Capital Allowances on Preparatory Costs

Capital allowances on preparatory costs are now clearly allowable for certain pre-construction activities following a landmark UK court decision. Businesses investing in large-scale infrastructure—especially in renewable energy projects like offshore wind farms—can now benefit from tax relief on costs incurred well before assets are installed.

Why This Matters for Capital Allowances on Preparatory Costs

Capital allowances are a key tax relief for businesses, allowing the cost of qualifying capital expenditure to be deducted from taxable profits. While machinery and equipment are well-established as qualifying assets, there has long been uncertainty around the status of early-stage costs like environmental studies, feasibility surveys, and technical assessments.

A recent Court of Appeal judgment has now confirmed that these preparatory costs, where incurred for the provision of assets such as turbines and cables, do fall within the scope of allowable capital expenditure.

This is a significant win for companies involved in offshore energy, infrastructure, and construction, providing clarity and a route to reclaim tax on a wider range of project costs.

What Are Preparatory Costs?

Preparatory costs refer to expenses incurred before the actual construction or installation of capital assets. These may include:

• Environmental impact assessments
• Ornithological and collision risk studies
• Noise, radar, or telecoms interference surveys
• Seascape and landscape evaluations
• Geophysical or metocean assessments

Such studies are often required for planning approval, safety compliance, or effective asset deployment—but until now, their eligibility for capital allowances has been debated.

The Court’s Decision: What Changed?

The Court of Appeal has now ruled that preparatory studies and environmental assessments qualify for capital allowances when they are incurred “on the provision of” plant and machinery under section 11 of the Capital Allowances Act 2001.

This expands the interpretation of qualifying expenditure beyond physical construction, recognising that early studies are essential to the design, siting, and safe installation of plant assets.

For example, a geophysical survey that influences the placement of offshore turbines is seen as integral to asset provision—not a separate, non-qualifying expense.

What This Means for Your Business

If your business incurs preparatory costs during the development of infrastructure projects, you may know the following:

• Claim capital allowances on qualifying surveys and reports
• Amend prior claims if costs were previously disallowed
• Reduce corporation tax liabilities on earlier projects

This applies particularly to renewable energy businesses, real estate developments, utilities providers, and major infrastructure operators.

Revenue or Capital? The Tax Treatment Clarified

One of the case’s most important conclusions was the clarification that such preparatory costs are capital in nature—not revenue expenses deductible under trading profits.

Even if a preparatory cost doesn’t qualify under the capital allowances framework, it cannot be deducted as a revenue item. This means businesses must ensure proper classification on the balance sheet and process the claim through the capital allowances route.

Retrospective Relief and Revisions

The court also confirmed that tribunals have the power to amend tax return entries based on their findings—even if HMRC’s closure notices didn’t explicitly change those figures.

This opens the door to retrospective adjustments for affected businesses, allowing historic preparatory expenditure to be brought into scope and tax relief applied to earlier years.

Who Can Benefit?

The ruling is especially relevant for businesses in sectors such as:

• Renewable Energy: Offshore wind, solar farms, tidal and hydro projects
• Utilities and Infrastructure: Pipelines, power grids, road and rail projects
• Construction and Development: Projects involving environmental impact and planning assessments
• Telecoms and Data Infrastructure: Where technical groundwork precedes major installations

If you’ve invested in planning, surveying, or environmental studies for such projects, you may now be entitled to additional tax relief.

What Counts as “On the Provision Of”?

To qualify, a preparatory cost must relate directly to the future provision of capital assets. This includes studies that:

• Influence design or placement of assets
• Are required for regulatory approval before installation
• Help avoid physical damage or operational failure
• Support efficient or safe deployment of plant and machinery

The key is that these studies serve the function of enabling the asset to exist or operate—therefore, they’re essential to its provision.

What Doesn’t Qualify?

Costs unlikely to qualify include:

• Purely administrative or legal fees
• General corporate finance expenses
• Marketing or promotional costs
• Studies unrelated to the actual plant installation

Only costs that relate directly to the function, safety, or siting of assets will qualify under this updated interpretation.

Action Steps for Businesses

To make the most of this capital allowances opportunity:

1. Review recent and upcoming projects: Identify all early-stage costs and assess their purpose.
2. Categories qualifying studies: Focus on those related to asset provision, safety, siting, or installation.
3. Update accounting treatment: Ensure costs are capitalised appropriately and included in your capital allowances claims.
4. Consider amending prior returns: If earlier expenditure was disallowed, you may now revise those claims based on the Court of Appeal ruling.
5. Work with a tax specialist: Ensure documentation supports your claims and align your strategy with the latest legislative interpretations.

This clarification about capital allowances on early planning costs helps businesses invest in sustainable projects. By recognising the importance of early planning for capital assets, the courts have made it easier for businesses to receive tax breaks and increase their confidence in their investments. 

At Tax Accountant, we help businesses maximise capital allowances, review past claims, and plan future projects to minimise their tax liabilities. Contact us today for a project review or tailored analysis of your capital spending.