Following the Supreme Court’s decision in Orsted West of Duddon Sands (UK) Ltd v HMRC, which denied capital allowances on various early-stage surveys and professional fees connected with an offshore windfarm development, HMRC have updated their Capital Allowances manual to provide further clarity on the treatment of professional fees, preliminaries and design costs.
The revised guidance at CA20070 (professional fees and preliminaries) confirms HMRC’s continued acceptance of allocating preliminaries and professional fees on a pro rata basis, consistent with the decision in JD Wetherspoon v HMRC. The updates include a £5 million threshold above which HMRC may consider challenging this approach. However, HMRC state that use of a pro rata methodology, even on larger projects, will not normally be challenged on that basis alone, and Valuation Office advice must be obtained before such a challenge is pursued (albeit the guidance does contain a comment that in larger projects “there will often be other capital allowances aspects that need to be enquired into”). This reaffirms the importance of disclosure to HMRC in reports and tax returns, so they can see the levels of preliminaries and satisfy themselves that there are no other areas that merit opening an enquiry.
A new section on design costs has also been added. As they hinted in the Orsted case, HMRC accept that "the cost of producing the final detailed engineering designs without which the plant could not be manufactured or installed, and which are incurred as part of the process of providing the plant" may qualify as being ‘on the provision of’ plant and machinery. By contrast, "studies or surveys carried out at a preparatory or early stage of a prospective investment" are not considered to meet this threshold. While some clarity is welcome, uncertainty remains over where the boundary lies in practice, particularly where design work evolves through multiple iterations before and during construction (as is common with architect’s drawings, for example).
HMRC have also introduced a dedicated manual page (CA95010) summarising the Orsted decision. This confirms their view that expenditure on preparatory studies and surveys of the type considered in the case does not qualify for plant and machinery allowances. However, taxpayers looking for certainty on what costs can qualify may be disappointed by the concluding sentence 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". Updates have also been made with reference to the Orsted case to CA20060 concerning the restricted meaning of ‘on’ and ‘on the provision of’, highlighting HMRC’s relatively narrow interpretation of these words, in line with the Supreme Court’s decision.
Alongside these updates, and as part of the L-Day package, HM Treasury has launched a consultation on the tax treatment of predevelopment costs. The consultation seeks views from businesses and advisers on the level of certainty provided by the Orsted judgment and HMRC’s revised guidance, the types of predevelopment expenditure commonly incurred, and how such costs should be treated under the capital allowances regime. It also seeks input as to whether current rules influence investment decisions and affect the UK’s competitiveness as a destination for investment. The deadline for responding is 21 September 2026.
Although no legislative changes have yet been proposed, the consultation suggests HM Treasury is listening to concerns, particularly from the infrastructure and renewable energy sectors, that the current approach may discourage investment into the UK. It could signal a willingness to consider whether the capital allowances regime is delivering the investment incentives intended for these types of projects.