Tax relief for predevelopment costs

Capital allowances are the tax equivalent of depreciation, allowing expenditure on capital assets to be deducted as an expense when calculating trading profits. In order to qualify for plant and machinery allowances, the expenditure must be incurred on “the provision of plant or machinery”. 

The taxpayers were related companies who carried out preliminary studies associated with the design and installation of offshore windfarms. The studies ranged from ornithology and marine mammal studies to geophysical and geotechnical investigations. All courts and tribunals agreed that the wind turbines and array cabling were “plant”; the question was whether the preliminary studies were the “provision of plant”. Applying a test of necessity and remoteness, the FTT held that some of the studies qualified for capital allowances, but not others. On appeal, the UT construed the statutory words more strictly and held that none of the studies were the provision of plant. 

On further appeal to the Court of Appeal, Newey LJ said that where the plant is bespoke, the cost of designing it must be the provision of plant. It was already established that installation costs could qualify for plant and machinery allowances, and Newey LJ said that these costs weren’t limited to the process of installation but also included costs informing how installation should take place. Accordingly, the Court of Appeal held that capital allowances can be claimed if the expenditure: 

• informed the design of plant or machinery or how it was to be installed;
• related to plant or machinery that was in fact acquired; and
• did not arise from circumstances particular to that taxpayer (e.g. financing costs). 

The breadth of the first condition allowed Newey LJ to conclude that nearly all of the preliminary studies were the provision of plant. Some studies e.g. benthos and marine mammal studies led to mitigation measures (such as limiting construction work to particular times of year) in the installation process. Other studies e.g. geophysical and geotechnical studies fed into the design of the wind turbines and their bases. The fact that some studies e.g. ornithology and collision risk studies did not result in a change to the design of the wind turbines or to their location did not mean that these studies did not inform the design, meaning that these studies were also the provision of plant. 

Comment

• Following the introduction of full expensing in April 2023, plant and machinery allowances are an extremely valuable tax relief. 
• The breadth of this decision potentially opens the door to claiming capital allowances on other types of preliminary studies carried out on real estate or infrastructure projects, provided these projects involve the installation of “plant”.
• This decision may be of particular interest to taxpayers embarking upon renewable energy projects, constructing developments with energy centres and creating data centres. 
• Following the taxpayer’s loss in the UT, a consultation on tax relief for predevelopment costs was announced in the Corporate Tax Roadmap published alongside the Autumn Budget 2024. The government said they wished to encourage investment in renewable energy and major infrastructure projects. It will be interesting to see whether the consultation contains a proposal to legislate to give taxpayers greater certainty in this area.

Authored by Tom Eyre-Brook and Laura Hodgson.