‘Disappointing’ UK tax ruling will hit projects across sectors, say experts

The highly awaited judgment will disappoint developers across sectors and add to their project costs, according to tax law experts at Pinsent Masons.

Jamie Robson and Jake Landman of Pinsent Masons were commenting after the Supreme Court overturned an earlier ruling by the Court of Appeal in England and Wales which had favoured UK taxpayers.

The Capital Allowances Act 2001 (CAA) provides scope for businesses to claim capital allowances – a form of tax relief – on certain ‘qualifying expenditure’. That includes expenditure “on the provision of plant and machinery”.

Last year, the Court of Appeal ruled that it was possible for capital allowances to be claimed on expenditure on a variety of preliminary environmental assessments and engineering studies. It cited a range of examples in its judgment including geotechnical studies, and various assessments and studies developers might carry out to assess likely visual or noise impacts, impact on cultural heritage sites, and impacts on marine environments or birds.

However, the Supreme Court has now determined (31-page / 335KB PDF) that there needs to be a close connection between the expenditure and the plant for the expenditure to be considered to have been incurred “on” the provision of plant. It said the approach the Court of Appeal had taken in reaching its decision was too broad and inconsistent with case law.

The Supreme Court said that while the purchase price of plant and the costs of transporting it to the site and of installing are typically eligible for capital allowances and can be regarded “as the exception that proves the rule”, studies and surveys which “provide the business with advice about how to choose or design plant” fall “well outside the limiting curve” of what would be considered allowable as connected to the provision of plant, and such surveys and studies have “the most tangential connection with the diminishing value of the physical asset”. It added that it is “not helpful … to say that any study or survey that ‘informs’ or ‘feeds into’ the design of the plant must be regarded as being spent ‘on the provision of’ the plant”. It characterised such arguments on what the law provides as “much too broad”.

The Supreme Court ruling was issued in the context of a dispute between HMRC and companies in the Orsted group. The dispute in the case centred on whether costs on certain surveys and studies that need to be carried out during the planning and consenting stages of a windfarm development were eligible for capital allowances, but Robson and Landman said the judgment has implications for a much wider range of projects.

Robson said: "The decision is disappointing on two counts for taxpayers. First, it is clear that expenditure on surveys and studies as described in this case will not qualify as expenditure ‘on’ the provision of plant and machinery and second because a clear test for what would does qualify is not identified, other than that there should be a narrow interpretation and a ‘close connection’ between the expenditure and the plant. In summary, there is clarity that the studies and surveys in this case are not, as put by the Supreme Court, ‘close to the boundary’ but taxpayers will continue to need advice, and indeed further litigation, to pinpoint where that boundary is.”

“For example, it was left open whether the costs of producing final technical drawings and specifications which are then ‘made real’ might qualify for relief in a different case,” he added.

Landman added: “This result has impact across sectors. There are many industries and businesses that incur extensive expenditure on surveys and studies as part of development. The fact that the Court of Appeal judgment has been overturned will be a big disappointment.”

“The Supreme Court was not persuaded by the fact that the accounting profit calculation had reflected that a significant amount had been spent on the surveys and studies. There was a firm statement that what is reported in a company’s accounts has never determined how the taxable profits are calculated. A government consultation was planned to consider tax treatment of pre-development costs but it didn't progress after the Court of Appeal judgment. The Supreme Court's conclusion means that many will feel that this now needs to push ahead,” he said.