In Orsted West of Duddon Sands (UK) Limited & Ors v HMRC, the Supreme Court considered whether significant pre-construction costs could qualify for capital allowances tax relief.
The case centred on offshore windfarm projects where the companies incurred substantial expenditure on environmental surveys, seabed investigations and technical studies before any turbines were constructed. The companies argued that these costs were an essential part of creating bespoke assets and should therefore qualify for capital allowances.
HMRC disagreed, and the Supreme Court ultimately sided with HMRC.
The decision focused on a key piece of legislation stating that capital allowances are only available for expenditure incurred “on the provision of plant or machinery”.
The judges concluded that this requires a direct and close connection to the physical asset itself. Although the surveys and investigations were necessary for deciding whether and how the windfarms could be built, they were considered preparatory in nature. They helped place Orsted in a position to construct the assets, but they were not part of providing the plant or machinery itself.
While this case involved offshore windfarms, the implications are much wider.
Many businesses incur significant costs before acquiring or constructing long term assets, including:
• feasibility studies
• design and planning work
• professional fees
• environmental or regulatory assessments
Following this decision, these types of costs are less likely to qualify for capital allowances unless they are closely linked to the acquisition, construction or installation of the qualifying asset itself.
For businesses planning major investment projects, this is an important reminder not to assume that all upfront project costs will attract tax relief.
At A&C Chartered Accountants, we recommend reviewing expenditure carefully as projects progress, separating early stage exploratory costs from spending directly connected to the asset. Getting this distinction right from the outset can help avoid unexpected tax liabilities later.