Capital Allowances: Supreme Court Overturns Court Of Appeal On Pre-construction Development Costs

The recent Supreme Court decision is a significant development for taxpayers, particularly those involved in large infrastructure and renewable energy projects and might require a reassessment of previously filed or anticipated capital allowances claims in respect of pre-construction development costs.

Herbert Smith Freehills Kramer LLP acted for the four Respondent companies (“Orsted”) in the appeal by HMRC to the UK Supreme Court in Orsted West of Duddon Sands (UK) Ltd and others v HMRC [2026] UKSC 12, which overturned the Court of Appeal's decision that capital expenditure on offshore wind farms prior to commencing construction qualified for capital allowances. The Court of Appeal decision was discussed in our previous blog post here.  

The Supreme Court decided that plant and machinery allowances would be available for the costs of acquiring an item of plant, and that the costs of transporting and installing such an item would also be allowable as an exception, but that the costs incurred by Orsted on geotechnical and other studies that directly informed the design and installation of the plant in this case fell outside the statutory words “on the provision of plant and machinery”.

Background to the Appeal

Orsted operates a number of offshore windfarms off the coast of England. Orsted incurred substantial pre‑construction development costs on surveys and studies investigating various aspects of the environment in which the windfarms would be constructed, including metocean, geophysical and geotechnical studies, which informed and influenced the design, construction and installation of the windfarm and its components. Following decisions below, when the appeal reached the Supreme Court it was common ground that: (i) the generation assets of the windfarm (treated as a single item) constituted “plant” for the purposes of the capital allowances regime; and (ii) the expenditure in question was capital in nature because it was incurred towards a capital asset (the wind farm). The only issue before the Supreme Court was whether the costs incurred would qualify for capital allowances as expenditure “on the provision of plant or machinery” under section 11(4) of the Capital Allowances Act 2001 (“CAA 2001”). If so, Orsted would be entitled to take those costs into account when computing its taxable profits (by way of capital allowances); if not, Orsted would be left with no deduction for costs which everyone accepts were incurred solely for trading purposes.

The Court of Appeal held that all the expenditure in dispute would qualify. HMRC appealed to the Supreme Court. 

The Supreme Court Decision 

The Supreme Court unanimously allowed HMRC’s appeal and held that the surveys and studies did not qualify as capital expenditure “on the provision of” plant. The judgment was given by Lady Rose, with whom Lord Lloyd‑Jones, Lord Hamblen, Lord Burrows and Lord Richards agreed.

The Supreme Court looked at the ordinary meaning of the words used in the context of section 11(4) CAA 2001 and held that the requirement for expenditure to be “on” the provision of plant indicated a “narrow” test.

The Supreme Court attached particular significance to the choice of language used by Parliament. It interpreted the fact that section 11(4) does not employ other phrases which “connote a much looser” nexus, such as “in connection with”, “relating to” or “with a view to”, to mean that Parliament intended to require a close connection between the expenditure and the plant provided. The two leading authorities (both decisions of the House of Lords, which respectively considered that excavation costs incurred in preparation for the installation of plant qualified for allowances, but finance costs of funding the acquisition of plant did not) were held to support such a narrow construction. 

The Supreme Court rejected the argument that, since design costs embedded in the price of off‑the‑shelf plant would qualify for allowances, the principle of equal treatment for taxpayers indicated that design costs separately incurred on bespoke plant should qualify in the same way. The Supreme Court said that the price set by the supplier of a product does not inform whether the price is qualifying capital expenditure in the hands of the taxpayer who purchases the item, and that HMRC has never dissected the purchase price to strip out e.g. revenue costs incurred by the supplier that would be wrapped up in the price.. Other costs, such as transportation and installation costs, can be allowed as they are inherent in the concept of the plant being “provided”. Orsted’s disputed costs, however, were in the nature of providing the business with information on how to choose or design the plant, which would not be within the narrow scope of the provision. 

The Supreme Court also found the link between the annual allowance and the erosion of the value of plant through wear and tear to be a useful indicator of the intended narrowness of the concept. Capital allowances were designed to reflect the gradual deterioration of assets through use in a business and the eventual need for replacement. That underlying rationale weighed against extending plant and machinery allowances to the costs of surveys and studies which the Supreme Court regarded as having “only a tangential connection” with the diminution in value of the physical assets comprising the windfarm.

Matters Left Open

The Supreme Court did not draw a bright line explaining the precise boundary of what should and should not be qualifying expenditure. What we do know is that it considers the rule to be narrow and restrictive. The Supreme Court indicated that, while it understood that the Government may wish to encourage investment in renewable energy projects, any broadening of the meaning of capital expenditure incurred in providing plant for such projects should be a matter for legislation by Parliament. 

The Supreme Court declined to comment on a fact-specific question where HMRC reserved its position - whether the costs of producing the final technical drawings and specifications which are then “made real” by the manufacturer of an item of plant could be recoverable as capital allowances. 

Similarly, the Supreme Court noted that HMRC accepted that surveys and studies carried out during the final stages of fabrication or during installation may, in principle, qualify where they form part and parcel of the fabrication or installation process. However, none of the expenditure in dispute in this case fell into that category, and thus the Supreme Court did not express a view.

Next Steps

Taxpayers who have made or are contemplating capital allowances claims in respect of pre‑construction capital expenditure of this kind may need to review their position in light of this decision. That is particularly so for businesses in the renewable energy sector and other large‑scale infrastructure projects, where such costs are often material.

In April 2025, the Government announced that its planned consultation on the tax treatment of “pre‑development” costs would be postponed, following the Court of Appeal’s decision. It remains to be seen whether, and in what form, the consultation will now proceed in light of the Supreme Court’s ruling, and whether legislative reform will follow to provide greater certainty to taxpayers.

In addition, as the Government introduces the new clearance facility for infrastructure projects with at least £1 billion of qualifying project expenditure, taxpayers who can access this facility would be advised to secure agreement on the treatment of capital expenditure incurred prior to the commencement of the construction phase.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.