Capital allowances: Gunfleet Sands

Executive summary

The Court of Appeal’s decision in the Gunfleet Sands case  has marked a significant shift in how capital allowances are interpreted for large infrastructure projects. At the heart of the dispute was whether early-stage costs – such as environmental studies and technical surveys – could be considered capital expenditure “on the provision of plant or machinery.” The ruling has opened the door for developers to claim tax relief on a broader range of predevelopment costs, challenging HMRC’s previously narrow stance and offering new opportunities for fiscal optimisation.

Background

Gunfleet Sands Ltd, along with other offshore windfarm operators, found themselves in a prolonged dispute with HMRC over the eligibility of nearly £48 million in predevelopment expenditure. These costs were incurred before any physical assets were installed, covering feasibility studies, environmental assessments, and technical surveys essential to the design and installation of wind turbines.

What made this case particularly contentious was the nature of the expenditure. Unlike traditional capital costs (such as purchasing or installing machinery) these were intangible, preparatory activities. HMRC argued that such costs were too remote from the actual provision of plant and machinery to qualify for capital allowances. The issue raised broader questions about how infrastructure projects are planned and whether the tax system adequately reflects the realities of modern development.

Technical context

The legal foundation of the case rested on Section 11 of the Capital Allowances Act 2001, which allows relief for capital expenditure “on the provision of plant or machinery.” The interpretation of this phrase became the central battleground.

Initially, the First-tier Tribunal sided with the developers, recognising that the studies were integral to the safe and effective installation of the turbines. However, the Upper Tribunal reversed this decision, adopting a narrower view that only direct costs such as purchasing, transportation, and installation should qualify.

The Court of Appeal ultimately reinstated the broader interpretation, emphasising that the phrase should be understood in its ordinary language and commercial context. It ruled that expenditure which informs the design and installation of plant, and is incurred in the course of bringing that plant into existence, can indeed qualify. This decision rejected HMRC’s rigid approach and acknowledged the complexity of modern infrastructure development.

HMRC’s position throughout the case was that only costs directly tied to the physical provision of plant should be eligible. They viewed feasibility studies and environmental assessments as either too remote or related to land acquisition. While the Court of Appeal disagreed, HMRC has appealed to the Supreme Court, with a hearing expected in early 2026. Until then, the Court of Appeal’s ruling stands as the prevailing interpretation.

Impact

The implications of this case are far-reaching. It reinforces the importance of interpreting tax legislation in a way that reflects commercial reality, rather than adhering to overly restrictive definitions. For developers, the ruling provides greater certainty and flexibility in claiming relief on early-stage project costs.

One of the key lessons is the importance of continuity. The Court made clear that only expenditure linked to projects that proceed to completion can qualify. This means that feasibility studies for abandoned projects remain outside the scope of relief.

Another critical distinction is between design and feasibility. Costs that inform how a project proceeds, such as technical surveys used to determine turbine placement, are eligible. In contrast, costs that assess whether a project should proceed, like general viability studies, are not.

This principle has direct relevance to new build construction projects. Developers of commercial buildings, logistics hubs, or mixed-use developments for example often incur substantial costs related to the installation of plant and machinery. These can range from ground condition surveys to energy modelling and structural assessments. Where these studies directly inform the design and installation of plant or machinery within the building, as can be the case with HVAC systems, lifts, or renewable energy installations, they may now fall within the scope of allowable capital expenditure. The Gunfleet Sands ruling provides a clearer framework for assessing these costs and strengthens the case for claiming relief, provided the project reaches completion and the link between study and installation is well documented.

It is an important to note the distinction between professional fees that can qualify for plant and machinery allowances under Capital Allowances Act 2001, Section 11, as opposed to structures and buildings allowance. This is governed by Section 270BB, and only expenditure on the construction of a building or structure qualifies, and professional fees are included only where they form part of that construction cost. Care is needed to keep apportionment principles separate for these two regimes.

For clients, this means careful documentation is essential. Linking studies directly to the design and installation of plant will be crucial in substantiating claims. It also highlights the need to apportion costs where studies serve multiple purposes, ensuring that only the qualifying portion is claimed.

How we can help

At TFI Group, we understand the complexities of fiscal incentives and the challenges of navigating capital allowance claims. The Gunfleet Sands decision has created new opportunities, but also new responsibilities for developers, and investors and their advisors.

We offer comprehensive capital allowance reviews to identify qualifying expenditure and ensure claims are robust and defensible. Our team helps structure claims to maximise relief, including apportioning mixed-purpose costs and preparing detailed documentation to support eligibility.

We also engage directly with HMRC on behalf of our clients, providing expert support in responding to queries and resolving disputes. Beyond individual claims, we advise on strategic planning to ensure future projects are structured in a way that optimises tax relief from the outset.

Whether you’re developing renewable energy infrastructure, constructing new buildings, or investing in large-scale commercial projects, TFI Group is here to help you unlock the full value of available fiscal incentives.

Author: Sam Moore