Gunfleet Sands Ltd and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 03 February 2022 |
| Neutral Citation | [2022] UKFTT 35 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2022] UKFTT 35 (TC)
Judge Nigel Popplewell
Michael Jones QC instructed by Herbert Smith Freehills LLP appeared for the appellants
Elizabeth Wilson QC and Angharad Parry instructed by the General Counsel and Solicitor to HM Revenue & Customs appeared for the respondents
Corporation tax – Capital allowances – CAA 2001, s. 11 – Expenditure incurred on studies relating to the design and construction of offshore windfarms and their component parts including wind turbines and electrical cables – Are the windfarms single items of plant? – Yes – In the alternative the wind turbines and electrical cables are single items of plant – Was the expenditure on the studies incurred on the provision of such plant? – Yes in some cases but no in others – to the extent that it was not so incurred, could it be treated as pre-trading revenue expenditure and deductible under section CTA 2009, s. 61? – No – In light of the wording of the closure notices and the consequential amendments to the appellants returns, did they have to prove those items of expenditure? – Yes – Were the amounts of qualifying expenditure set out in the appellants returns finally determined for the purposes of FA 1998, Sch. 18, para. 88? – No – Appeal allowed in part.
The First-tier Tribunal (FTT) found that each windfarm was a single item of plant and that design expenditure incurred in order for the windfarm to function qualified for capital allowances.
Each company (referred to collectively as Orsted) owned and operated an offshore windfarm and was engaged in the business of generating and selling electricity. Orsted appealed to the FTT against the decision by HMRC to deny claims for capital allowances in respect of expenditure incurred on studies (eg environmental impact, metocean and geophysical studies) in relation to the windfarms.
The following issues were considered by the FTT:
- The single/multiple plant issue. Did the offshore windfarms comprise a single item of plant and machinery for the purposes of the capital allowances legislation and if not, what was the plant and machinery for the purposes of that legislation?Applying the test set out in Cole Brothers Ltd v Phillips (HMIT) [1982] BTC 208 that, for individual items of plant to be considered as together making up a single item of plant, the individual parts need to be directed to a single purpose, the FTT found that each windfarm was a single item of plant. In coming to this conclusion, the FTT accepted that each turbine was capable of and did operate separately; however, that did not bar the windfarm as a whole from being a single item of plant. If it was wrong on that, the FTT's decision was that each turbine was an item of plant, as were the array cables.
- The qualifying expenditure issue. In respect of that plant, was the expenditure qualifying expenditure incurred on the provision of the plant in accordance with CAA 2001, s. 11(4)(a)?For Orsted, expenditure on studies which directly related to the design of the plant or its installation was incurred on the provision of the plant; HMRC disagreed, arguing that design was to remote. The FTT drew a distinction between expenditure on design which it was necessary to incur for the windfarms to function (necessary design) and other expenditure on design (unnecessary design), and found that only expenditure on necessary design qualified for capital allowances.Appeal allowed in part. Having considered each category of expenditure separately, the FTT found that some of the categories were necessary design and so qualified for capital allowances.
- The revenue deduction issue. Was Ordec otherwise entitled to relief for the expenditure as pre-trading revenue expenditure pursuant to CTA 2009, s. 61?Appeal dismissed. The expenditure was capital expenditure and as such, a revenue deduction was denied by CTA 2009, s. 53. The FTT acknowledged that, for the expenditure not qualifying for capital allowances (see Issue 2, above), this meant that no tax relief was due: simply because it falls out of the arms of the capital allowance legislation does not mean that it falls into the lap of the trading deduction legislation.
- The quantum issue. Was it open to HMRC to put the appellants to proof of the amounts and categories of the disputed expenditure in light of the nature of the enquiries and the closure notices closing those enquiries?In the closure notices, HMRC incorrectly amended the returns by adjusting the amount of the writing down allowances rather than the amount of expenditure qualifying for capital allowances. For Ordec, the closure notices defined the scope and subject matter of the appeals, and it was not open to HMRC to argue that there was a quantum issue; for HMRC this was merely an obvious transcriptional error.Appeal dismissed. The reasonable recipient of the closure notices would have concluded that they dealt with the quantum and categories of expense, and were not restricted to a timing issue. The FTT had the power to adjust the amendments pursuant to TMA 1970, s. 50.
- The closure notice issue. Whether amounts in the returns had been conclusively determined for the purposes of FA 1998, Sch. 18, para. 88.For Ordec, as a result of the errors in the closure notices referred to above, the amount of qualifying expenditure was now conclusively determined for subsequent periods and could not be altered. Appeal dismissed. Although conditions one to three at para. 88(3) had been met, condition four had not as an appeal had been brought which had not been fully determined; therefore, the amount could be altered.
In summary, each windfarm was a single item of plant and some of the design expenditure was found to qualify for capital allowances.
One of the key issues considered here was whether design expenditure could be said to be incurred “on the provision of” plant and machinery. The FTT rejected HMRC's argument that the expenditure was too remote, finding that capital allowances may be due where it was necessary to incur the expenditure for the plant to function.
[1] This case predominantly concerns the extent to which capital allowances are available to the appellants for expenditure incurred on studies and project management in relation to offshore windfarms. The appellants contend that they are entitled to such allowances, but in the alternative, the expenditure qualifies as pre-trading revenue expenditure for which they are entitled to a deduction under the relevant statutory provisions.
[2] Each appellant owns and operates an offshore windfarm, and each is engaged in the business of the generation and sale of electricity through that offshore windfarm. The appellants are all members of the same group of companies whose parent company is Orsted A/S, a Danish incorporated and resident company (“Orsted”).
[3] These appeals concern four categories of expenditure which have been incurred by the appellants. Expenditure on: Environmental impact studies and assessments; metocean studies (including studies on water level, wave regime, currents and wind conditions): geophysical and geotechnical studies; and project management, design and procurement. I shall use the expression “studies” as shorthand for the three foregoing studies.
[4] The amount of this expenditure is considerable. In round terms and in a number of accounting periods, Gunfleet Sands Ltd (“Gunfleet”) expended £22.5 million; Gunfleet Sands II limited (“Gunfleet II”) expended £870,000; Walney (UK) Offshore Windfarms Limited (“Walney”) expended £15.5 million, and Orsted West of Duddon Sands (UK) Limited (“WODS”) expended £9 million.
[5] Each windfarm consists of a collection or array of wind turbine generators (“wind turbines”) which are usually identical and are connected together electrically by cables and then further connected via substations to the public grid. There is usually both an offshore and onshore substation. The wind turbines and the array of cables which connect them in order to transport the electricity generated by those wind turbines to the offshore substation is known as the generation unit and the wind turbines and the array cables as the generation assets (“generation assets”). This distinguishes them from the offshore and onshore substations and the electrical cables which run between them and then from the onshore substation to the National Grid, called the export cables. Those assets are known as the “transmission assets” and collectively as the transmission unit. This is not an artificial or convenient distinction. Legislation prohibits common ownership of the generation assets and the transmission assets.
[6] Each wind turbine is made up of a number of component parts. At the top is the rotor, the gearbox and generator, housed in a covering called a nacelle. This is conveniently called the turbine. A cable then conveys the electricity generated by the turbine down the inside of a metal tube called the tower on which the turbine sits. The wind turbine is secured to the seabed by a foundation which is connected to the tower by way of a transition piece.
[7] HMRC accept that each appellant is entitled to capital allowances on the costs incurred on the fabrication and installation of the wind turbines themselves, and indeed on the electrical array cables which connect them. But, simply stated, their position is that the expenditure on the studies is too remote from, and is not on the provision of, the generation assets individually or as a whole and thus does not qualify for capital allowances. It puts the appellants in the position to incur expenditure on the provision of plant, but the expenditure is not on the provision of plant.
[8] Mr Jones, Miss Wilson and Miss Parry have each made clear helpful and eloquent submissions, both orally and in writing. I am grateful for those submissions which have helped me considerably, and I have taken those submissions into account (along with all of the...
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