The government has published the outcome of its consultation on the 'Tax treatment of predevelopment costs'. Respondents placed particular value on certainty, and the government intends to provide greater clarity on the current tax treatment.
On 13 July 2026, the government began a Consultation on the tax treatment of predevelopment costs.
- Predevelopment costs are incurred before an asset is built or installed; these include feasibility studies, regulatory approvals, site investigations, and design and engineering.
- Capital expenditure of this nature is only relieved through capital allowances if it is incurred 'on the provision of' plant or machinery. Otherwise, it is not deductible.
- The consultation followed the Supreme Court's decision in Orsted West of Duddon Sands (UK) Limited & Ors v HMRC [2026] UKSC 12.
- The Court considered the requirement that expenditure be 'on the provision of' Plant and machinery and held that expenditure must have a close connection with the plant or machinery provided.
- The studies and surveys provided to the court did not meet this test.
- HMRC subsequently updated its guidance to reflect this decision, including the treatment of design costs.
The consultation invited evidence in the following three broad areas.
Responses: Existing tax treatment and the effect of the Supreme Court judgment
Respondents considered that the Supreme Court judgment gave high-level legal clarity, but there were practical uncertainties for businesses.
- Areas of uncertainty highlighted included:
- The treatment of design and engineering costs.
- Mixed-purpose expenditure. Some studies may be required for regulatory approval, while also informing final design and installation.
- The treatment of professional fees, surveys undertaken after the final investment decision and costs embedded in lump-sum contracts.
- Whether the test should be applied when expenditure is incurred or retrospectively once the asset is complete.
- Respondents identified problems with applying the current test.
- Project records and invoices do not provide sufficient detail.
- Tax analysis may not take place until years after the work was undertaken, which increases compliance costs and can lead to inconsistent treatment.
- The cost of specialist advice needed by smaller businesses may exceed the benefit.
There was mixed evidence as to whether the Supreme Court judgement has affected how businesses structure or incur predevelopment costs.
- Some said projects were not being formally restructured, but others said that historic claims are being reviewed, modelling assumptions have been changed and a more cautious position is being adopted on the availability of allowances.
Responses: Types, purposes, scale and timing
Responses showed that there is a wide range of different types of costs and these can vary substantially by project and sector.
- Estimates of the proportion of total capital expenditure spent on predevelopment costs ranged from less than 1% for straightforward projects to more than 5% for complex ones.
Respondents said that costs are incurred for a variety of reasons.
- It was emphasised that costs commonly serve several purposes. A survey may support a consent application, inform the investment decision and determine the final engineering design.
- Most felt that predevelopment costs have limited recoverability when a project does not go ahead.
Most respondents felt that relief should be available for predevelopment expenditure. It was argued that genuine business costs should not be unrelieved simply because they are capital and do not meet the statutory test.
- Suggestions for how predevelopment costs could be relieved included:
- Widen the statutory test.
- Create a defined category of qualifying predevelopment expenditure.
- Treat costs as part of the assets they support.
- Establish a residual project pool.
- Adapt research and development allowances.
- Provide an upfront credit.
Responses: Impact on investment, commercial decisions and UK competitiveness
Views were mixed on how much the tax treatment of predevelopment costs determines whether a project proceeds.
- It was felt that permanently disallowing predevelopment costs, or uncertainty about their future, could make the UK less attractive than other jurisdictions.
- Respondents valued certainty; a clearly defined but less generous relief would be better than a generous allowance but uncertainty in how it could be used.
Next steps
The government acknowledges the challenge in determining the tax treatment of predevelopment costs.
- It intends to provide greater clarity on the current tax treatment.
- It will explore whether further changes to the guidance can be made via the work on 'Corporate Tax Simplification for Business Investment'.
- This would include more worked examples, clearer principles and improved apportionment rules.
- Legislative changes may also be explored, but only if guidance alone cannot provide the necessary certainty.
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In Orsted West of Duddon Sands (UK) Limited & Ors v HMRC [2026] UKSC 12, the Supreme Court (SC) applied a narrower interpretation to the term ‘on the provision of plant' than was applied by the Court of Appeal (CoA).
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