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At Autumn Budget 2024, we were promised a consultation on the tax treatment of predevelopment costs. However, following the Court of Appeal’s decision on a recent case, the government is postponing publication of the consultation while it considers the implications of the decision.
The case, which is known as Orsted West of Duddon Sands (UK) Ltd and others v HMRC [2025] EWCA Civ 279, marked a victory for taxpayers and provides clarity on how capital allowances are treated on pre-construction development costs.
Capital allowances are a form of tax relief that businesses can claim when they pay out on capital expenditures. This particular case arose because of a capital allowances claim for expenditure on pre-construction development work in the years before the resulting buildings became operational. H M Revenue & Customs (HMRC) contended that this expenditure did not fit within the legal definition of what can qualify as a capital allowance and so denied the claim.
The Court of Appeal, however ruled that HMRC’s view was too narrow and upheld the taxpayer’s claim. The Court developed a ‘three-limb’ test for whether expenditure can qualify, as follows:
1. The taxpayer can demonstrate that the expenditure informed the design or installation of the asset in question.
2. The asset in question was actually acquired or constructed.
3. The expenditure wasn’t because of the particular circumstances of the taxpayer. This would, for instance, rule out financing costs.
The decision meant that costs for environmental impact assessments, geophysical and geotechnical studies and other design and installation work could qualify for capital allowances.
Is this the end of matters?
Possibly not. HMRC may appeal the case to the Supreme Court. However, the government has committed to looking at how to provide greater clarity on what qualifies for different capital allowances and simplifying the law and tax treatment of predevelopment costs.
Therefore, once the government has digested the results of the decision, they may move to adjust the legislation rather than continue to pursue the matter through the courts.
If you need any advice on how the appeal decision may affect predevelopment expenditure you have made or are planning to make, please get in touch. We would be happy to help you!
See: https://www.gov.uk/government/news/tax-treatment-of-predevelopment-costs-update-on-consultation
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