The tax treatment of predevelopment costs has been the subject of a recent Supreme Court decision. This is likely to mean that capital allowances will be restricted for some predevelopment costs. The government has consulted on the impact of the decision and whether the current rules could affect investment decisions.

Predevelopment costs are costs incurred in the early stages of a project, before the main development work begins. They can include feasibility studies, surveys, design work, planning and other regulatory approvals and preparatory activities. The amount and type of costs will vary between projects and sectors.

The Supreme Court decision earlier this year established that expenditure must be incurred ‘on the provision of’ plant or machinery to qualify for plant and machinery capital allowances. This means that some predevelopment costs will not qualify. For example, expenditure on securing planning permission would not normally meet this test. Where such expenditure is capital in nature, it may therefore receive no tax deduction.

A HM Treasury consultation was published in July and sought views on the types of predevelopment costs businesses incur and the extent to which uncertainty remains following the Supreme Court decision and the effect of the current rules on investment decisions. The government says it is not currently minded to change the tax treatment of these costs.

Concerns have been raised that this could increase the commercial risk associated with long-term development projects, particularly where substantial costs are incurred before a project proceeds. There have been calls for clearer HMRC guidance on the treatment of historic claims and future tax relief for predevelopment costs.

The government has said that it will publish its response to the consultation in due course. In the meantime, businesses undertaking significant investment projects should review the treatment of their predevelopment expenditure and consider whether costs previously treated as qualifying for capital allowances remain eligible under the current rules.