As explained in an earlier article, the decision of the Supreme Court in the case of Orsted (also referred to as Gunfleet Sands) has clarified the tax treatment of predevelopment costs. Costs of this nature typically include capital expenditure incurred by businesses: 

• to determine whether a project is viable;
• to obtain regulatory approval; and 
• in carrying out preparatory activities.  

Supreme Court decision 

In April 2026, the Supreme Court found that, for capital allowances to be available for predevelopment costs, there must be a "close connection" between the costs and the provision of the plant and machinery.  

This close connection test was a new formulation as to when capital allowances may be available for predevelopment costs and resulted in the Supreme Court reaching a decision that was contrary to that decided in the Court of Appeal. The Supreme Court decision has effectively clarified a narrower interpretation of the rules, restricting the availability of capital allowances with the result that some predevelopment costs will not attract tax relief.  

Government consultation 

In July 2026, the government published a consultation on the tax treatment of predevelopment costs to help it understand more about: 

• the types of predevelopment costs incurred by businesses when undertaking investment projects;
• whether, following Orsted, there is still uncertainty as to the correct tax treatment of predevelopment costs; and
• the impact of the tax treatment of predevelopment costs on investment decisions, and on wider government goals, such as growth. 

Clear guidance needed 

ICAEW recommends that HMRC publishes clear guidance on: 

• the treatment of historic claims following Orsted, including HMRC's expectations regarding closed periods and potential penalty exposure; and
• the application of the "close connection" test. ICAEW says that the new approach represents a departure from the apportionment methodology that some businesses will have adopted, requiring those businesses to make significant changes to their systems and processes.  

Case for a new tax relief 

Further, ICAEW has called on the government to consider introducing a specific mechanism to provide relief for appropriate predevelopment costs, for example, a targeted infrastructure relief.

ICAEW appreciates that this would come at a cost to the Exchequer. However, this would need to be balanced against the government’s aim to encourage investments of this nature to stimulate growth and investment in the UK and assist the UK in meeting emission targets and provide energy security. ICAEW has also made this recommendation in its pre-Budget submission (ICAEW Representation 75/26).