Delay to Consultation on Tax Treatment of Predevelopment Costs – What This Means for You

At the Autumn Budget 2024, the UK government announced plans to consult on the tax treatment of predevelopment costs. However, this consultation has now been delayed, following a key ruling in the Court of Appeal that may reshape how capital allowances are applied to pre-construction expenditure.

The Orsted v HMRC Case – A Victory for Taxpayers

The delay comes after the ruling in the case of Orsted West of Duddon Sands (UK) Ltd and others v HMRC [2025] EWCA Civ 279, which provided much-needed clarity on capital allowances for predevelopment expenditure.

The case centred on whether businesses could claim tax relief on costs incurred before construction work begins, such as:

• Environmental impact assessments
• Geophysical and geotechnical studies
• Design and installation planning

HMRC had argued that these pre-construction costs did not qualify for capital allowances. The Court of Appeal disagreed, ruling in favour of the taxpayer and introducing a new three-limb test to determine if expenditure qualifies.

The Court’s Three-Limb Test for Capital Allowances

According to the ruling, for predevelopment expenditure to qualify for capital allowances, it must meet these three criteria:

1. The expenditure must inform the design or installation of the asset in question.
2. The asset must be constructed or acquired as a result.
3. The costs must not arise from the taxpayer’s unique financial situation (e.g. financing costs).

This test significantly broadens the scope for businesses to claim capital allowances on early-stage development costs, giving them more tax planning flexibility.

What Happens Next?

While this ruling is a positive development for taxpayers, it might not be the end of the story:

• HMRC may appeal the case to the Supreme Court.
• The government has signalled its intent to review and potentially simplify the legislation on capital allowances and predevelopment tax treatment.

This means that we could see legislative changes in the near future, depending on the final legal outcomes and government policy direction.

How This Affects Your Business

If your business incurs pre-construction development costs, this ruling could have a direct impact on your tax position. Whether you’re involved in property development, renewable energy, infrastructure projects, or large-scale capital investments, this is a crucial development to be aware of.

What Should You Do Now?

• Review any current or planned predevelopment expenditure to determine if it may now qualify for capital allowances.
• Stay informed about any further legal developments or policy updates.
• Seek professional advice to ensure your business is fully compliant and making the most of all available tax relief opportunities.

We’re here to help. Our team can provide tailored guidance on how this ruling may affect your projects and how to structure your development costs efficiently.

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