Tax treatment of predevelopment costs: consultation

The government has published a consultation on the extent to which capital allowances are available for predevelopment costs following the Supreme Court judgment in Orsted West of Duddon Sands (UK) Ltd. The consultation indicates that the government is not currently minded to legislate to change the tax treatment of predevelopment costs bearing in mind the expense of significantly extending reform, but is seeking to better understand where issues of uncertainty remain following the Supreme Court judgment and how any such uncertainty may affect business decisions around where and whether to invest.

Whilst businesses may be disappointed by the narrow scope of the consultation, there is clearly an opportunity to make representations on the wider question of how the current tax rules impact investment decisions and the competitiveness of the UK as a place for major projects. These suggest that whilst the government may not “currently” be minded to legislate, if the feedback indicates that the UK is being significantly disadvantaged by the inability to obtain tax relief for certain predevelopment costs (such as those early surveys in Orsted West of Duddon Sands), then the government may not have closed the door on reform.

Background

For some investment projects, significant amounts of expenditure may be incurred in the early stages before work begins (predevelopment costs). Predevelopment costs might include costs to determine the project feasibility and viability, to obtain regulatory approvals such as planning consent, and preparatory activities for the development. Where such expenditure is income in nature, it can generally be deducted when calculating trading profits. However, where expenditure is capital in nature, it will generally only be deductible if it qualifies for capital allowances. However, capital allowances do not cover all capital expenditure incurred by businesses. In particular, capital expenditure only qualifies for plant and machinery allowances insofar as it is incurred “on the provision of” the asset. Expenditure incurred on the acquisition, construction, installation and transport of plant or machinery will generally be incurred ‘on the provision of’ the plant or machinery.

In the recent case of Orsted West of Duddon Sands (UK) Ltd v HMRC, the Supreme Court confirmed that expenditure "on the provision" of plant should be given a restricted meaning, limited only to expenditure directly on the provision, including installation, of the plant and not on broader reports and surveys which enabled or contributed to the project as a whole. In that case, the taxpayer argued that the development of an offshore windfarm necessarily involved a number of steps including the carrying out of various environmental and metaocean surveys and assessments, including ones that informed and enabled the design of the individual wind turbine foundation locations and foundations. However, the Court held that capital allowances were not available for expenditure on carrying out studies and surveys which provide the business with advice about how to choose or design plant.

Following earlier decisions in this case, the government indicated in its Corporate Tax Roadmap (published in 2024) that it would consult on predevelopment costs, stating: "A core pillar of our Growth mission is to encourage investment in renewable energy and major infrastructure projects, and the government is therefore keen to understand the impact of the tax rules on the costs of such investments".

Consultation

The focus of the consultation appears to be on the question of tax certainty around the treatment of costs associated with major projects. The consultation recognises that certainty is a crucial aspect of encouraging investment which is, in turn, crucial to the goal of boosting growth in the UK and is keen to understand how the tax treatment of predevelopment costs impacts on investment decisions. Therefore, the government has published the consultation “to better understand the predevelopment costs business face, businesses’ understanding of the tax treatment of these costs, and how impactful the tax deductibility of predevelopment costs would be on commercial decision making, investment viability and the UK’s competitiveness”.

In addition, the focus of the consultation is very much on predevelopment costs that are directly required before plant and machinery can be installed or operated. The government is specifically not considering predevelopment costs that relate to intangible assets, land transactions, or abortive expenditure.

The aim of the consultation, therefore, is to gather feedback so that the government can better understand:

• the predevelopment costs incurred when undertaking investment projects
• stakeholder understanding of the tax treatment of those costs under existing legislation
• the impact of whether predevelopment costs are deductible or not for tax purposes on investment decisions, and on wider government goals, such as growth.

The consultation notes that HMRC has updated its guidance on the correct tax treatment of predevelopments costs, such as design costs, following the Supreme Court decision and is keen to understand if businesses remain uncertain as to the correct tax treatment and the commercial impact of the current rules. The government is particularly keen to have examples of where uncertainties remain and of any changes to business structures or the incurring of predevelopment costs as a result of the tax position.

Although seeking feedback on the impact of the tax treatment of predevelopment costs on investment decisions and the competitiveness of the UK, the ultimate aim appears largely limited to providing greater certainty and clarity for businesses on the correct tax treatment. The consultation makes it clear that the government “is not currently minded to legislate to change the tax treatment of these costs”. Nevertheless, there are clearly opportunities to make wider representations. For example, Question 10 asks, “To what extent do you consider that predevelopment costs should qualify for capital allowances or other forms of tax relief? Please explain your reasoning and indicate which types of predevelopment costs you believe are most important to have tax relief.” Indeed, Chapter 4 of the consultation is entirely focussed on the impact of the current rules on investment decisions, including comparison with other jurisdictions. These questions perhaps indicate that the government has not entirely closed the door on more significant changes to the tax treatment of such costs if the responses it receives indicate the UK economy might benefit.

Comment

The consultation is open until 21 September 2026 and responses should be sent to predevosts@hmtreasury.gov.uk. The government will be holding stakeholder meetings through the summer and intends to publish a response to the consultation in due course.