A recent Supreme Court ruling has provided important clarification on what businesses can — and cannot — claim under capital allowances rules.

The case, Orsted West of Duddon Sands (UK) Limited & Others v HMRC, focused on whether large-scale pre-construction costs linked to offshore windfarm developments could qualify for capital allowances tax relief.

What Was the Dispute About?

Before construction began, the businesses incurred substantial expenditure on:

  • environmental surveys,
  • seabed investigations,
  • technical assessments, and
  • other feasibility-related studies.

The companies argued that these costs were essential to creating the final windfarm assets and should therefore qualify for capital allowances.

HMRC challenged this position, and the Supreme Court ultimately agreed with HMRC.

Why Were the Claims Rejected?

The ruling centred around the wording within the legislation, which states that capital allowances are available only for expenditure incurred:

“On the provision of plant or machinery.”

The Court concluded that there must be a direct and close connection between the expenditure and the physical asset itself.

Although the surveys and investigations were necessary before construction could begin, they were viewed as preparatory activities rather than part of actually providing the plant or machinery.

In simple terms, the costs helped determine whether the project could proceed — but they were not considered part of building or installing the assets themselves.

What This Means for Businesses

While the case involved offshore windfarms, the implications apply across many industries.

Businesses often incur significant upfront costs before purchasing or constructing long-term assets, including:

  • feasibility studies,
  • professional consultancy fees,
  • planning and regulatory assessments,
  • technical investigations, and
  • early-stage design work.

Following this ruling, many of these early project costs may not qualify for capital allowances unless they are directly connected to acquiring or installing the asset itself.

Planning Ahead Is Key

When undertaking major investment projects, it’s important not to assume that every upfront expense will automatically attract tax relief.

Carefully categorising costs at the start of a project can help businesses:

  • maximise legitimate tax relief,
  • avoid compliance issues,
  • improve forecasting, and
  • prevent unexpected tax liabilities later on.

At Harris Lacey and Swain, we can help review project expenditure, identify qualifying costs, and ensure capital allowance claims are structured correctly from the outset.