The Court of Appeal decision on the “Gunfleet Sands” capital allowance case has recently been published.
The Gunfleet Sands case revolves, inter alia, around whether expenditure on various studies undertaken by the taxpayer in connection with the acquisition and installation of certain windfarm generating assets was expenditure “on the provision of plant or machinery” which is one of the requirements that needs to be met if plant or machinery allowances are to be available under s11 CAA 2001.
Our newsletter of 15 November 2022, relating to the First-Tier Tribunal (FTT) decision in this case, sets out in some detail the facts and arguments.
The FTT found that expenditure on some of the expenditure on studies was indeed incurred on the provision of plant, i.e. the cost which was necessary to incur to enable it to properly function. The Upper Tribunal (UT) however subsequently found, in 2023, that none of the expenditure on the studies was incurred on the provision of plant. That decision also indicated that design costs may also be too remote to qualify. The UT decision was then appealed to the Court of Appeal, which has now overturned the UT decision and found that expenditure on nearly all of the studies in question were on the provision of plant. The Court of Appeal indicated that they saw no evidence that Parliament intended that a strict and narrow interpretation of the law was intended.
The main principles that can be taken from the Court of Appeal decision is that expenditure on the provision of plant includes not only the cost of acquiring and installing plant, but also costs in designing, determining how the plant is to be installed and project managing. Thus, expenditure on, for example, marine mammal studies was on the provision of the plant as they provided information which informed how and where the installation should take place. Similarly, expenditure informing when the installation should take place to avoid adverse weather windows and fish spawning periods was also on the provision of the plant.
Lord Newey summarised the position as follows:
“While, therefore, I am not going to attempt a provide an exhaustive account of when capital allowances are available, it seems to me that they can be claimed where (a) the taxpayer can demonstrate that, looking at matters objectively and with the benefit of hindsight, expenditure informed the design of plant or machinery or how it was to be installed, (b) the expenditure related to plant or machinery which was in fact acquired or constructed and (c) the expenditure did not arise from characteristics or circumstances particular to the specific taxpayer.”
It is not clear whether the reference in (b) to plant be being actually acquired or constructed is a reference to the fact that generally no relief is available in a period in respect of expenditure on the provision of plant unless the plant is in fact owned, or whether in the case of study and design costs this is a necessary condition that needs to be met for the expenditure to be regarded as on the provision.
The decision does not alter other well established case law principles that expenditure on whether to acquire plant or not, or expenditure which is determined by the position of the purchaser rather than of the plant, do not qualify.
It is not known whether HMRC will seek to appeal this decision but for now it appears that relief for expenditure on the provision of plant is available more widely than was previously the case, and once it is decided to acquire a piece of plant which cannot be simply acquired off the shelf, any expenditure on its design and installation should qualify for relief except possibly if the project is aborted.
It would be surprising that hindsight might be relevant in determining whether expenditure can qualify as being “on the provision”. This introduces a practical difficulty particularly for the oil industry where there can be many years between the study and design work and the actual construction.
In the past oil and gas companies have treated abortive project expenditure such as Front End Engineering and Design costs as not on the provision of plant, and not prevented under s399 CAA 2001 from qualifying under the MEA provisions. S399 CAA 2001 refers to expenditure on the provision of plant (without any reference to an ownership requirement), so if the meaning of these words is now wider than previously thought, that could limit the opportunity for claiming MEA allowances if allowances are not available under s11 CAA 2001 because the asset is never acquired. However, if plant must actually be acquired or constructed for the costs to qualify this MEA fall back may still be available
In other cases although there is generally a requirement to own the asset in order for plant or machinery relief to be available, where expenditure is incurred under certain contractual structures the taxpayer is deemed to own the asset such that plant or machinery relief is available.
Taxpayers should therefore review their arrangements for study and design costs which may prove to be abortive as a result of this decision. In particular, there may be difficulties where different third parties are needed to fulfil different aspects of the project, but we believe that it may be possible to structure arrangements to protect the relief.
The case also looked at what asset(s) constituted the plant, and whether any of the costs could be treated as revenue costs, but the original FTT and UT decisions, that the asset was the whole generating asset, and that none of the costs were revenue in nature, were not disturbed.
This remains a complex and uncertain area with the availability of relief for expenditure depending very much on the facts of any particular case. If readers would like to discuss any of the above, please do not hesitate to get in touch with your normal CWE contact.