Capital Allowances - Gunfleet Sands

What impact are pre-development costs having on capital allowances?

Capital allowances remain a crucial relief for businesses investing in the UK. With the government recently announcing that full expensing is being permanently maintained, businesses now have the opportunity to obtain tax relief on up to 100% of their capital investment. This relief is more generous than most jurisdictions and highlights the value of a stable and incentivised capital allowances regime for stimulating investment in the UK and supporting the transition to Net Zero.

A stable and consistent approach to boost growth

In the recent 2024 Autumn Budget, the government set out its Corporate Tax Roadmap which highlights its priorities around company taxation and its aim to enhance predictability, stability and certainty to drive investment and growth. Central to this roadmap is a commitment to cap the main rate of Corporation Tax at 25%- the lowest in the G7- for the duration of this Parliament. There is also a commitment to maintain the UK's generous capital allowance regime, underscoring the importance of these incentives to businesses.

Shining the spotlight on pre-development costs

As part of the Roadmap, the government announced a consultation on providing investors in major construction projects such as those within the Energy and Infrastructure sectors with greater tax certainty in advance.

This includes a review of the tax treatment of pre-development costs, particularly in light of the Gunfleet Sands Ltd v HMRC case, which impacts the level of capital allowances available. This case focused on the eligibility of capital allowances for expenditure incurred by several offshore windfarm companies.The primary issue was whether expenditure on environmental impact, technical/engineering studies, and project management costs qualified as capital expenditure "on the provision of plant" under section 11 of the Capital Allowances Act 2001 (CAA 2001).

The main contention was whether Gunfleet Sands’ expenditure on feasibility studies, planning, design, environmental surveys, grid connection, and other preparatory activities was incurred on the provision of plant or machinery for capital allowances purposes. HMRC argued that such expenditure was not eligible for capital allowances, as it was either too remote from the provision of plant or machinery or was incurred on the acquisition of an interest in land.The Tribunal ruled in favour of HMRC, determining that many of these costs were non-qualifying for capital allowances based on a strict interpretation of what constitutes expenditure “on the provision of plant.” This decision has been appealed and will be heard on 4th February 2025.

Looking ahead: clarity through consultation

The decision has had a wide-ranging impact, not only on the energy sector but also on the broader application of capital allowances claims in the UK. The ruling has potentially narrowed the scope to qualify for capital allowances and creates more uncertainty around the regime. This undermines the considerable work that has been done over the years to introduce a level of simplicity and consistency around these valuable tax reliefs.

A consultation will be published in early 2025 seeking to engage with impacted stakeholders from a broad range of industries to understand the implications of the Gunfleet Sands case and how it is affecting their investment decisions. The consultation is expected to explore options for change concerning pre-development costs and to encourage investment in renewable energy and major infrastructure projects.

This is a significant issue for many clients and businesses, and it is encouraging that it is now being considered. It is imperative that HMRC provide clear guidance on this matter. Failure to do so may result in significant uncertainty for large-scale infrastructure projects and could adversely affect the attractiveness of the UK as a destination for such investments.