The Court of Appeal published their decision in Gunfleet Sands on 17 March 2025, upholding the taxpayers’ appeal on the availability of capital allowances for predevelopment expenditure on offshore windfarms. This case has previously been referred to as Gunfleet Sands and I will continue to do so here, though I note that the first named appellant at the Court of Appeal was Orsted West of Duddon Sands.

Background

In October 2023, the Upper Tribunal’s (UT) decision in this case had dealt a blow to the UK’s offshore wind sector and to major infrastructure projects more generally. 

The Capital Allowances Act 2011, section 11 grants capital allowances for qualifying expenditure, which is “capital expenditure on the provision of plant or machinery” subject to certain conditions being met. 

While the First-tier Tribunal had interpreted “capital expenditure on the provision of plant or machinery” widely, encompassing all capital expenditure which was necessary for the design and safe construction of the windfarms, the UT took a much narrower approach. In the view of the UT, only “the making/construction of the plant, transportation of the plant and its installation” could qualify for capital allowances. On that basis, none of the expenditure on technical or environmental impact studies carried out by the taxpayers was expenditure “on the provision of plant or machinery”. 

The reverberations were felt throughout the offshore wind sector and beyond and, with the government focused on green energy and getting Britain building, a consultation was promised in the October 2024 Corporate Tax Roadmap on the tax treatment of predevelopment costs. Slated for early 2025, no details of that consultation have yet been released.

Court of Appeal’s decision 

The ground has shifted considerably with the Court of Appeal’s judgment on an appeal by the taxpayers from the UT. Lord Justice Newey (who gave the unanimous judgment of the Court of Appeal) was unconvinced by the UT’s narrow interpretation of what constitutes qualifying expenditure, commenting that:

If, as a matter of ordinary language, a taxpayer incurs expenditure “on the provision of” plant from which, potentially, it will earn taxable profits, it is not obvious that Parliament should not have wished all such expenditure to be eligible for capital allowances.

Instead, Lord Justice Newey provided a tripartite test for the availability of capital allowances, which are available where the following conditions are met (but will not necessarily be unavailable if these conditions are not met): 

• 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, 
• the expenditure related to plant or machinery which was in fact acquired or constructed, and
• the expenditure did not arise from characteristics or circumstances particular to the specific taxpayer. 

In the case at hand, the application of this test resulted in all of the still-contested expenditure on studies carried out by the taxpayers being qualifying “capital expenditure on the provision of plant and machinery” (other than for the scoping documents, for which further submissions were requested).

This case provides a greater measure of certainty for all major infrastructure projects in the UK on the availability of capital allowances for predevelopment costs – which should chime with other government priorities. It will therefore be interesting to see how the anticipated consultation on predevelopment costs might be framed in the context of the Court of Appeal’s decision in Gunfleet Sands and whether HMRC will seek permission to appeal to the Supreme Court.