The Supreme Court has ruled that the costs of surveys and studies in connection with the construction of wind farms were not 'capital expenditure on the provision of plant' for the purposes of Section 11(4)(a) of the Capital Allowances Act 2001, and therefore did not qualify for capital allowances.
A group of companies that operated offshore wind farms had spent considerable sums on surveys and studies investigating many different aspects of the environment in which the wind farms would be constructed. They claimed capital allowances on that expenditure. HM Revenue and Customs (HMRC) opened enquiries into those claims and subsequently issued closure notices on the basis that the studies did not qualify for capital allowances. After HMRC confirmed their position on review, the companies appealed to the First-tier Tribunal (FTT).
The FTT allowed their appeals in part, finding that some of the studies, such as the geophysical and geotechnical studies, directly related to necessary design for the wind farms and so qualified for capital allowances. However, that decision was overturned by the Upper Tribunal (UT), which held that, applying the strict and narrow principle encapsulated in the legislation, none of the studies constituted expenditure on the provision of plant. They were advice on the type of plant to use or on how and when to install it.
The companies appealed to the Court of Appeal, which considered that Section 11 encompassed costs of design as well as costs of installation, and that eligible expenditure would extend to the costs of studies which informed such design or installation. Applying that test to the studies, the Court concluded that almost all of the studies that remained in dispute qualified for capital allowances. HMRC appealed to the Supreme Court.
The Court agreed with the UT that the requirement that the expenditure must be 'on' the provision of plant indicated a narrow test, requiring a close connection between the expenditure and the plant provided. The Court observed that many statutory provisions use other phrases such as 'in connection with' or 'relating to' to indicate a much looser connection.
The companies pointed to the need for equal treatment of taxpayers, comparing a taxpayer who pays for design work to be carried out before commissioning a bespoke piece of plant with a taxpayer who buys the same piece of plant off the shelf. However, the Court did not accept that this was a valid argument for a broad construction of Section 11(4)(a). The question to be addressed was whether the cost was qualifying expenditure in the hands of the taxpayer claiming the allowance, not what its status was in the hands of the supplier.
The Court noted that the concept of capital allowances reflects the gradual deterioration of an asset as it is used in the business and the ultimate need to replace it. That militated against the studies, which had only the most tangential connection with the diminishing value of the wind farms, being included. Allowing the appeal, the Court concluded that the studies did not fall within the statutory wording.