In a long awaited and important judgement for businesses engaged in major infrastructure projects and those in the renewables sector, the Supreme Court (SC) concluded that expenditure on environmental studies did not qualify for capital allowances.

The costs had informed the design and layout of an offshore windfarm, which the parties agreed was an item of plant. However, the SC found that the disputed expenditure did not have a close enough connection to the construction or installation of the windfarm. Therefore, it could not be considered to have been incurred ‘on the provision of’ plant, as the legislation requires.

This decision will be disappointing for many and creates further uncertainty about the tax relief available for large scale projects. It comes at a time when the Government is keen to promote investment in energy infrastructure and reduce reliance on imported fossil fuels. Last year, the Government published its Industrial Strategy, which identified clean energy as one of the UK’s highest potential sectors, but ongoing uncertainty may limit its ability to reach that potential. The SC decision therefore is likely to prompt calls for a consultation on the tax treatment of so-called ‘predevelopment’ expenditure, which has been put on hold while the case was working its way through the courts.

Whilst the decision will be of particular interest to those undertaking large scale projects, it will impact all businesses that incur professional fees and costs on surveys and studies as part of the acquisition, construction or installation of plant or machinery. These businesses will need to consider whether the costs are sufficiently closely connected to qualify for relief. As the UK’s capital allowances regime has become more generous in recent years, HMRC may scrutinise claims for non‑qualifying expenditure more closely.

Taxpayer expenditure explained: costs incurred on environmental studies

The taxpayer companies in Orsted West of Duddon Sands (UK) Limited & others (Orsted) v HMRC (previously Gunfleet Sands Limited and others v HMRC) incurred significant expenditure on the design and construction of offshore windfarms. The windfarms were items of plant.

The companies claimed capital allowances for environmental and technical studies undertaken prior to construction, on the basis that the expenditure was ‘on the provision of’ plant (the windfarms). HMRC challenged the claims, believing that the studies were too remote from the actual expenditure on the windfarms to meet this condition.

The SC had to determine how the term ‘on the provision of’ should be interpreted. Although this seems a straightforward question, the differing conclusions of the First-tier Tribunal (FTT), Upper Tribunal (UT) and Court of Appeal (CoA) show that it was anything but simple.

FTT allowed some, but not all, of the disputed expenditure. By contrast, the UT adopted a narrow interpretation and concluded that none of the expenditure qualified as the costs were not on the actual construction, transportation or installation of the plant. The CoA took a different view, finding that capital allowances should be available for the majority of the expenditure as the studies informed the design and/or installation of plant.

The Supreme Court’s decision

The SC followed the decision taken in the UT and held that the term ‘on the provision of’ must be interpreted narrowly. It agreed with the UT that the term ‘on’ indicates a narrow test requiring a close connection between the expenditure and the relevant plant or machinery.

Other terms commonly used in tax legislation, such as ‘in connection with’, ‘relating to’ or ‘with a view to’, indicate a looser connection is required. By choosing to use the term ‘on’ rather than one of these other terms, Parliament has chosen a narrow test that requires a close connection.

The SC specifically noted that “costs, commonly incurred, of carrying out studies and surveys which provide the business with advice about how to choose or design plant fall … well outside the limiting curve (of expenditure on the provision of plant)”.

The SC considered the broader context and purpose of the capital allowances regime as a whole but found that this did not support a wider interpretation.

The SC is the highest court in the UK, so its decision cannot be appealed.

What are the implications of the Supreme Court’s decision?

Businesses hoping for the SC to reject HMRC’s appeal, or at least provide a straightforward test for assessing the availability of capital allowances for relevant expenditure, are likely to be disappointed by this judgement.

The appeal did not concern expenditure on final drawings and technical specifications, and the SC expressed no view on it. However, the SC noted that HMRC was prepared to accept that, if further surveys and studies were carried out during the final stages of fabrication, or during the course of the installation of the windfarm, they may qualify as being ‘on the provision of’ plant. This may be either because they are part and parcel of the production process or because they are part of installing the windfarm.

The SC also made reference to ‘preliminaries’, broadly defined as indirect costs incurred over the duration of a project, on items such as site management, insurance, general purpose labour, temporary accommodation and security. These costs are treated in the same way as professional fees, which the SC noted will not always qualify for capital allowances. Therefore, if expenditure on preliminaries is incurred in connection with a building project that includes the provision of plant or machinery, only the portion of this expenditure that is incurred ‘on the provision of’ plant or machinery can qualify.

Is this the end of the road?

The Corporate Tax Roadmap published in 2024 stated that, following the UT decision, the Government was “aware of business concerns regarding predevelopment costs” and committed to launching a consultation aimed at reducing uncertainty in this area of tax. However, following the CoA decision in 2025, this consultation was postponed.

It is currently unclear how the Government will respond to the SC decision. Given the likely impact on tax relief available for infrastructure projects, which may ultimately impact their commercial viability, affected businesses will be keen for a consultation to be launched as soon as possible. Providing no tax relief for predevelopment costs contrasts with the generosity of the wider capital allowances regime and could be a barrier to investment. If launched, the consultation may consider alternative routes to provide tax relief for these early-stage costs.

For those undertaking very large-scale projects (costing £1bn or more), an advanced tax certainty regime is due to begin in July 2026. This regime should enable those that qualify to agree tax treatments with HMRC up front, giving them certainty when making stop/go investment decisions.

How should businesses approach capital allowances after the Supreme Court ruling?

Businesses must assess how closely and directly connected pre-construction or pre-acquisition costs, such as professional fees and costs for surveys and studies, are to the provision of plant and machinery. This assessment determines the capital allowances treatment. Careful consideration of all relevant facts and circumstances will need to be documented to support the position ultimately taken.

In many cases, there will be considerable doubt as to whether the costs are sufficiently closely connected to the relevant plant and machinery to justify a claim. Engaging a capital allowances specialist at an early stage will help to ensure claims are technically correct and optimised.

Those that have previously made claims based on the more generous approach suggested by the CoA’s decision may now need to review those claims and consider next steps. This may include potential amendments to relevant returns or disclosures to HMRC.

If you want to discuss how this decision could impact your business, please get in touch with Peter Graham, Rupert Guppy or your usual RSM contact.

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