At a time when the government is staking its economic agenda on infrastructure-led growth, the Supreme Court shut the door on capital allowances for the bulk of predevelopment costs and disappointingly, the long-promised consultation may do little to reopen it.

In previous blog posts (Court of Appeal’s decision in Gunfleet Sands: a boost to the UK government’s infrastructure drive and Gunfleet Sands: Supreme Court rules on the limits of “expenditure on the provision of plant”)], we’ve followed the fluctuating approach of the courts to predevelopment costs in the case of Gunfleet Sands (referred to as Ørsted West of Duddon Sands at the Court of Appeal and Supreme Court). 

Back in October 2023, the Upper Tribunal took a narrow view of the scope of expenditure which qualifies for plant and machinery capital allowances under section 11 of the Capital Allowances Act 2011. Keen to promote the UK’s renewable energy credentials, the new Labour government announced a consultation on the tax treatment of predevelopment costs as part of its October 2024 Corporate Tax Roadmap. The consultation was put on hold after the Court of Appeal’s more taxpayer-friendly judgment, but the government has now decided to press ahead with its consultation in the wake of the Supreme Court decision, upholding the appeal by HMRC.

That decision leaves the majority of expenditure on predevelopment studies ineligible for capital allowances. However, the cost of these studies can be high, particularly for significant infrastructure projects (such as nuclear power plants, offshore wind farms, airports etc.) which require a large number of studies and surveys to inform their design and to feed into applications for the required regulatory approvals. 

HMRC published updated guidance in the Capital Allowances Manual at CA95010 on the Gunfleet Sands case earlier this month. HMRC states the case confirms that not all capital expenditure qualifies for capital allowances, even when this expenditure is necessary for a project to proceed and notes that “decisions in this area will continue to be highly fact-specific, and the boundaries of section 11(4) will still need to be assessed case by case”.

In the context of the continued need to boost the UK’s economic growth, the consultation focuses on whether the lack of capital allowances is impacting investment decisions and the UK’s competitiveness. An important piece of that puzzle will be what costs taxpayers think will fall outside of the capital allowances regime. Perhaps picking up on the Supreme Court’s decision not to express a view on the treatment of the cost of the final technical drawings and specifications, which were not at issue in Gunfleet Sands, the consultation also queries whether uncertainties remain for taxpayers applying these rules. 

But, despite raising these questions, underlying the whole exercise is the government’s statement that it “is not currently minded to legislate”, given that the UK already “has a competitive regime of investment support”, including full expensing available for most new plant and machinery in the year of expenditure (but not, of course, for the predevelopment expenditure required to build these). The consultation refers to the need to balance capital allowances for predevelopment costs against generosity elsewhere in the system, in a thinly veiled reference to the straitened fiscal circumstances. 

Companies affected will need to respond to the consultation by 21 September if they are to influence the government’s position.