The Supreme Court’s decision in Orsted West of Duddon Sands and others v HMRC (the tax case formerly known as Gunfleet Sands) is more than a technical ruling on capital allowances. It could have important implications for the economics, valuation and financial reporting of offshore wind and other capital-intensive infrastructure projects.

The case concerned expenditure on environmental and technical studies carried out during the planning and design of four offshore wind farms. The expenditure was capital in nature, so the only means for tax relief was via the capital allowances regime. The wind farms’ generation assets were accepted to constitute plant. The central question was whether the costs of the studies were incurred “on the provision of” that plant for the purposes of section 11(4) of the Capital Allowances Act 2001. If the answer to that question was ‘yes’, then the company could obtain tax relief by way of tax depreciation. If not, there was a permanent difference from a tax perspective and no means for the relevant expenditure to obtain relief, which resulted in approximately 2.5% detrimental impact on project economics.

The Supreme Court unanimously allowed HMRC’s appeal, in effect confirming a permanent difference and overturning the Court of Appeal’s more favourable decision.

Gunfleet Sands ruling: a narrower test for capital allowances qualifying expenditure

The Supreme Court ruled that for costs to qualify for tax relief under the capital allowances regime, there must be a direct, close link to the physical equipment itself. Even if a study is essential (or legally required) to complete the project, costs spent to assess the site, secure permits or inform how plant should be selected or designed do not automatically qualify.

That distinction is commercially uncomfortable for offshore wind. As a result, developers may no longer be able to claim tax relief on critical work such as:

• Environmental impact assessments.
• Seabed investigations.
• Ornithology work.
• Metocean analysis.
• Geophysical surveys.
• Geotechnical studies.

Many of these are fundamental to consent processes, engineering activities and investment decisions. The Supreme Court itself acknowledged that the information was needed to design and build the wind farms ultimately constructed. But commercial necessity is not the statutory test and the Court drew a line around expenditure with a sufficiently close connection to the construction or installation of the plant itself.

The judgment does not mean that every survey, professional fee or design cost is automatically disallowed. The appeal did not express any view on costs related to final drawings and technical specifications. HMRC also accepted that studies conducted during final fabrication or installation might qualify where they form part of the production or installation process.

How the Gunfleet Sands ruling affects offshore wind project economics

For energy investors and developers, the distinction between deferred relief and permanent disallowance is critical. A timing difference can delay tax relief and reduce its present value while a permanent disallowance removes the relief altogether.

The amendments made by HMRC to the four taxpayers’ returns in the Gunfleet Sands case totalled approximately £48m. At a 25% corporation tax rate, a permanent loss of relief on £48m of expenditure represents an illustrative tax value impact of £12m. That’s before considering the timing and profile of the allowances that might otherwise have been available.

Applied across a development portfolio, the potential effect becomes more significant. Offshore wind projects spend significant sums before final investment decision and before revenue generation begins. Losing tax relief on these early expenses could result in higher effective development costs. This in turn might impact investment hurdle assessments, especially acute for projects already facing high costs, expensive financing conditions, rising supply chain costs (as cited for Orsted’s withdrawal of Hornsea 4 in May 2025) and grid constraints.

It is now even more important for developers to be able to accurately tell which expenditure is qualifying as opposed that to which might qualify and expenditure treated as permanently non-qualifying. Assuming that all project-development expenditure attracts capital allowances may no longer be viable. Instead, developers can look at ways to de-risk pre-final investment decision expenditure and construction costs through specialist planning special purpose vehicle (SPVs). This is something with which the team at RSM can help you.

What does the ruling mean for open tax returns and capital allowances claims?

Projects with capital allowances computations that have not yet been agreed with HMRC should review those positions as a matter of urgency. This includes returns under enquiry, open periods and claims where the tax treatment of surveys, studies, professional fees or project preliminaries remains unresolved.

Businesses must establish how closely the expenditure relates to the actual provision of plant, not if an activity contributed to a successful project. That requires a granular review of contracts, invoices, work scopes and project stages rather than high-level accounting classifications. The supporting file should explain:

• What was delivered.
• When it was delivered.
• How it was used.
• Whether it formed part of design selection, consenting, fabrication, construction or installation.

Businesses that filed on the basis of the Court of Appeal’s broader reasoning will need to reconsider their position. Depending on the facts and the status of the relevant return, their next steps might be amendments, disclosures to HMRC or incorporating the revised treatment into an existing enquiry.

What are the financial reporting implications for offshore wind and energy projects?

The judgment may affect both current and deferred tax balances for renewable energy and infrastructure projects. Finance teams should look closely at whether recognised deferred tax assets or assumed future capital allowances are still supportable under the Supreme Court’s interpretation. In particular, any prior-period judgments where a material amount of expenditure was treated as qualifying based on the Court of Appeal decision (or another wider interpretation). The appropriate accounting treatment depends on a range of factors. These include:

• Which reporting framework was used.
• Materiality.
• The facts known when the earlier accounts were authorised.
• Whether the change amounts to a new estimate, a correction of a past error or another adjustment.

A prior-year adjustment should not be assumed automatically. However, it should be considered where the revised analysis indicates that earlier financial statements have materially misstated current tax, deferred tax or the tax basis of project assets. Audit committees and auditors will also want clarity on the associated judgments, uncertainties, disclosures and effective tax-rate consequences.

What should offshore wind developers and investors do now?

The immediate priority is identifying affected costs and calculating the financial impact of losing tax relief on them. Developers should map expenditure by project, legal entity, accounting period, workstream and development stage. Tax teams then need to work alongside engineering, finance and project personnel to determine the factual connection between each material expenditure category and the provision of plant.

Investors and lenders should ask whether updated tax assumptions have been reflected in base-case models, downside cases, covenants, valuations and acquisition pricing. Transaction documents might also need to be reviewed where tax warranties, indemnities, completion accounts or locked-box positions depend upon historical capital allowances claims. For regulated entities there is the added complexity of assessing whether the change in approach is a notifiable event and how any adjustment to the tax base is recovered, impacting current and future customer pricing models.

The Gunfleet Sands ruling does not make offshore wind projects unviable. It does, however, remove an assumption on which some historical tax positions and project models may have relied. Until the UK tax legislation is updated to include these pre-development costs within the qualifying pools, careful cost classification and realistic modelling are essential.

How we can help your renewable energy business

We have extensive experience in the energy and natural resources industry, working with clients in sectors spanning oil and gas, renewables and cleantech and mining and metals.

If you would like to discuss the impact for your energy and natural resources business, please contact Sheena McGuinness or your usual RSM contact.

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