HMRC v Orsted West of Duddon Sands (UK) Ltd is a landmark Supreme Court dispute that concerns whether substantial pre-construction costs incurred by offshore windfarm operators qualify for capital allowances for offshore windfarms under the Capital Allowances Act 2001.
Written by Yitong Guo, Senior Associate Solicitor
Background
Ørsted is a group of companies ultimately owned by Ørsted A/S, owning developed offshore windfarms. They incurred significant expenditure on environmental surveys and feasibility studies in their development process. These investigations examined seabed conditions, marine environments, airspace impacts, and other factors essential to the design and construction of the windfarms.
The operational ‘plant’ comprises the windfarm’s generation assets, such as the turbines and associated cabling. The expenditure in question is capital rather than revenue in nature. The main issue in the case here is whether the costs of these preparatory studies can be said to be ‘on the provision of plant’ within the meaning of section 11(4) of the Act.
Legal Issues
The dispute lies in the interpretation and application of the capital allowances regime. The relevant legislation is the Capital Allowances Act 2001, in particular section 11(4).
The court is asked to consider: How far can ‘on the provision of plant’ extend: does it include preparatory expenditure necessary to design and enable the plant, or only costs more directly tied to its physical provision?
We note that in regard to the definition or interpretation of ‘plant’, the issue is not what the ‘plant’ is, but whether the expenditure relates sufficiently to its provision.
Conclusion
Considering the material facts, the statutory regime and several case laws, the Supreme Court allowed the appeal. We note the case law it relied on supports a narrow reading of words. Most of the time, tax rules like this work without difficulty because it is obvious whether something counts as expenditure on plant or machinery. However, even simple words like ‘on’ can be uncertain at the edges, leading to disputes in borderline cases.
Although earlier judges thought the wording of section 11(4)(a) was simple enough to avoid lengthy interpretation, this case shows that even apparently clear language can be disputed in unusual situations.
As a conclusion, the court held that the surveys and studies in question are not close enough to the plant to count as expenditure ‘on’ it. They are too remote to fall within the provision.
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