Supreme Court decision on tax relief for pre-development costs could deter investment

The Supreme Court has ruled that significant pre-development expenditure, incurred in windfarm construction projects, is not eligible for capital allowances. The government should launch its promised consultation on the tax treatment of pre-development costs as soon as possible, to address the impact on future investment.

The Supreme Court issued its judgement in Orsted West of Dutton Sands (UK) Limited (now named Orsted Schroders Greencoat WODS HoldCo Limited) and others v HMRC on 15 April. The case was previously known as 'Gunfleet Sands'.

The court unanimously allowed HMRC’s appeal against the March 2025 Court of Appeal decision. This comes after a lengthy period of uncertainty about the availability of tax relief for pre-development costs.

The ruling could potentially deter future investment in major infrastructure and renewable energy projects.

Case history

Orsted is the parent company of a group that owns and operates windfarms off the English coast. In the course of planning and designing the windfarms, the group incurred considerable expenditure on a range of environmental and technical reports and studies.

 The question for the Supreme Court was whether this expenditure qualified for capital allowances under s11(4) CAA 2001 as "capital expenditure on the provision of plant".

By the time the case reached the Supreme Court, two important points had been established:

• The ‘plant’ in each case comprised the generation assets of the windfarm treated as a single item, rather than each individual turbine.
• The expenditure on the reports and studies was capital in nature, rather than revenue (so was not deductible as pre-trading revenue expenditure under s61 CTA 2009).

However, determining the availability of capital allowances wasn’t straightforward, as illustrated by the differing judgments earlier in the process. The First Tier Tribunal held that most of the expenditure did qualify for capital allowances under section 11. In 2023 the Upper Tribunal allowed HMRC’s appeal and decided that none of the expenditure qualified. The Court of Appeal then allowed Orsted’s appeal and held that the expenditure did qualify, prompting HMRC’s appeal to the Supreme Court.

The Supreme Court found in HMRC’s favour. It rejected Orsted’s argument that all the costs necessarily incurred to provide the windfarms should qualify as expenditure 'on' the provision of plant. Instead it decided that the statutory wording requires a close connection between the expenditure and the plant provided. Here, the court considered that the connection was not close enough.

Consultation on pre-development costs

The government’s 2024 Corporate Tax Roadmap, issued after the Upper Tribunal decision, said:

“The government is aware of business concerns regarding predevelopment costs, following the Gunfleet Sands Ltd and others vs. HMRC (2023) decision. We will explore this carefully with affected stakeholders through a consultation to be launched in the coming months, to help inform the government’s next steps and potential options. A core pillar of our Growth mission is to encourage investment in renewable energy and major infrastructure projects, and the government is therefore keen to understand the impact of the tax rules on the costs of such investments.”

However, in April 2025, the government issued an update on the consultation:

“Following the Court of Appeal judgement on 17 March on matters with significant readout across to this issue, the publication of the consultation on the tax treatment of predevelopment costs is being postponed. The government is considering the implications of the judgment for the consultation. To give stakeholders and government time to reflect on the judgement, the government will determine its next steps in respect to this consultation in due course.”

As the government acknowledged in 2024, businesses were concerned about the availability of tax relief for significant amounts of pre-development expenditure.

The Supreme Court’s confirmation that capital allowances are not available could have negative consequences for investment in future large infrastructure projects involving pre-development costs. The government should proceed with the promised consultation as soon as possible.

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