The Gunfleet Sands decision on capital allowances: implications for businesses

The Supreme Court’s April 2026 judgment in Orsted West of Duddon Sands (UK) Ltd & others v HMRC (commonly referred to as the Gunfleet Sands case) is an important milestone for any business investing in large capital projects. It provides long-awaited clarity on where the boundary sits between costs that qualify for plant and machinery capital allowances and costs that fall outside the regime as broader pre-development expenditure.

For businesses delivering capital intensive projects particularly in energy, infrastructure, real estate and manufacturing, the decision reinforces that some indirect and professional costs can still qualify, but only where they have a close and direct link to the provision of the plant itself. As a result, capital allowances considerations will need to be embedded into project planning from an early stage, supported by robust documentation and clear cost coding to substantiate claims and minimise the risk of challenge. 

Case background 

The case concerned the treatment of c£48 million of costs incurred by the taxpayers on feasibility studies, environmental surveys and other technical work undertaken during the development of four offshore windfarms. 

The studies and surveys in question were undertaken over several years and involved a wide range of specialists, including both external consultants and employees seconded from within the wider Orsted group. Together, these studies informed multiple stages of the projects, ranging from early investment decision‑making to the detailed design of foundations, turbines and installation methods.

The findings of these studies influenced the design and installation of the windfarms. For example, extensive surveys of seabed conditions, sea states, and marine life affected the type and design of foundations used, with only two of the 258 foundations ultimately installed being identical. Similarly, different turbine and tower configurations were selected depending on the characteristics of individual locations. Feasibility and design typically took around six years, followed by a construction phase lasting a further four years, during which additional studies were undertaken. 
This was a highly anticipated case as feasibility study, survey and design costs have not previously been considered by the courts in significant depth. Previous cases have focussed on the physical provision of assets (ie the costs of constructing, installing and transporting assets) and the JD Wetherspoon PLC v HMRC 2012 case commented on the treatment of associated preliminaries. The legislation on this area is relatively open to interpretation – s11(4) CAA 2001. 

The general rule is that expenditure is qualifying expenditure if: 

• it is capital expenditure on the provision of plant or machinery wholly or partly for the purposes of the qualifying activity carried on by the person incurring the expenditure.

HMRC’s manual (page CA20070) notes that professional fees, including survey fees, architects’ fees, quantity surveyors’ fees, structural engineers’ fees, service engineers’ fees and legal costs, preliminaries, and indirect costs incurred over the duration of a project on items such as site management, insurance, general purpose labour, temporary accommodation and security, only qualify for capital allowances where they relate directly to the acquisition, transport, installation and provision of plant and machinery.  

What was the outcome of the first three hearings of this case? 

At first instance, the First Tier Tribunal (FTT) in 2021, held that a number of studies could qualify, while others could not. Both parties appealed that decision. In 2023, the Upper Tier Tribunal (UTT)  
ruled in HMRC’s favour, concluding that the costs for all of the studies were too remote from the provision of the plant and machinery. The taxpayer appealed to the Court of Appeal (CoA) but withdrew its original claims for certain categories of studies.

In 2025, the CoA overturned the UTT’s decision and held that all of the studies and surveys still in question qualified for plant and machinery allowances. HMRC then appealed to the Supreme Court.  

Judgement by the Supreme Court in 2026 

The Supreme Court heard the appeal in late 2025 and delivered its decision on 15 April 2026.  

The Court allowed HMRC’s appeal, concluding that the expression ‘on the provision of plant’ should be interpreted narrowly, according to its ordinary everyday meaning, and that this required a close connection between the expenditure incurred and the plant itself. 

In reaching its decision, the Court contrasted the statutory wording with other provisions in tax legislation that use broader phrases eg 'in connection with' or ‘relating to’ which connote a much looser nexus. The judgement rejected the argument from the taxpayer’s counsel that there was no concept of ‘necessity’ or ‘exclusively’, within ‘on the provision of’. However, the Court did acknowledge that costs beyond those of basic necessity could qualify, such as further refinements of the design to improve the performance of the turbines. 

The judgement also emphasised that a principle of capital allowances is to take the place of the accounting concept of depreciation costs. On that basis, the Court said that the survey costs do not depreciate in value in the same way that the physical costs of the assets do, having only a ‘tangential’ connection with the physical assets. 

While earlier cases had commented more broadly on design costs, this judgement focused on the eligibility of environmental surveys and technical studies, reserving comment on the treatment of the final design costs (those used directly by a manufacturer to fabricate the plant). The judges also noted the disparity between such costs and the embedded design costs commonly included within 'off-the-shelf' plant and machinery which are commonly accepted as qualifying for capital allowances. 

It is also important to note that the judgement (and indeed HMRC) acknowledged that some survey costs may still be eligible for plant and machinery allowances, provided that they relate directly to the acquisition, transport, installation and provision of plant and machinery.  

What this means for your business

In light of the Supreme Court judgement, businesses will now need to review historic claims and financial models to assess the potential impact of the decision. The judgment also highlights the need for detailed records demonstrating how individual studies and surveys relate directly to the provision of plant and machinery, particularly given the time lag between incurring costs and undertaking capital allowances reviews. The principles set out by the Court are also relevant to construction and refurbishment projects that incur indirect design and data‑gathering costs.  

Further to this, the Autumn Statement of 2024 announced a consultation into pre-development costs. This consultation has been on hold whilst this case was being appealed, but it is possible that this consultation will now re-open, potentially focussing on the treatment of wider survey and design costs.  

For more information, get in touch with Jeremy Chapman and Stephen Foster.