In the recent case of Orsted West of Duddon Sands (see UK Supreme Court Denies Capital Allowances for Survey Costs for our full briefing on the decision), the Supreme Court held that certain pre-development expenditure incurred on surveys and studies during the planning of offshore windfarms did not qualify for plant and machinery allowances. This may have implications for the oil and gas sector where other allowances are also unavailable.
The Supreme Court emphasised that the capital allowances legislation, which requires expenditure to be "on the provision of" plant, points to a narrow test in which a close connection is required between the spending and the asset itself. Advisory costs, including surveys and studies that inform the design or installation of plant, fall outside that test even where the information is essential to the project proceeding.
The scope of allowable expenditure on plant and machinery has therefore been restricted considerably.
Implications for the Energy and Infrastructure Sector
For the wider energy and infrastructure sector, the decision is significant. As the Court of Appeal observed, the questions raised by this appeal are "becoming more acute as very large infrastructure projects require extensive and costly preparatory work".
Expenditure on surveys and studies that provide a business with advice about how to choose or design plant will generally be ineligible for plant and machinery allowances, even where that information is essential to the project proceeding. The Court did leave open the possibility that some costs such as final technical drawings or surveys carried out during fabrication or installation might still qualify, but stressed that these were fact-sensitive questions.
The direct impact on oil and gas businesses is more limited. Oil and gas operations typically benefit from mineral extraction allowances, which provide a distinct and generally more favourable regime. Mineral extraction allowances are available for a broader category of expenditure, including on certain pre-trading activities and preparatory appraisal works. Accordingly, many of the survey and study costs disallowed in a renewable energy context may remain eligible for relief when incurred in connection with oil and gas exploration and development.
Looking ahead: consultation on pre-development costs
The government indicated at Budget 2024 that it will consult on the tax treatment of pre-development costs for major infrastructure projects following the Orsted decision and the wider policy debate it has prompted. The Supreme Court's own judgment acknowledged the policy tension, noting that the statutory language is "a very blunt instrument with which to provide incentives to business to invest in plant."
Oil and gas businesses should monitor this consultation closely. Although the mineral extraction regime provides a degree of insulation from the immediate impact of Orsted, any reform to the treatment of pre-development costs could affect the scope of mineral extraction allowances or introduce new cross-sector rules.
Once the consultation is published, it would be worthwhile:
- engaging with the consultation process directly to ensure that the particular characteristics of upstream exploration and development expenditure are well understood by policymakers and
- reviewing current capital allowance claims to confirm that pre-development expenditure is being claimed under the most appropriate statutory provision and that the basis for any plant and machinery claims is defensible in light of Orsted.
Other author: Nicholas Gardner, Partner
