When is capital expenditure "on the provision of plant” for the purposes of section 11 Capital Allowances Act 2001? This was the question the Supreme Court had to answer in Gunfleet Sands. This case has previously been referred to as Gunfleet Sands (one of the four taxpayers in the case) and I will continue to do so here, although I note that the first named respondent at the Supreme Court was Orsted West of Duddon Sands.

The Supreme Court unanimously agreed with HMRC that section 11 has to be construed narrowly with the result that expenditure on plant (in this case windfarms) did not include pre-construction expenditure by the taxpayers on environmental surveys and studies, even though these were a necessary stage for preparing an environmental impact assessment to obtain the required consents prior to the windfarms being designed and built.

The Supreme Court agreed with HMRC that a more expansive reading of section 11 “risks scooping up expenditure which rightfully falls within” different sections of the legislation thereby “disturbing the careful balance between what is allowed and what is not allowed” under the detailed terms of those other provisions.

The judgment will disappoint taxpayers involved in major infrastructure projects and adds urgency to the government’s long‑promised consultation on the tax treatment of pre‑development expenditure.  The judgment is fact-specific, however, and leaves open the possibility of some predevelopment costs qualifying in certain circumstances.  

Where does the boundary lie?

Capital allowances reflect the deterioration of an asset over time by wear and tear and the ultimate need to replace it. In this way, capital allowances incentivise investment in plant and machinery but Gunfleet Sands shows the limits of that incentive. The Supreme Court did not accept the argument that, as the purpose of capital allowances is an incentive to invest in plant and machinery, the provision should be construed broadly. Instead, it concluded that “One cannot rely on the broad purpose of a provision to define where the precise boundary lies between what is caught and what is not caught”.

The Supreme Court found the link between the annual allowance and the erosion of value of the plant through wear and tear to be “a useful pointer to the narrowness of the concept”. The surveys and studies were seen as having only a tangential connection with the diminishing value of the windfarm assets.

The Supreme Court also considered that the use of the word “on” rather than phrases used in other provisions such as “in connection with”, “relating to” or “with a view to”, requires a closer connection between the expenditure and the plant than those broader formulations. There was much discussion about where the boundary lies between allowable and non-allowable expenditure but it was sufficient for the Supreme Court to conclude that the studies and surveys were not close to the boundary (wherever that lies) – they were firmly on the “too remote to be allowable” side.

What is the impact of this decision?

Opinions on the meaning of “on the provision of plant” have differed at each stage of the proceedings. The First-tier Tribunal held that most of the expenditure on the studies and reports qualified for capital allowances but the Upper Tribunal held that none of it qualified. The pendulum swung back in favour of the taxpayers at the Court of Appeal before finally coming to rest on HMRC’s side at the Supreme Court.

Large infrastructure projects require costly and extensive preparatory work and this decision will be disappointing to taxpayers hoping for a more generous interpretation of section 11 and greater certainty. But there are some rays of hope in the Supreme Court’s judgment for certain types of predevelopment expenditure.

The first is that the Supreme Court did not express a view as to whether the cost of producing final technical drawings and specifications which are then “made real” by the manufacturer could be recoverable. This is a fact-sensitive question and as this kind of expenditure was not in dispute in this case, and HMRC reserved its position on this, it was not necessary for the Supreme Court to consider it. There is the possibility, then, that such expenditure may qualify for capital allowances. 

The second glimmer of hope for taxpayers is that HMRC accepted that further surveys and studies carried out in the final stages of fabrication or during the course of installation of a windfarm may qualify as being “on the provision of plant” either as part and parcel of the production process or as part of the installation of the windfarm.

What happened to the consultation on predevelopment costs?

Following the Upper Tribunal’s decision in Gunfleet Sands (that none of the expenditure on environmental studies and surveys was expenditure on the provision of plant) and in light of the government’s focus 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. This was expected early in 2025 but it was then announced that the consultation would be delayed after the Court of Appeal’s decision in Gunfleet Sands (in the taxpayers’ favour) while the government considered the implications of the judgment for the consultation. 

The Corporate Tax Roadmap states: “A core pillar of our Growth mission is to encourage investment in renewable energy and major infrastructure projects, and the government is therefore keen to understand the impact of the tax rules on the costs of such investments.”

The Supreme Court’s decision illustrates the need for the government to provide relief for expenditure on predevelopment costs that do not currently fall within the statutory wording for capital allowances in order to incentivise such investments. It is hoped that the government launches the promised consultation on the tax treatment of predevelopment costs without further delay.