Orsted v HMRC: what “on the provision of plant” really means for infrastructure developers

In Orsted West of Duddon Sands (UK) Limited (now named Orsted Schroders Greencoat WODS Holdco Limited) and others v Commissioners for His Majesty’s Revenue and Customs, the Supreme Court has unanimously held that the costs of environmental, geotechnical, and other preparatory surveys and studies incurred during the development of offshore windfarms do not qualify for capital allowances under section 11(4) of the Capital Allowances Act 2001. The expenditure was not “on the provision of” plant. The decision reverses the court of appeal and restores, in substance, the upper tribunal’s conclusion – though on somewhat different reasoning. For developers of large-scale infrastructure, the judgment draws a tight line around what counts as qualifying capital expenditure and will have significant consequences for project costing and tax planning.

The facts in brief

The respondents, all members of the Orsted group, own and operate offshore windfarms off the English coast. In the course of developing these windfarms they spent tens of millions of pounds on a wide range of surveys and studies: metocean assessments, geotechnical and geophysical investigations, environmental impact assessment work covering ornithology, marine mammals, benthos, archaeology, noise, telecoms interference, landscape and visual impact, and socio-economic assessments. This expenditure was capital in nature – that was common ground. The question was whether it fell within the statutory language requiring that expenditure be “capital expenditure on the provision of plant.”

The amounts at stake across the four companies totalled approximately £48 million. These were claimed as part of pools of qualifying expenditure running into hundreds of millions of pounds, so the sums were not trivial – but nor were they the lion’s share of the total spend. That might tempt one to regard this as a marginal dispute. It is not. The principle at stake matters enormously.

The journey through the courts

The case produced a remarkable spread of judicial opinion. The first-tier tribunal allowed most of the claims, applying a test of whether the studies “directly related to the necessary design, construction or installation” of the windfarm – in essence, whether the windfarm could have generated electricity without the information in question. The upper tribunal reversed, holding that none of the studies qualified, on the basis that the statutory words should be read strictly and narrowly and that the studies amounted to advice about how to design or install plant, not expenditure on provision of the plant itself. The court of appeal then reversed again, adopting a broad test and holding that almost all of the disputed studies – and ultimately, after further submissions, all remaining disputed categories including scoping studies – qualified on the basis that they had informed the design of the plant or how it was to be installed.

Lady Rose, giving the sole judgment with which all four other justices agreed, allowed HMRC’s appeal. While her reasoning overlapped to some degree with aspects of the upper tribunal’s analysis, she departed from it in certain respects – for instance, she did not endorse the upper tribunal’s distinction between physical activity and intellectual effort in the design process. Nor did she adopt the FTT’s necessity test or the court of appeal’s expansive approach. The result, however, was clear: none of the survey and study costs qualified.

The legal analysis: what does “on” mean?

The entire case turned on what might seem an unremarkable word. As Lady Rose observed, quoting Lord Upjohn from the foundational case of Barclay, Curle [1969] 1 WLR 675: “I appreciate that when considering the meaning of simple English words it is impossible to give a prolonged exposition upon the matter; opinions may differ.” She added, with dry understatement, that the present case “has already amply demonstrated” that Lord Upjohn “was over-optimistic in saying that it was impossible to give a prolonged exposition on the matter.”

The supreme court’s reasoning can be distilled to a few core propositions:

First, the word “on” in the phrase “expenditure on the provision of plant” requires a close connection between the money spent and the plant provided. Parliament could have used looser language – “in connection with,” “relating to,” “with a view to” – but chose not to. As Lady Rose put it: “Those phrases do not mean the same as ‘on’. Parliament has used a different test here and, in my judgment, it requires a close connection.”

Second, the “limiting curve,” to use Lord Wilberforce’s phrase from Ben-Odeco [1978] 1 WLR 1093, is drawn tightly around the plant itself. The purchase price is the primary qualifying cost, whether for off-the-shelf or bespoke items. Transport and installation costs can also qualify, as established by Barclay, Curle. But the court rejected the proposition that costs which merely “inform” or “feed into” the design of plant are thereby spent “on” its provision.

Third, the court gave short shrift to the argument that if a manufacturer wraps design and research costs into the price of a component sold off the shelf, and that full price qualifies, then a developer who carries out equivalent studies itself should be entitled to equivalent relief. Lady Rose endorsed Lord Russell’s observation in Ben-Odeco that the build-up of the supplier’s price “cannot have any relevance” to whether the purchaser’s own separate expenditure qualifies. The question is always what the expenditure achieved in the hands of the taxpayer claiming the allowance.

Fourth, the court rejected the policy argument that capital allowances are intended to incentivise investment, and that a broad reading better serves that purpose. Lady Rose acknowledged the point but responded that “the breadth or narrowness of the phrase ‘on the provision of’ is a very blunt instrument with which to provide incentives to business to invest in plant.” If parliament wishes to encourage particular kinds of investment — as it has done for renewable energy through targeted subsidies and enhanced first-year allowances – it has more precise tools available.

What the court left open

There were some deliberate gaps. HMRC expressly reserved their position on whether the cost of producing final technical drawings and specifications – the documents from which the manufacturer actually fabricates the plant – might qualify. Lady Rose noted this was “a fact-sensitive question” on which there were no findings below, and declined to express a view. Similarly, HMRC were prepared to accept that surveys and studies carried out during the final stages of fabrication or during the course of installation might qualify as being part and parcel of the production or installation process. But none of the studies in this case fell into that category, and the court expressly left the question open.

This leaves a question mark. Developers will want to know exactly where the line falls between a geotechnical survey carried out two years before construction begins (which on this judgment clearly does not qualify) and a ground investigation carried out at a specific foundation location during the installation phase (which, on HMRC’s concession, might qualify – though the court did not decide the point). The judgment does not draw that line with precision, and one suspects further disputes will arise.

Practical impact

Offshore wind and major infrastructure developers

This is the group most immediately affected. The development of an offshore windfarm is, as the FTT’s careful findings showed, an enormously complex undertaking. Each turbine foundation is bespoke. The layout of the array depends on seabed conditions, metocean data, environmental constraints, and regulatory requirements. Developers cannot simply order windfarms from a catalogue. The preparatory studies are not optional extras – they are integral to the regulatory process and to safe, effective design.

Yet after this judgment, none of that expenditure qualifies for capital allowances under section 11(4). The court acknowledged that the information was needed – “there is no doubt that Orsted needed to obtain the information set out in the reports and studies in order to be able to design and build the windfarms which were in fact built and are now in operation” – but held that being needed was not enough. The costs fell outside the limiting curve.

The financial impact is real. For Orsted alone, approximately £48 million of expenditure across four projects is excluded from qualifying pools. At the writing-down allowance rate identified in the judgment – 14% for general plant and machinery – that represents a meaningful reduction in annual tax relief. The principle established by the judgment is plainly capable of applying to other sectors that rely on bespoke plant requiring extensive preparatory investigation – onshore wind and solar developers, pharmaceutical manufacturers designing cleanroom facilities, petrochemical companies planning bespoke processing equipment, and data centre operators investigating ground conditions, among others. While the judgment does not decide the position for those sectors, they would be well advised to review their capital allowance claims in light of it.

Tax advisers and project finance teams

The judgment demands a recalibration of advice. For years, there has been genuine uncertainty about the boundary of qualifying expenditure, and some advisers – no doubt encouraged by the FTT’s and court of appeal’s decisions – will have taken a broader view. That broader view is now definitively wrong.

The practical task will be to categorise project expenditure with greater care. The key distinctions emerging from the judgment are:

• Purchase price of plant (whether off-the-shelf or bespoke): qualifying.
• Transport and installation costs: qualifying.
• Surveys and studies carried out during installation to support the physical process of installing the plant: potentially qualifying on HMRC’s concession, though expressly left open by the court.
• Final technical drawings and manufacturing specifications: position reserved by HMRC, potentially qualifying, but untested.
• Preparatory surveys, environmental assessments, and design studies carried out before fabrication: not qualifying.
• Scoping studies and feasibility work: not qualifying.

Advisers should also note that the court firmly shut the door on using HMRC’s own capital allowances manual as an aid to statutory interpretation. The manual’s references to professional fees qualifying where they “relate directly to the acquisition, transport and installation” of plant cannot be relied upon by taxpayers to support a broader reading, any more than HMRC could rely on it to restrict a taxpayer’s claim.

The renewable energy sector more broadly

There is an irony here that the court was clearly aware of. The UK government has consistently sought to encourage investment in renewable energy through a range of policy instruments: contracts for difference, renewable obligation certificates, enhanced capital allowances for specific types of equipment, and direct subsidies. Yet the general capital allowances regime, as now interpreted, excludes from relief a significant category of expenditure that is essential to bringing renewable energy projects to fruition.

Lady Rose addressed the policy argument directly and rejected it, noting that a wide interpretation of section 11 “would greatly increase the kinds of expenditure that can qualify for all kinds of plant and machinery whether the Government wishes to encourage that investment or not.” That is a fair point as a matter of statutory interpretation. But it highlights a gap. If parliament considers that preparatory expenditure on renewable energy infrastructure ought to attract relief, it will need to legislate specifically. The general wording of section 11(4) will not do the work.

Other sectors with bespoke plant

The principle is not confined to windfarms. Any business that commissions bespoke plant requiring significant preparatory investigation — pharmaceutical manufacturers designing cleanroom facilities, petrochemical companies planning bespoke processing equipment, data centre operators investigating ground conditions for cooling infrastructure — will be affected. The more bespoke the plant and the more extensive the preparatory work, the greater the quantum of expenditure that this judgment excludes from relief.

HMRC

HMRC will no doubt welcome the clarity. The court’s narrow reading aligns with the position set out in their capital allowances manual and gives them a firm basis for challenging claims that include preparatory study costs. The decision also reinforces the broader principle, derived from Ben-Odeco, that capital allowances are not a general-purpose mechanism for relieving all costs associated with a business’s investment in plant.

A note on the reasoning

The supreme court’s analysis is characteristically thorough but also characteristically cautious. Lady Rose was careful not to lay down a comprehensive test for all cases. She expressly declined to decide whether final technical drawings qualify. She acknowledged that the boundary between “on” and “not on” the provision of plant is fact-sensitive. And she was candid about the limits of the exercise: “even the simplest and most commonly used word – ‘on’ in the present case – has a penumbra of meaning that generates disputes in unusual fact patterns.”

What is clear is that the court was uncomfortable with the court of appeal’s approach. The observation that if the test were as broad as the court of appeal held, the house of lords in Barclay, Curle would have had no difficulty resolving the question before it is a powerful one. It is also notable that the court rejected the use of hindsight – the court of appeal had suggested looking back from the finished plant and asking what was spent on providing it. Lady Rose was wary of this, noting the criticism of blurring the two limbs of section 11(4).

The reasoning is persuasive, but it does leave practitioners in the position of knowing with certainty what does not qualify while remaining uncertain about some things that might. The reserved position on final technical drawings is a particular gap. One would expect that issue to be litigated before long.

Looking forward

This judgment will prompt several responses:

1. Immediate review of existing claims. Developers and their advisers should audit current capital allowance pools to identify and remove expenditure on preparatory studies that has been included on the basis of the court of appeal’s broader test. Failure to do so risks discovery assessments and potential penalties.
2. Restructuring of future project costs. There may be scope to structure contracts so that preparatory investigation work is bundled into contracts for the supply and installation of plant, rather than procured separately. Whether this would change the tax analysis is debatable – substance over form principles apply – but it will no doubt be explored.
3. Lobbying for legislative change. Industry bodies, particularly in the renewable energy sector, may press for a specific statutory provision allowing relief for preparatory expenditure on qualifying plant. Given the government’s net zero commitments and the scale of planned offshore wind deployment, there is a reasonable prospect of such a measure being considered, though the fiscal cost would need to be weighed.
4. Further litigation on the boundary. The reserved questions – final technical drawings, surveys during installation – will generate further disputes. The precise location of the “limiting curve” remains to be mapped in full.

Conclusion

Orsted v HMRC is a significant decision that brings welcome clarity to a question that has troubled practitioners for years. The supreme court has confirmed that the word “on” in “expenditure on the provision of plant” means what it says: the money must be spent on actually providing the plant, not on the preliminary work of investigating, studying, and designing it. The costs commonly incurred in preparing the ground – sometimes literally – for the provision of plant fall, as Lady Rose put it, “well outside the limiting curve.”

For developers of large-scale infrastructure, the message is clear: the tax system will give you relief for the plant itself and the direct costs of getting it into place, but not for the extensive preparatory work that makes it possible to design and build it in the first place. Whether that is the right policy outcome is a question for Parliament, not the courts. But for now, it is the law.

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