Recent court cases have provided further evidence of the many grey areas in the field of capital allowances. In this article, Ray Chidell MA (Cantab), ATT, CTA (Fellow), a tax specialist with Six Forward, explains and illustrates the issue, and explains how businesses can maximise their legitimate claims without creating present or future problems with HMRC.
When correctly claimed, capital allowances offer a valuable form of tax relief. What is more, the relief is wholly legitimate, to the extent that capital allowances have frequently been mentioned by HMRC – and even in Parliamentary discussions – as an example of acceptable tax planning. So every tax-paying business that is entitled, under the law, to claim capital allowances should certainly be taking advantage of the available relief.
The need to get it right
The key point, of course, is that the relief must be correctly claimed. If too few allowances are claimed, the business pays more tax than it has to. If the claim is excessive, it may be challenged by HMRC, either immediately or for up to 20 years later under HMRC’s “discovery” powers, and there is a risk of incurring interest charges and even penalties.
Finding that balance, and entirely removing the risk of penalties and delayed tax charges, is the role of the professional capital allowances adviser. At Six Forward, we have implemented rigorous procedures to achieve that goal.
How things can go wrong
There are two ways in which a capital allowances claim may bring problems rather than solutions.
The first hurdle to negotiate is the fine detail of the relevant tax legislation, mostly as contained in the Capital Allowances Act 2001. Like any other form of tax relief, capital allowances are underpinned by detailed rules. These can be complex, especially in relation to fixtures in property, and there are no short cuts. It is necessary to recognise where the pitfalls lie, and to navigate each part of the legislation rigorously to determine if there is any entitlement to claim in given circumstances. That process requires a high level of technical training and also the day-to-day experience of handling every variety of capital allowances claim.
The second difficulty relates to case law interpretations. Capital allowances concepts have a history of well over 100 years, but the most recent case law shows that many fundamental terms remain open to different interpretations. These difficulties may relate to concepts as basic as the meaning of “plant or machinery” or of expenditure being “on the provision of” something.
In recent years, we have seen some cases involving huge amounts of expenditure. These have concerned everything from vast hydroelectric complexes (SSE Generation), to facilities for processing radioactive waste (Urenco), to satellite launches (Inmarsat), to an enormous quay wall (Mersey Docks) to offshore windfarms (Gunfleet / Orsted). In each instance, the case reports provide valuable guidance when considering capital allowances claims for more everyday expenditure, for example on offices or hotels.
As HMRC have just been granted permission to take the last of these to the Supreme Court, let’s look at the history of this case to illustrate the difficulty.
Orsted West
This case was first recorded as Gunfleet Sands, but as the appeal progressed through the courts it took on the name Orsted West, being the name of a parent company. The case was primarily concerned with the costs of preliminary studies relating to the design and construction of offshore wind farms. One company in the group was claiming for relief on almost £1 billion of expenditure.
A very brief summary is all that is needed to show how uncertain capital allowances claims can be:
- The First-tier Tribunal (FTT) ruled that some of these costs qualified but others did not.
- Both HMRC and the company appealed against that decision.
- The Upper Tribunal (UT) ruled in HMRC’s favour, finding that the FTT interpretation had been too generous towards the claimant company. The UT ruled that the words “on the provision of plant” (relevant for all capital allowances claims) should be applied strictly and narrowly.
- The Court of Appeal explicitly disagreed with this view, holding that qualifying expenditure “encompasses costs of design as well as costs of installation, and that the eligible expenditure will extend to costs of studies which informed such installation or design”, and therefore allowing far more allowances.
- HMRC’s appeal to the Supreme Court is due to be heard on 3 February 2026.
So this case shows how there may be uncertainty, sufficient to confound the tax tribunals and courts, over what is in fact a fairly basic capital allowances question: can you claim plant and machinery allowances for preliminary studies? The other cases referred to above relate to different technical issues that raise similar uncertainties.
Practical implications
Rather than addressing those particular technical details, the focus of the rest of this article is on the practical implications of the uncertainty itself. What should a business do when faced with such a degree of uncertainty?
The answer comes in three parts:
First, it is necessary to have a clear understanding of where the case law stands at the time the claim is prepared. Each court has its own level of authority, with the Supreme Court standing at the top of the pyramid. Any claim that has grey areas must be tested against the current understanding of the law. Needless to say, this involves technical tax training as to how the law is meant to be applied, and also an up to date awareness of recent case law developments. If a court has specifically stated that expenditure on a particular type of expenditure does not qualify for capital allowances then a claim that goes counter to that view will be a red flag for HMRC. Even if the point is not picked up immediately, there is a real risk that HMRC will be able to launch a successful challenge many years later.
Secondly, though, no two cases are identical. The principles of any given case can be applied to new circumstances, but the details always differ. It may be possible to draw a legitimate distinction between two apparently similar cases. However, one tax practitioner’s view that there is a distinction does not guarantee that HMRC will share that conclusion. This then leads to the third aspect, which is disclosure.
The temptation when presenting a substantial claim for tax relief may be to bend the presentation of the facts so as to show the favourable angles. The real danger here is that the claim is accepted in the short term, but challenged at a later date, with potentially disastrous consequences once the business has moved on. The tax concept of “discovery” is a whole topic in itself but, in brief, HMRC can make a discovery (and re-open accounts submitted many years earlier) where the tax officer could not have been aware of the correct tax position on the basis of information made available. Turning this around, if a business makes a sufficient disclosure of the facts, that will offer full protection against a future discovery assessment (and, incidentally, against the risk of penalties in the short term). Once more, correct presentation of the facts involves nuance and technical expertise.
