Capital allowances case could generate changeby
In this case concerning a wind farm, the decision about the expenditure that qualifies for plant and machinery allowances could turn out to have extensive implications for other taxpayers.
A case concerning the design and installation of a wind farm may have far-reaching consequences for taxpayers in relation to the interpretation of the extent of expenditure that qualifies for plant and machinery allowances under the capital allowances regime. In Gunfleet Sands Ltd vs HMRC  UKUT 260 (TCC), the upper tribunal (UT) upheld part of the decision of the first tier tribunal (FTT) but overturned other elements of their decision.
In the original case as heard by the FTT, the operator of the wind farm, Orsted, had claimed some £300m as expenditure qualifying for plant and machinery allowances. This amount included £48m incurred on studies and seabed surveys that impacted the design and installation of the windfarms. HMRC denied this amount in full, but the FTT allowed some of it and disallowed other parts.
In his decision relating to this issue in the FTT, Judge Popplewell introduced the concepts of “necessary design” and “unnecessary design”. He then examined each of the studies and surveys in granular detail and assessed which elements constituted necessary design and which did not. When he concluded on these distinctions, he allowed some and disallowed other expenditure accordingly.
Orsted appealed to the UT in relation to the disallowed expenditure and HMRC cross-appealed in relation to the expenditure that had been allowed in the original case.
Designs on installation and transport
The UT considered the concept of what constitutes expenditure “on the provision of plant”. Referencing Barclay Curle and Ben-Odeco, the UT concluded that “on the provision of” may cover installation and transport costs (and in principle other similar expenditure). However, the UT decided that “on the provision of” is “applied strictly and narrowly” and “not interpreted generously”. So, the UT focused solely on installation and transport and no other similar expenditure.
Design costs (described by the UT as “intellectual effort for the production of instructions by which the plant can be made”) were preparatory work that did not constitute expenditure “on the provision of” plant. This was the case even where the studies fed into the design of unique foundations for individual wind turbines because the studies were just inputs into design. But, even if the costs were design themselves, that was just “the provision of design”, which put the taxpayer in the position of providing plant (not the provision of plant). In other words, the UT appeared to conclude that neither the “process of design” nor “end product” design formed part of the cost of the provision of plant. Or put bluntly, no design costs qualify.
Sometimes an off-the-shelf item of plant has an element of design priced into the amount paid. The UT concluded that here the full cost qualifies without any stripping out of the design costs. They recognised that this gave rise to a disparity between design costs incorporated into a sale price and design costs which are undertaken in large-scale projects involving bespoke plant. But they explained this away as “disparity is built into the nature of the test [“on the provision of”]. It is simply a function of the words Parliament has chosen to circumscribe the relief”.
Implications of the decision
This case related to the specific circumstances of the design and installation of a windfarm. However, the implications of the decision, if not appealed and allowed to stand, may have far-reaching consequences for other taxpayers, especially those constructing real-estate assets. It has long been accepted by HMRC that professional fees and preliminary costs (those costs that are necessarily incurred to enable the delivery of a building project) are deemed to be expenditure “on the provision of plant”, usually apportioned to those costs of plant or machinery on a pro-rata basis as per the decision set out in the UT case of JD Wetherspoon vs The Commissioners for Her Majesty’s Revenue and Customs in 2012.
I am strongly of the opinion that such costs are expenditure on the “provision of plant” because without such expenditure being incurred the plant could not function in the taxpayer’s trade. For example, without the input of a mechanical engineer to design how the myriad components of an air conditioning system function together as a whole when installed in a building, those individual components would be little more than pieces of a jigsaw with no functional use in an unassembled state.
As such, it is my view that Orsted may be inclined to appeal this decision and would have a very strong case in doing so. If the dicta in this decision is more widely applied, and HMRC changes its stance on the apportionment of design fees and preliminaries, this may reduce a taxpayer’s claim for capital allowances relief on a typical building project by 20% or more, and will undoubtedly discourage investment in plant and machinery at a time when the UK can ill afford for that to happen.
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Aubrey Calderwood is managing director of leading fiscal incentives company, Gateley Capitus. He also previously ran the capital allowances practice of a ‘Big Four’ accountancy firm. He has a professional background in both taxation and property and has acted for some of the UK’s largest entities across a variety of sectors. Aubrey helps...