Consultation reviewing tax relief on pre-development costs published by UK Treasury

The consultation document published on Monday seeks to understand more about the pre-development costs that businesses incur when undertaking investment projects; the current tax treatment of these costs; and the impact that tax relief has on commercial decision making, investment viability and the UK’s competitiveness. It follows a recent Supreme Court decision denying capital allowances for pre-development costs in relation to a windfarm. The costs in question included preliminary environmental assessments and engineering studies.

Jamie Robson, a tax expert at Pinsent Masons, said: “Following the Supreme Court decision on capital allowances in the Orsted case, the expected consultation on pre-development expenditure is welcome. At this stage, it might be better described as a request for information, which suggests that any actual legislative changes in this area will be some time coming. The government is looking at gaining an understanding of what the relevant expenditure is, its impact on investment decisions and a jurisdictional comparison.”

The consultation focuses on pre-development costs that are more directly required before plant and machinery can be installed or operated. It does not consider pre-development costs relating to intangible assets, land transactions or abortive expenditure. Following the recent Supreme Court decision, the Treasury is “gathering information on potential areas of uncertainty in order to provide greater clarity to businesses”.

Robson encouraged businesses and stakeholders to engage constructively with the consultation. “It is likely to be key to any positive outcome that there is a significant response from those impacted and therefore any impacted businesses, and their advisors, should be sharpening their pencils over the summer and responding to the consultation.”

Businesses can claim capital allowances – a form of tax relief – on certain ‘qualifying capital expenditure’. Capital allowances for plant and machinery are limited to expenditure “on the provision of” plant and machinery. Costs on the purchase, construction, installation and transport of plant and machinery would generally qualify for tax relief whereas certain pre-development costs, such as securing planning permission, would not qualify.

Jake Landman, a tax disputes expert at Pinsent Masons, welcomed the government’s acknowledgment that that there remains uncertainty on tax deductibility of certain costs. “The desire to understand the commercial impact on investment decisions of certain costs not being deductible is also welcome and it will be important for submissions to be comprehensive in this respect,” he said.

“Hopefully the government's stated objective to make sure the UK regime attracts investment will lead to some genuinely positive changes. The consultation closes in September and currently there is no timeline for further developments. This continues to be an area to watch closely."