provider challenging the definition of what is and is not “plant”.

Again, this case shows that the definition of what is and what isn’t “plant” is not always clear and each case should always be reviewed on its own merits, especially where large amounts of expenditure have been incurred. In contrast to the SSE case, here the appellants case was dismissed and the items were not held to be plant.

This is an employee’s tax case concerning claiming capital allowances on expenditure on two caravans may appear to have no relevance to many of our readers. However, this case is a reminder that we cannot assume what will qualify as plant and machinery based on prior claims, we must always go back to first principles.