Supreme Court narrows scope of capital allowances for major infrastructure projects

The UK tax system offers, by comparative international standards, relatively generous tax relief for capital investments under the capital allowances regime. The regime provides for various full, partial and writing-down reliefs to ensure that certain capital expenditure is relievable in the calculation of profits for tax purposes.

However, when dealing with plant and machinery, there is a requirement that the capital expenditure is incurred “on the provision of” that plant or machinery qualify. This has given rise to uncertainty around the extent to which preliminary and ancillary expenditure, such as design costs, pre-development costs, surveys and studies, can be said to be incurred “on the provision of” the eventual plant and machinery.

In this connection, the Supreme Court’s highly anticipated decision in Orsted West of Duddon Sands v HMRC [2026] UKSC 12 signifies one of the most significant modern restatements of the meaning of expenditure incurred “on the provision of plant” for capital allowances purposes under section 11(4) of the Capital Allowances Act 2001 (CAA 2001). Its implications extend beyond the specific facts of the case, affecting all capital‑intensive projects involving extensive preparatory studies, regulatory engagement and bespoke design elements.

By unanimously allowing HMRC’s appeal, the Supreme Court has decisively rejected the broader purposive approach endorsed by the Court of Appeal and, in contrast, reaffirmed a narrow interpretation of section 11 CAA 2001 rooted in the classic authorities of Barclay, Curle and Ben‑Odeco.

Background

The taxpayers, members of the Ørsted corporate group, operate large offshore windfarms constructed pursuant to seabed leases from the crown estate. As part of the lengthy development process, they incurred substantial expenditure on surveys and studies, including environmental impact assessments (EIAs), geotechnical and geophysical surveys, metocean studies and a wide range of ecology, heritage and visual impact assessments.

It was common ground that the relevant windfarm generation assets constituted “plant” and that the survey costs were capital rather than revenue in nature. The legal question for the courts to answer was limited to whether the costs were capable of qualifying for capital allowances by virtue of being incurred “on the provision of” the windfarm generation assets within section 11(4)(a) CAA 2001.

The lower tribunals and courts adopted markedly different approaches. The First‑tier Tribunal applied a “necessary design” test, allowing some claims. The Upper Tribunal rejected that approach and denied relief altogether. The Court of Appeal then swung decisively the other way, holding that studies which “informed” the design or installation of plant could qualify, even if they did not directly alter the final design. The Supreme Court was asked to determine where the correct boundary lay.

The Supreme Court decision

Lady Rose, delivering the unanimously agreed judgment, held that none of the disputed surveys and studies qualified for capital allowances. The court concluded that section 11(4)(a) requires a close and direct connection between the expenditure and the plant itself. Expenditure which merely provides information, advice or assurance about whether, and how, plant should be designed or located does not meet that test.

In the court’s view, the studies were “well outside the limiting curve” surrounding the plant and its provision.

A narrow reading of “on”

A central focus in the judgment is the interpretation of the statutory language. Parliament chose the preposition “on”, rather than broader expressions such as “in connection with” or “relating to”. According to the court, this linguistic choice signals a deliberately confined and narrow scope.

While transport and installation costs may qualify (because they are inherent in making plant available for use), expenditure which merely precedes, facilitates or informs the decision‑making process does not, in the Supreme Court’s view, qualify on the particular facts presented. The fact that such expenditure may be essential from a regulatory or commercial perspective does not bring it within section 11(4).

The court was particularly concerned that the Court of Appeal’s approach would, in practice, allow almost any preparatory cost to be swept into the capital allowances pool so long as plant was ultimately constructed. That, the Supreme Court held, would undermine the careful architecture of the CAA 2001, including the distinct regimes for structures, buildings and certain enabling works.

Design costs

Importantly, the court stopped short of laying down an absolute rule that all design expenditure must fall outside section 11(4). Lady Rose acknowledged that detailed technical drawings produced as part of fabrication or installation might, in an appropriate case, qualify as expenditure “on” the provision of plant. However, no such costs were in issue before the court, and the point was expressly left open.

What the court decisively rejected was the proposition that any study which “informs” design, even if it merely confirms existing assumptions, should qualify. That approach was described as “much too broad”.

Practical implications: what should taxpayers do now?

The immediate effect of the decision is to significantly constrain capital allowance claims for large infrastructure projects, particularly in regulated sectors such as energy, transport and utilities.

Key practical points include:

• EIA and consent‑driven costs are high risk: Even where such studies are indispensable to project delivery, they are unlikely to qualify unless they form part of installation works themselves.
• Careful cost categorisation is critical: Businesses should distinguish rigorously between plant costs, installation costs and preparatory or advisory expenditure.
• Expect continued disputes at the margins: The court has left open difficult questions around late‑stage design work and surveys undertaken during installation.
• Policy relief must come from Parliament: The court made clear that incentives for renewables or other favoured sectors should be delivered through targeted allowances, not by stretching section 11 beyond its statutory language.

With the government deciding, in April 2025, to postpone the publication of a consultation on the tax treatment of “pre-development costs” following the Court of Appeal’s broader interpretation of the provisions, we might expect the policy discussion in this area to recommence imminently.

For now at least, the Supreme Court’s narrow interpretation may give rise to historic issues for various taxpayers who have been claiming a wider range of preliminary and ancillary capital expenditure under the capital allowances regime in CAA 2001. Particularly where amounts are substantial, taxpayers may wish to seek advice on the broader implications of this case to their historic and current tax position.

Contact us to find out if this affects your business.