Why a recent court decision could increase infrastructure project tax costs

Businesses involved in large construction or infrastructure projects often spend significant amounts of money long before anything is actually built. These early costs can include feasibility studies, surveys, and environmental assessments – all essential steps in getting a project off the ground.

In a significant win for HMRC, a recent Supreme Court decision has confirmed that, in many cases, these early‑stage costs do not qualify for capital allowances tax relief, even where the costs were necessary to deliver the final project.

The ruling is an important one, particularly for companies operating in sectors such as renewable energy, construction, utilities and large‑scale manufacturing.

What was the case about?

The case involved a number of UK subsidiaries of Ørsted A/S, a major offshore wind developer and the tax treatment of costs incurred in relation to developing offshore wind farms in the UK.

Before the wind farms could be built, the companies had to commission a wide range of studies and surveys, including:

• Environmental impact assessments
• Seabed and ground surveys
• Wind, weather and marine studies

These activities were essential to design, locate and safely install the wind turbines and associated equipment.

The total cost of these studies ran into tens of millions of pounds.

This is a long running case where different levels of the legal system have taken different views. The Court of Appeal took a very expansive view in the taxpayer’s favour, saying that these costs could be claimed, but the Supreme Court have overruled this, finding in HMRC’s favour.

The tax question

As these costs were related to the creation of capital assets, the costs were not deductible as revenue expenditure. The UK tax rules allow businesses to claim tax relief via capital allowances on spending that is treated as being “on the provision of” plant or machinery (such as wind turbines or manufacturing equipment). The question was whether the costs of these surveys and studies, which were capital for tax purposes and necessary for the creation of the windfarms, counted as expenditure incurred on the provision of plant and could therefore get relief via capital allowances.

Ørsted argued that the survey and study costs should qualify because:

• They were essential to the design and installation of the wind turbines
• The turbines could not have been built without the information the studies provided

HMRC disagreed, saying the costs were too far removed from the actual construction of the turbines.

After judgements at the First Tier Tax Tribunal, Upper Tribunal and the Court of Appeal, the dispute finally reached the Supreme Court.

What did the Supreme Court decide?

The Supreme Court ruled unanimously in favour of HMRC, reversing a previous Court of Appeal decision in this case.

The key message from the judgment is that a cost being necessary is not enough for it to qualify as being “on” the provision of plant.

The Court focused on the specific wording of the legislation, concluding that “on the provision of plant” sets a narrow test. It is not “in connection with” or “relating to” or “with a view to”.  In practical terms, expenditure must:

• Be closely and directly connected to the plant or machinery; and
• Either create the plant, form part of it, or physically bring it into place and make it operational

Costs that merely inform, advise, or enable decisions about the plant do not meet that test, even if they are necessary precursor for the creation of the plant.

The Court decided that:

• The survey and study costs helped the business decide how to build the wind farm
• But they were not part of building or installing the equipment itself
• As a result, the costs were too remote to qualify for capital allowances

Why does this matter?

This decision has potentially significant financial implications:

• Many early‑stage project costs are capital in nature, meaning they are not deductible as normal business expenses
• If they also do not qualify for capital allowances, no tax relief is available at all
• This increases the overall after‑tax cost of major projects

For sectors that rely heavily on upfront analysis and surveys, such as renewable energy and infrastructure, the impact can be substantial.

Infrastructure project tax costs beyond wind farms

Although the case involved offshore wind projects, the principles apply much more widely.

Any business undertaking a major capital project may incur costs such as:

• Feasibility studies
• Ground investigations
• Design research
• Technical or environmental surveys

Following this ruling, many of these costs will not qualify for plant and machinery tax allowances, even if they are essential to the project’s success. Depending on the nature of the asset, allowances may be available at a slower rate under the structures and buildings allowance regime.

What if your business has already claimed relief on infrastructure project tax costs?

Some businesses may have previously claimed capital allowances on similar costs, relying on a more generous interpretation adopted by the Court of Appeal before the Supreme Court’s decision.

Where those claims fall within normal HMRC enquiry time limits:

• HMRC may challenge them
• Additional tax and interest could arise

It is unlikely that HMRC could charge penalties where taxpayers based their claim on the previous Court of Appeal decision, as the taxpayer would not have displayed any careless behaviour in such a case.

This makes it especially important for businesses to review recent past claims involving design, survey, or feasibility expenditure.

Are any questions still open?

The Court acknowledged that there may be grey areas, particularly where studies or surveys are conducted:

• During the final stages of construction, or
• As an integral part of the installation process

The judgment does not definitively rule out all such costs, but it sets a much higher bar for qualifying.

What should businesses do now to manage infrastructure project tax costs?

If you are planning or have recently undertaken a major capital project, it would be sensible to:

• Review how early‑stage costs have been treated for tax purposes
• Identify any spending that may now fall outside the scope of capital allowances
• Consider the impact on project budgets and investment decisions
• Seek advice before making or finalising capital allowance claims

Final thoughts

The Supreme Court’s decision brings this long-running tax case to a close, finding in HMRC’s favour. It highlights a longstanding but often misunderstood point in the tax system: not all necessary costs attract tax relief.

For businesses investing heavily in long‑term infrastructure, understanding where tax relief is – and is not –  available is now more important than ever. This is a hugely complex area so it is vital that businesses get the high-quality advice tax advice in relation to such projects to ensure that they can maximise their tax position, while minimising the risk of HMRC investigations.

If you would like to discuss how this decision may affect your business or current projects, professional advice at an early stage can help avoid costly surprises later.