What does the Orsted West Supreme Court judgment mean for capital allowances and the energy sector?

Capital allowances are the tax mechanism that allow businesses to obtain tax relief on their investment in capital items. They are therefore a vital part of managing the cost of installing new equipment, with many pieces of technology used for renewable energy generation being eligible for the relief. However, exactly which items qualify for capital allowances is not always clear. The recent Supreme Court ruling in the Orsted West (Gunfleet Sands) case has re-established the narrower test for the limitations of capital allowances on preparatory work and will be concerning to those people in the UK undertaking renewable energy projects and other large infrastructure projects with a significant investment in preparatory work. While this case was specifically about wind farms, the ramifications may be felt across the sector. 

What were the issues in the Orsted West of Duddon Sands (UK) Limited case? 

The Orsted West of Duddon Sands (UK) Limited v HMRC [2026] UKSC 12 (referred to in the tribunals as Gunfleet Sands Ltd and others v HMRC) case centred on the question of whether costs incurred on surveys and studies during the planning and design of windfarms qualified for capital allowances under section 11(4) of the Capital Allowances Act 2001. Surveys and studies are undoubtedly a vital part of establishing an offshore wind farm and they can constitute a sizeable amount of the cost of the overall project. Having spent a considerable sum on conducting these surveys and studies, Orsted felt that capital allowances should be able to be claimed in order to reduce the overall tax liability, on the basis that it is “capital expenditure on the provision of plant”. HMRC disagreed. 

Orsted’s argument was not without merit, indeed they had prevailed in the Court of Appeal. Whilst HMRC has indicated that surveys and studies carried out in the final stages of fabrication or during the course of installation may qualify for capital allowances, they argued that for the expenditure to be “on” plant there must be a strong and close nexus between the expenditure incurred and the supply of the item in question. 

The Supreme Court unanimously found for HMRC, insisting that a close connection between the expenditure and the plant was required and so reinstating the narrow test from the Upper Tribunal decision. In conclusion, Lady Rose stated “I do not regard these studies and surveys as close to the boundary between what should be regarded as “on” plant and what is too far away from the plant itself to be so regarded. They do not fall within the statutory wording and I would therefore allow the appeal.”  

What is the impact on the renewable energy sector? 

Clarity of legal terminology is welcome, even if it is not the definition of terms that taxpayers would like to see. Capital allowances often carry a compliance risk due to a lack of consensus relating to the eligibility of qualifying expenditure and the fact-specific nature of claims. So, whilst the renewable energy sector may view the ruling as restrictive in terms of its ability to invest in new infrastructure, it does now bring more certainty to the costs of these projects. 

There are calls from some in the sector for the law to be revised to better enable renewable energy projects to be established in the UK. A planned consultation on the tax treatment of predevelopment costs was postponed following the Court of Appeal judgment, but the way is now clear for this to happen. Restrictions on funding pathways for renewable energy projects may seem to run counter to the Government’s goal of Net Zero, so this is not likely to be the last time the matter is addressed.  

Whether or not there will be changes to the law in the future, the reality is that energy sector businesses need to understand the law as it currently stands. This will mean a thorough review of existing and future projects to ensure that costs are managed accurately and that only qualifying capital allowance claims are. A combined approach of seeking professional legal and financial advice may help other businesses avoid similar challenges to those faced by Orsted.