Pre Construction Costs Tax Treatment Post Orsted

Architectural Design

Following the landmark Supreme Court ruling in Orsted, which established a narrow interpretation for capital allowances on the tax treatment of pre-construction costs, HM Revenue & Customs ('HMRC) has now updated its capital allowances manual (CA20070) to confirm its understanding of the latest treatment.

Interestingly, the UK government has also launched a formal consultation to assess the potential impact on business and evaluate the merits of legislative change following the ruling and narrowing interpretation. The consultation closes on 21 September 2026.

This article is intended to breakdown what this latest ruling means and provide practical guidance by reference to the RIBA Plan of Work to help demonstrate the potential implications across the stages of a typical construction project.

Pre Construction Costs Narrowing

It’s not just that more pre-construction or development costs for capital works will not qualify for plant and machinery allowances, Orsted lost its back-up argument to treat these costs as pre-trading revenue expenditure.  The expenditure was for the creation of an enduring capital asset and just because it did not qualify for capital allowances did not mean it should become deductible under general tax principles.

Underlying motivation and intention matter when determining an items capital or revenue tax treatment.  A good example of this is HMRC’s published view over the tax treatment of abortive costs.  In the case of ECC Quarries Ltd v Watkis [1975] 51TC153 the costs incurred in an unsuccessful planning application were regarded as capital despite accounting treatment as revenue and no asset being acquired or modified.

The Orsted case focused on plant and machinery allowances (PMAs) and specifically capital expenditure ‘on the provision of’ (CAA 2001 s11(4)a) plant or machinery.  It ruled that expenditure on studies or surveys carried out at a preparatory or early stage of a prospective investment, such as work undertaken to assess feasibility, select a site, gather data to inform the development, or inform whether and how a project will proceed, will not normally be expenditure “on” the provision of plant or machinery and will not qualify for PMAs. Neither will costs incurred for securing planning consent or similar regulatory approvals (too remote).

By contrast, design costs that form an integral part of constructing or installing a specific item of plant, for example 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 on the same basis as transport and installation costs.

Application to RIBA Plan of Work

Given that every capital project has some level of pre-construction work the above narrow interpretation is likely to raise some practical challenges on tracking costs associated with the different project stages of a construction project.

RIBA Stage	Brief Explanation	Primary Professionals	Additional / Specialist Input	Potential Tax Treatment (Post-Orsted)
0: Strategic Definition	Confirming the best means of achieving Client Requirements.	Client Team	RIBA Client Advisers, strategic advisers, management consultants.	Non-Qualifying. Classified as "preliminary information-gathering" and deemed "too remote" from the physical provision of plant.
1: Preparation and Briefing	Developing the detailed Project Brief and sourcing Site Information.	Client Team	RIBA Client Advisers, architectural skills (feasibility), engineers, surveyors.	Non-Qualifying. Feasibility and site sourcing costs are unlikely to meet the strict proximity test for allowances.
2: Concept Design	Establishing the Architectural Concept aligned to vision and budget.	Client and Design Teams (Architect, Engineers)	Specialist consultants (fire, acoustic), cost consultant, construction advisor.	Generally Non-Qualifying. Studies providing advice on "how to choose or design plant" fall outside the "limiting curve" of relief.
3: Spatial Coordination	Spatially Coordinating info before producing manufacturing details.	Lead Designer and Design Team	Client Team, Construction Team and Specialist Subcontractors.	Generally Non-Qualifying. Cost for obtaining planning consent will not qualify but there may be overlap with (4).
4: Technical Design	Developing information required to manufacture and construct the project.	Design Team and Specialist Subcontractors	Client monitoring team (optional).	Potentially PMA Qualifying. The "Small Window". Potential relief for final detailed engineering designs used directly for fabrication.
5: Manufacturing and Construction	Manufacturing Building Systems and constructing the building.	Construction Team	Client Team and Design Team (inspection and query resolution).	Likely PMA Qualifying. Fees for experts onsite to ensure machinery is installed correctly according to spec generally qualify.
6: Handover	Handing over the building, initiating Aftercare, and concluding the contract.	Construction Team and Contract Admin	Entire Project Team, FM and Asset Management (AM) teams.	Mixed/Revenue. Aftercare and FM tasks typically fail the capital allowance test; focus is on use rather than "provision".
7: Use	Operating and maintaining the building efficiently until its end of life.	FM and AM teams	Design Team (POE), RIBA Client Advisers.	Revenue. These are operational management or revenue costs rather the capital

The Court dismissed the argument that if plant were bought 'off-the-shelf' the design costs would qualify as part of the price. The purchaser must still demonstrate a 'direct and close connection' between the specific underlying expenditure and the plant provided. This means that regardless of the procurement route (Design & Build, EPC, Traditional etc) the onus is on taxpayers to demonstrate that the expenditure, whether incurred directly or through a contractor, has a 'close connection' to the physical asset and satisfies the narrower interpretation of 'on the provision of'.

Tagging Potentially Qualifying Fees

Filtering or unbundling the cost of professional fees to meet the above (mostly stages 04 to 05) is only the first stage in the process. The project itself can have a multiplicity of elements that different advisers will input on. A facade specialist or structural engineer may only be involved in specific construction work elements which will require tagging accordingly whereas a project manager or architect may oversee the installation of the whole project. In this regard a 'pro rata' apportionment can be acceptable and HMRC has provided new guidance based on the project size and amounts involved:-

• Small Projects (under £5 million): HMRC generally accepts a pro rata approach for apportioning professional fees and preliminaries. For these smaller claims, enquiries should not be opened solely because a business used this methodology rather than a detailed analysis.

  
  

• Large Projects (over £5 million):For major infrastructure, a pro rata approach is more likely to be reviewed as part of a wider capital allowance audit.

Crucially, if HMRC intends to challenge a pro rata apportionment on a large project, they must seek advice from the Valuation Office Agency (VOA) before opening an enquiry. VOA consultation is also mandatory if preliminaries or fees look unusually high - defined as exceeding 25% of total construction costs.

Interaction with other Capital Allowances

The Orsetd case deals with Plant or Machinery but it would be remiss to ignore the interaction with Structures and Building Allowances (SBAs) and Research and Development Allowances (RDAs).

The Orsted windfarm project pre-dates SBAs which were introduced for construction contracts, on or after, 29 October 2018. SBAs already exclude expenditure on planning permission, land remediation, land reclamation and general landscaping but it also has a different starting basis. Instead of expenditure 'on the provision of' it is 'on the construction of' (CAA 2001 s270BB(1)).

At the moment, HMRC state that professional fees relating to the 'design and construction' of a building (provided that the building is actually constructed) can fall into the meaning of 'on the construction of' (CA93110) so it is possible that some of the additional non-qualifying PMAs going forward could still attract tax relief (albeit at a much reduced rate). However, SBAs have a different entitlement basis to PMAs which is tied to non-residential use. There is also a statutory PMA exclusion which means you have to calculate PMAs first in order to demonstrate (it is not just a balancing figure).

Contrast with RDAs which has a much wider 'all expenditure incurred' for carrying out R&D or providing facilities (CAA 2001 s438).

Key Takeaways

Capital investments, and particularly more complex investments, with greater upfront risk are likely to be most affected by the Orsted ruling with reduced qualifying PMA costs.

Ordinary construction projects are not going to escape the need to differentiate technical and actual construction fees from feasibility, planning and scoping. It is this filtering and unbundling of pre-construction costs which is likely to cause the greatest burden.

Upfront professional fees where there is a clear motive or intent to create a capital asset treated as revenue in a businesses accounts are likely to come under more scrutiny.

Whilst a pro-rata approach may still be acceptable for eligible fees and preliminary costs, if these are excessive (25%+) or the project large (£5million+) be prepared to have your professional fee calculations challenged.

We will continue to review the latest guidance and will be responding to the consultation in due course. If you would like to discuss how the latest guidance could impact your project expenditure or provide input into our consultation response please do not hesitate to contact bryan.crawford@furastaconsulting.com