The recent Supreme Court decision in Orsted West of Duddon Sands Ltd & Others v HMRC is one of the most important UK tax rulings in recent years for businesses involved in infrastructure, renewable energy and large-scale capital projects.
The case has significant implications for how companies claim capital allowances on pre-construction and development costs, particularly where projects involve extensive surveys, feasibility work and technical studies before physical construction begins.
Background to the case
The dispute involved offshore windfarm projects. During the development stages, the company incurred approximately £48 million of expenditure on:
- Environmental impact assessments
- Seabed and geotechnical surveys
- Metocean analysis
- Feasibility studies
- Technical design investigations
The company argued that these costs should qualify for plant and machinery capital allowances because they directly informed the design and installation of the offshore windfarms.
HMRC challenged this position, arguing that the expenditure was too remote from the actual provision of the plant and machinery itself.
Journey Through the Courts
The case passed through several stages of litigation:
- First-tier Tribunal – largely found in favour of Orsted
- Upper Tribunal – overturned the earlier decision and sided with HMRC
- Court of Appeal – reinstated much of Orsted’s argument
- Supreme Court (2026) – ultimately ruled in favour of HMRC
The Supreme Court’s Decision
The Court focused on the wording of section 11(4) of the Capital Allowances Act 2001, which allows relief for expenditure incurred “on the provision of plant or machinery.”
The judges concluded that:
- There must be a direct and close connection between the expenditure and the provision of the qualifying asset
- Preparatory or investigative activities are not automatically qualifying expenditure
- Costs that merely inform decision-making or project planning may fall outside the scope of capital allowances
Although the studies were essential to the overall project, the Court found they were not sufficiently connected to the actual installation of the windfarm equipment.
Which businesses are affected?
The decision has implications far beyond the renewable energy sector. It is particularly relevant for businesses involved in:
- Construction
- Property development
- Infrastructure projects
- Manufacturing
- Transport and logistics
- Energy and utilities
Many companies incur significant “indirect costs” before construction begins. Following the ruling, these costs may no longer qualify for capital allowances unless businesses can clearly demonstrate a direct link to the qualifying plant or machinery.
Key Considerations for Companies
Businesses should:
- Review how project costs are categorised from the outset
- Maintain detailed documentation supporting capital allowance claims
- Clearly separate qualifying and non-qualifying expenditure
- Ensure invoices and reports demonstrate a direct relationship to plant installation where possible
- Seek specialist tax advice early in major projects
The ruling also increases the likelihood of HMRC scrutiny in relation to large capital allowance claims involving development and preparatory costs.pacer
Conclusion
This case provides important clarity on the boundaries of capital allowances legislation, but it also creates greater complexity for businesses undertaking major projects.
The Supreme Court has reinforced HMRC’s narrower interpretation of qualifying expenditure, making it clear that preparatory studies and investigative work will not automatically attract tax relief simply because they contribute to a wider capital investment.
For companies investing heavily in infrastructure or development projects, proactive planning, robust record keeping and careful tax analysis will now be more important than ever in maximising available reliefs while minimising the risk of challenge from HMRC.
At Menzies, our specialist tax advisers work closely with businesses across a range of sectors to help identify qualifying expenditure, support robust capital allowance claims and navigate complex tax legislation. Whether reviewing historic claims, advising on new developments or assisting with HMRC enquiries, our team can help businesses manage risk while ensuring they maximise the reliefs available to them.
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