CIOT seeks law change on predevelopment costs after Orsted ruling

The Chartered Institute of Taxation has published its response to the government's consultation on the tax treatment of predevelopment costsTAX, following the Supreme Court's judgment in Orsted West of Duddon Sands (UK) Limited (now Orsted Schroders Greencoat WODS Holdco Limited) and others v HMRC [2026] UKSC 12Nationalarchives, given on 15 April 2026Nationalarchives. The consultation asks how far the tax treatment affects business and investment decisions and therefore wider government goals.

The main question in Orsted West was whether costs of pre-construction studies such as environmental assessments, marine surveys and technical studies could count as spending incurred on the provision of plant for capital allowances.TAX The companies, which own and operate offshore windfarms, spent considerable sums on surveys and studies of the seabed, sea conditions, flora and fauna and airspace while planning and designing the windfarms. It was common ground that the plant was each windfarm's generation assets treated as a single item, and that the study expenditure was capital rather than revenue in nature.

The Supreme Court allowed HMRC's appeal.Nationalarchives Lady Rose, with whom the other four justices agreed, held that the requirement in section 11(4)(a) of the Capital Allowances Act 2001 — that expenditure be capital expenditure "on the provision of" plant or machinery for a qualifying activity — is a narrow test requiring a close connection between the expenditure and the plant providedNationalarchives. The primary cost is the purchase price of the plant, with transport and installation costs also capable of inclusion; the "limiting curve" surrounds the plant and its provision. Expenditure on studies and surveys that advise the business on how to choose or design plant, informing the design without forming part of the plant itself, falls well outside that curve.Nationalarchives The studies were advice on the type of plant to use or on how and when to install it, and do not qualify even though the information was needed to design and build the windfarms as constructedNationalarchives.

The CIOT response says the close-connection test leaves the boundary between eligible and ineligible expenditure uncertainTAX, the lack of relief for essential business costs undermines a rational business tax systemTAX, and unpredictability deters investment and adds complexityTAX. It urges the government to consider seriously the strong case for legislative change in the short term to give clarity and tax relief for legitimate business expenseTAX, pointing readers to its full submission, the consultation document and its 2 June 2026 member feedback.

Capital allowances under Part 2 of the Capital Allowances Act 2001 turn on section 11, whose general rule allows plant and machinery allowances where a person carrying on a qualifying activity incurs capital expenditure on the provision of plant or machinery for that activity and owns the plant as a result.