Windfarms: Costs of surveys and studies do not qualify for Capital Allowances

A recent ruling by the Upper Tribunal (UT) that the necessary costs incurred in carrying out studies and surveys on the feasibility of windfarm establishment are not eligible for capital allowances narrows the scope of potential claims for similar future expenditure.

Case of Gunfleet Sands Ltd. & Others v HMRC

The case of Gunfleet Sands Ltd. & Others v HMRC, examined which activities involved in the development of windfarm plants could be eligible for capital allowances on the premise that they relate to the provision of qualifying plant.

Earlier this year, the First-Tier Tribunal (FTT), considered and accepted an appeal by the tax payer against HMRC’s refusal to allow capital allowances for expenditure on carrying out environmental and technical feasibility studies in connection with the development of offshore windfarms.

But following an appeal by HMRC, the UT ruled that such expenditure was not eligible for capital allowances.

The UT in November examined appeals from both the windfarms and HMRC regarding the eligibility of the companies’ claim for capital allowance in relation to the development of windfarms in four categories.

And while originally, the FTT had ruled that costs related to environmental impact studies, sea and sea-bed technical studies and geo-technical surveys were eligible for capital allowances, the UT took the opposite view.

The UT ruled that only costs associated with the “provision of the plant”, such as the purchase price, installation costs, fabrication costs or so-called “parasitical costs” -like transportation or basic installation expenses - should be eligible for capital-allowance relief.

The UT argued that while expenditure on areas such as feasibility studies were integral to the creation of designs that put parties in a position to be able to provide a plant, the actual provision of the plant is what happens once those designs are put into action. The environmental impact studies, sea and sea-bed technical studies and geo-technical surveys, therefore, were not considered as expenditure on the provision of the windfarms.

The ruling by the UT provides legal precedent and clarifies HMRC’s stance as to what constitutes expenditure on the provision of plant and might be applied in respect of any major renewable energy project.

The decision of the UT might be considered to sit somewhat at odds with HM Treasury’s objective of encouraging investment in renewable energy projects.

While the recently announced Green Industries Growth Accelerator is intended to support the growth of home-grown clean energy projects, among other things, the knowledge that the feasibility studies often necessary to secure such investment would likely be ineligible for tax relief, may be surprising for potential providers.

The UT’s decision in this matter highlights the importance for infrastructure companies to factor the absence of tax relief into their planning when considering the creation a renewable energy installations.