UK Government consultation on the tax treatment of predevelopment costs

The UK Government is consulting on the tax treatment of predevelopment costs following the Supreme Court decision in the Orsted case. It’s looking for views and evidence on the types of costs incurred, their treatment under the current rules, and the impact on investment decisions.

After the ruling in Orsted West of Dutton Sands (UK) Limited (now named Orsted Schroders Greencoat WODS HoldCo Limited) and others v HMRC, we raised concerns that denying capital allowances for significant predevelopment costs could have negative consequences for investment in future infrastructure projects. We suggested that the government should proceed with the promised consultation on the tax treatment of these costs as soon as possible.

The consultation has now been published by HM Treasury. The introduction states that “The government is conscious of the long road to certainty following several appeals, the appetite for clarity, and the cost of significantly extending reform, and is not currently minded to legislate to change the tax treatment of these costs.” However, change doesn’t appear to have been completely ruled out. The government is asking for input in three areas:

Certainty

HMRC has updated its guidance (in CA95010, CA20060 and CA20070) to address areas of uncertainty raised by businesses following the judgment, such as the treatment of design costs. 

The government wants to know:

• How the Supreme Court’s judgment in Orsted has affected understanding of the tax treatment of predevelopment costs.
• To what extent has the Supreme Court decision clarified the treatment of predevelopment costs in practice?
• Are there specific aspects where uncertainty remains (taking into account HMRC’s updated guidance as well as the judgment)? Examples requested.
• Are there are any practical challenges in applying the rules (details requested)?
• Has the judgment affected how businesses structure or incur predevelopment costs? 

Types of predevelopment costs

The government is not considering predevelopment costs relating to intangible assets, land transactions or abortive expenditure – the focus is on costs that are more directly required before plant and machinery can be installed or operated. 

The government wants input on:

• Types of predevelopment costs incurred in investment projects.
• The proportion of total capital expenditure for the project incurred on each type of predevelopment cost (and over what period are these incurred).
• The reasons for incurring the costs. For example, are they incurred for regulatory reasons, to inform business decisions or for other purposes?
• If a project does not go ahead, can any predevelopment costs be recovered (eg by selling surveys to another business)?
• To what extent should predevelopment costs qualify for capital allowances or other forms of tax relief? Please explain the reasoning and state which costs are most important. 

Impact on investment decisions

As noted earlier, the government is ‘not minded’ to legislate to change the tax treatment and notes that the UK has a ‘competitive regime of investment support’. However, it wants to understand:

• Whether the tax treatment of these costs impacts business and investment decisions – if so, why, and what are the impacts?
• What is the tax treatment of predevelopment costs in other jurisdictions? Does the treatment of these costs impact whether to invest in other jurisdictions, rather than the UK?
• Any other impacts of the tax treatment of these costs.
• How the tax deductibility of predevelopment costs compares in value to other potential changes? The consultation invites suggestions for particular incentives that would be preferable.

Send us your comments on the proposals

We would welcome members' feedback on the consultation. If you have any comments on any of the questions posed, please let us know as soon as possible, at the latest by Thursday 10 September.