Capital allowances – environmental studies and design costs

Capital allowances provide valuable tax relief that can be claimed on the costs of plant or machinery. This could be for fixtures within a building or for items of plant.  Moreover, these allowances, which can be up to 100% of the total expenditure incurred, are a way of reducing taxable trading or rental profits and saving tax.

Impact of recent capital allowance case

A recent capital allowance case may have a significant impact on the capital allowances that can be claimed on preliminary studies for large infrastructure or renewables projects. This specific capital allowance case (Orsted West at the Court of Appeal) related to preliminary studies required for offshore windfarm projects.

The stages of the case were as follows:

• The First Tier Tribunal (FTT) ruled that some of the costs qualified for capital allowances. This was because they were necessary for the design and installation of the wind turbines
• The Upper Tribunal disagreed with the FTT’s interpretation. They found, along with HMRC, that the expenditure on studies did not qualify for capital allowances
• The Court of Appeal broadened the interpretation of what qualifies as capital allowance expenditure. They held that costs related to the design and installation of plant or machinery, including most studies, qualified for capital allowances

The case discusses several types of studies in detail. The court held that all the studies, except socio-economic, tourism, and desktop metocean studies, qualify for capital allowances. Furthermore, the court decided that the provision of plant includes costs necessary for the design and installation of plant.

Reviewing projects and how we can help

Businesses that have recently undertaken large infrastructure or renewables projects should review the tax treatment adopted. If previously treated as non-qualifying, a capital allowances claim could now be made. It’s important to understand the type of survey and its impact, ensuring any change in treatment aligns with the Court of Appeal’s reasoning.

Additionally, any businesses planning any such significant projects should take advice at an early stage to ensure the evidence is collected and retained to back up any claim for survey or design costs.

Our capital allowance team has significant experience in this area.

• We can add value in identifying expenditure qualifying for capital allowances
• We will seek to maximise your tax relief and advise on the most efficient way to use your allowances.

Get in touch with our team here.