The Gunfleet Sands landmark decision on predevelopment expenditure for capital allowances

The case of Orsted West of Duddon Sands (UK) Ltd & Ors v HMRC [2025] EWCA Civ 279, more commonly referred to as Gunfleet Sands, revolved around the extent to which certain predevelopment expenditure can qualify for capital allowances under the Capital Allowances Act 2001 (CAA 2001). This case will have significant implications for businesses in the renewables sector and will have wider implications for businesses incurring preparatory expenses across other industries.

Background

In October 2023, the Upper Tribunal (UT) issued a judgment that was seen as a setback for businesses claiming capital allowances involved in major infrastructure projects.

Under the provisions of section 11 CAA 2001 (s.11), capital allowances are granted for ‘qualifying expenditure’, which is defined as “capital expenditure on the provision of plant or machinery wholly or partly for the purposes of the qualifying activity carried on by the person incurring the expenditure”, which results in that person owning the plant or machinery.

The taxpayers in this case all owned and operated offshore windfarms and the dispute primarily concerned whether expenditure incurred on various studies and surveys in the years before the windfarms became operational met the definition of qualifying expenditure. The main focus was on whether the expenditure in dispute could be considered to have been incurred “on the provision of” the relevant plant.

Initially, the First-tier Tribunal (FTT) had broadly interpreted this to include all capital expenditure which was ‘necessary’ for or ‘directly related to’ the design and safe construction of the wind farms. The necessity test adopted by the FTT was not supported by either party to the litigation on appeal to the UT. The UT was of the view that ‘on’ signalled a closer connection between the expenditure and actual provision of the plant, concluding that “the application of the strict and narrow principle encapsulated in the legislation, means that design of plant and the data inputs to that design, do not constitute provision of plant”. As a result, following the UT decision, most technical and environmental impact studies were excluded from qualifying for capital allowances. This narrow interpretation, coupled with inconsistent application caused uncertainty and concern within the industry.

Court of Appeal Decision

In March 2025, the Court of Appeal reversed the UT’s decision, providing much-needed clarity and relief. The court rejected the UT’s narrow interpretation and established a more inclusive framework for determining what constitutes qualifying expenditure. It set out a tripartite test concluding that design and related costs would qualify for capital allowances where they:

1. informed the design, construction or installation of the plant or machinery;
2. related to plant or machinery ultimately constructed or acquired; and
3. did not arise from specific circumstances or facts particular to the taxpayer in question.

The court reviewed earlier authorities on the meaning of expenditure on plant or machinery and summarised key principles, including:

• Expenditure on the provision of plant must include more than just the supply of the plant, as plant is not considered provided for trade purposes until it is installed.
• Costs of providing plant can include transport and installation, as well as other expenses beyond the price paid to the supplier.
• Provision of finance does not qualify as not all taxpayers need the same finance. The focus must be on the plant, not the taxpayer’s characteristics or circumstances.
• Referring to parallels with rules for structures and buildings allowances, it was noted that HMRC guidance there confirmed that professional fees for the design and construction of a building can represent expenditure on the construction of the building. A similar analysis should be applied to fees for the design and construction of plant.

The Court of Appeal therefore acknowledged that s.11 also encompasses the costs of design as well as costs of installation, and that the eligible expenditure will extend to costs of studies which informed such installation or design. However, this did not include certain socioeconomic and desktop scoping studies.

This landmark decision is not only a significant win for the renewables sector and indeed other industries with substantial preparatory expenditure, but also aligns with the government’s focus on green energy and infrastructure development.

Other matters

Whilst the primary focus of the case was on whether the design costs and associated studies were on the provision of plant and machinery for the purpose of capital allowances, two further subsidiary points were considered by the Court of Appeal. The court decided that:

• Whether or not such studies qualified for capital allowances, they would nonetheless be capital in nature and therefore not deductible for corporation tax purposes as a pre-trading revenue expense. The fact that certain expenditure does not pass the test to be “on the provision” of plant and machinery does not necessarily mean that it is not capital in nature by virtue of being incurred “with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade”.
• On a procedural point, a deficiency in a HMRC closure notice, where HMRC had identified an adjustment to the wrong box on the corporation tax return (CT600), did not render the notices to be invalid provided the overall undercharge to tax had been correctly identified by HMRC.

Practical implications

The Court of Appeal’s decision in Gunfleet Sands has several significant implications for businesses across various sectors.

The decision is a significant boost for the renewables sector, particularly offshore wind farms. It supports the financial viability of these projects by allowing a broader range of costs to qualify for tax relief.

By confirming that many enabling costs can qualify for capital allowances, the decision incentivises businesses to invest in the UK. This aligns with the government’s broader economic goals and its commitment to achieving net zero.

The ruling also provides essential clarity and sets a legal precedent for similar cases on what constitutes qualifying expenditure for capital allowances, particularly regarding predevelopment costs. This is crucial for businesses in the renewables sector, infrastructure, manufacturing and real estate.

Help from the experts

Even with this additional certainty, it is still important to carry out a proper analysis of predevelopment costs to identify which may or may not qualify for allowances. Our specialist team can assist with this and with all other aspects of your capital allowance claim.