UK offshore wind projects get customs duty boost

Tax expert Jake Landman of Pinsent Masons said the decision by the first-tier tax tribunal will be welcomed by developers of offshore wind farms in the UK.

The dispute before the tribunal concerned the UK customs duty classification of an underwater composite cable used to connect a windfarm in the North Sea to an onshore electrical substation.

The cable was manufactured in the US and imported into the UK. It was supplied by Nexans Norway A.S. (Nexans) and specifically designed to be used in the Seagreen offshore wind farm project, which became operational last year.

Importantly, the cable is made up of two main physical features: conductors, which enable power generated by the wind farm to be transmitted to the grid on-shore, and electricity to be carried out to the wind farm to facilitate the operation of equipment and systems while the wind farm is idle; and fibre optic cables, which enable data to be transmitted to the wind farm to allow its remote monitoring, control and operation from on-shore, and for the cable’s temperature to be remotely monitored for safety purposes.

HMRC’s case was that the cable should be categorised in such a way that it would attract a 2% customs tariff upon import to the UK. However, Nexans argued that HMRC had mis-categorised the cable under the classification regime, claiming that the product attracted a 0% rate.

The first issue before the tribunal was whether the cable constituted a ‘composite machine’ under the customs framework. Nexans argued that it wasn’t, as the cable was entirely passive and had no mechanical or digital parts, nor could it, or an of its parts, be considered to be a machine, machinery, apparatus or appliance applying the common meaning of those words.

HMRC’s position was that it was clear that in the context of the customs regime, the term ‘machine’ was intended to cover products beyond the simple or common understanding of the word and that on a proper construction, the cable had to be determined as such.  

While noting that it may feel odd to refer to a length of cable as a machine, the tribunal found for HMRC on the issue, considering each of the conductor cores and the fibre optic cables to be machines and the cable to therefore be a composite machine for customs purposes. 

However, to determine what customs duty rate applied, the tribunal had to further assess the function and character of the cable in more detail. To do this, it assessed detailed factual evidence as well as case law on the rules of interpretation regarding goods classification under the UK’s customs tariff regime.

The rules essentially provide a hierarchical framework for correctly classifying goods that could fall under two or more category headings. They provide, among other things, for the correct classification to be determined by reference to goods’ ‘principal function’ or, where no such principal function exists, other features such as its ‘essential character’.

In relation to the principal function test, the tribunal noted the settled position to be that “the decisive criterion for the tariff classification of goods is in general to be found in their objective characteristics and properties…” although despite that objective focus, the intended use of the goods can also be considered.

Here, HMRC argued that the cable’s principal function was that of conducting power, and that its data transmission functions were secondary to this.

The tribunal rejected this, instead accepting Nexans’ position that, based on the cable’s objective characteristics, the power and data functions were of equal importance.

The tribunal then turned to consider the essential character test. The question here was what factor would determine the essential character of the particular goods. For example, was it the material or component of the goods, or their bulk, quantity, weight of value – this was not prescribed in the customs regime and would vary between goods.

The tribunal noted that one test to be considered in identifying the relevant factor was to ask whether the goods would retain their characteristic properties if a particular constituent part was removed, known as the “dispensable constituent” test.

It ultimately found this to be of limited assistance in this case, however. This was because it considered that, as looked at objectively, the cable performed two independent functions of equivalent standing. If either were removed – the power cores or the fibre optic cables – then this would have a material impact on the functionality and character of the product.

Accordingly, the tribunal found that the essential character of the cable was the fact it performed two independent functions to a high degree. As had been noted in the detailed evidence, Nexans had faced significant challenges integrating the power and fibre optic elements of the cable and the fact they had overcome this was considered by the tribunal to represent the essential character of the cable.

In reaching its conclusions on both tests, the tribunal considered the technical specifications and objective characteristics of the cable itself, without considering any evidence on market requirements.

It did record, however, that that evidence reinforced the conclusion that the essential character of the cable, as perceived by a wide body of consumers, is its ability to successfully perform both functions. Absent either component, consumers would not regard what was left as “being anything approaching the cable we started with; it is not a product they would want.”

It added: “Put simply, in this context the fibre optic cables and the power cores were ‘better together’ and this, rather than either of them on its own, we find, is the essential character of the cable.”

The result was that Nexans’ cable fell into a category of goods to which a 0% UK customs duty rate applies.

Landman said: “While the case was determined on its facts, and concerns a very specific product, the tribunal recognised that the type of composite cable at issue in this case is favoured by wind farm developers and essential to their successful operation in the UK. Developers will therefore welcome this decision. It will be interesting to see if there is an appeal, although it will be difficult to challenge the extensive findings of fact made by the tribunal.”