Courts find windfarm costs exceeding £45m qualify for tax relief

The taxpayers in (previously Gunfleet Sands Limited & others v HMRC) incurred costs exceeding £45m on various environmental and technical studies ahead of constructing new offshore windfarms. They claimed tax relief in the form of capital allowances on these costs, but HMRC rejected these claims on the basis that the studies were too remote from the actual construction of the windfarms.

The First-tier Tribunal (FTT) allowed the taxpayer’s appeal in respect of some of the disputed costs but agreed with HMRC that some were too remote. The Upper Tribunal (UT) took a very different approach, concluding that none of the costs qualified for tax relief because they were not incurred on the actual construction, transportation or installation of the windfarms.

The Court of Appeal (CoA) overturned the UT decision and went further than the FTT, deciding that the costs of all the studies it was asked to consider qualified for tax relief, as the studies informed the design and/or installation of the windfarms. We summarised the key findings in the CoA decision in a separate article.

This decision is a great result for the taxpayers. If it had not been overturned, the narrow approach taken by the UT would have resulted in similar costs incurred by other businesses not qualifying for tax relief. This would have compounded other challenges for businesses in the renewables sector, as highlighted by .  

The government is aiming to increase business investment in the UK, which , as a way of boosting productivity and economic growth. The UT decision, if it had been upheld, could have undermined this aim by reducing the incentives for businesses to invest, particularly in renewable energy and major infrastructure projects, which are sectors the government is keen to promote. In fact, the published last autumn stated that the government was “aware of business concerns regarding predevelopment costs” following the UT decision, and promised that a consultation would be launched with the aim of reducing uncertainty in this area of tax.

The CoA judgement is likely to come as a relief for many businesses, not just the taxpayers directly involved. But they are not out of the woods yet, as it is currently unclear whether HMRC will seek to appeal the CoA decision to the Supreme Court. In addition, so far, the government has published no further details about the consultation announced last autumn. It remains to be seen what impact this decision, and any further appeal, will have on this consultation.