Research and analysis

Executive Summary: Predevelopment costs research

Published 27 October 2026

Research conducted by Ipsos between August 2025 and March 2026. Prepared by Ipsos for HMRC.

Disclaimer: The views in this report are the authors’ own and do not necessarily reflect those of HM Revenue and Customs.

1. Background to the research

Capital allowances offer tax relief aiding business growth by allowing deductions on expenses like machinery and property investments. However, some predevelopment costs such as the cost of environmental impact assessments are generally not eligible for tax relief and some businesses have expressed uncertainty on the correct tax treatment despite it sometimes being a significant share of total investment expenditure.

Prior to this study, HM Revenue and Customs (HMRC) had limited data on the prevalence and scale of predevelopment costs and their potential effects on investment and infrastructure development. HMRC commissioned Ipsos to conduct a mixed-methods study comprising 4,972 surveys with corporation tax-paying businesses and 20 follow-up depth interviews to assess the prevalence, types and amounts of predevelopment costs, as well as investment impact and tax treatment.

The Supreme Court issued its judgment in Orsted West of Duddon Sands (UK) Ltd and others v HMRC on 15 April 2026. The case considered the tax treatment of certain predevelopment costs, specifically whether the costs in dispute qualified for capital allowances. The Supreme Court concluded that the expenditure did not qualify for capital allowances. This research was conducted between August 2025 and March 2026, before the judgment was issued. Respondents’ views on the tax treatment of predevelopment costs therefore reflect the position at the time the research was undertaken.

2. Prevalence of predevelopment costs

The survey estimates that 16% of UK businesses paying corporation tax had incurred predevelopment costs since 2020, with 9% reporting that they had incurred these costs during the 2023 to 2024 financial year. The prevalence of predevelopment costs varied by business size. Small businesses (27%), medium-sized businesses (28%) and large businesses (45%) were more likely than average to report incurring predevelopment costs since 2020 (16% across all businesses).

There were also notable differences by sector. Businesses operating in the pharmaceutical (42%), electricity and gas (29%), accommodation and food (26%), education (26%), automotive (25%) and manufacturing (22%) sectors were more likely than businesses overall (16%) to report having incurred predevelopment costs since 2020.

Of the total predevelopment costs incurred since 2020, one-third (33%) was incurred in 2023 to 2024. Spending was broadly even across the preceding financial years, accounting for 24% in 2020 to 2021, 18% in 2021 to 2022, and 24% in 2022 to 2023. The mean total amount spent on predevelopment costs since 2020 was £357,000, compared with a mean spend of £139,000 in the 2023 to 2024 financial year.

3. Overall picture and tax treatment of predevelopment costs

Businesses participating in the qualitative research described costs incurred at the predevelopment phase as playing an essential strategic role. They reported that this expenditure enabled them to build business cases, assess opportunities for expansion, and conduct required legal and regulatory work needed to determine project feasibility. On average, businesses incurred 4 different types of predevelopment costs during the 2023 to 2024 financial year. The most common type of predevelopment costs incurred in 2023 to 2024 were project management costs (63%), followed by financial feasibility (45%), engineering or architectural services costs (43%) and market analysis costs (42%). Geographically, the most common region for businesses’ main expenditure of predevelopment costs were in physical sites in London (26%) and the Southeast of England (24%). Main expenditure refers to the location where a business incurred the greatest share of its predevelopment costs, noting that expenditure for some businesses may have been spread across multiple regions.

The qualitative research highlighted a clear difference in approach to incurring predevelopment costs: while some businesses undertook predevelopment for infrequent, one-off projects, for others, particularly in product development or construction, it formed an important and continuous part of their business model. Qualitative participants described incurring both internal and external costs. Where internal costs primarily related to staff time, businesses, especially smaller ones, found them challenging to quantify in financial terms. In contrast, external costs were often financially significant and included consultancy fees for regulatory or financial advice, legal fees for contractual matters, and design fees that could increase if redesigns became necessary.

Overall, 42% of businesses had deducted some amount of their predevelopment costs incurred in 2023 to 2024, and the size of predevelopment costs in relation to total investment project expenditure varied. Two-fifths of businesses (39%) indicating that predevelopment costs accounted for between 0 and 19% of the total cost of investment project expenditure. Just over 1 in 10 businesses said predevelopment costs accounted for 80 to 99% of total investment expenditure. 6% of businesses said that the predevelopment costs they incurred in 2023 to 2024 were in relation to a project that did not go ahead. The type of investment project influenced the proportion of the total budget spent during the predevelopment phase: businesses described spending a lower proportion on projects that focused on feasibility and preparatory work, but a higher proportion of spend for projects that involved building and construction or creating a product.

4. Broader consideration of predevelopment costs

The average timeframe from incurring predevelopment costs to the start of investment project delivery was 2 years. Qualitative interviews revealed that predevelopment timeframes varied considerably, with the duration of the predevelopment stage being influenced by factors such as a business’s experience, the time taken for regulatory approvals, the business’s financial health, market pressures, and the involvement of specialist partners. Half (53%) of businesses with predevelopment costs in 2023 to 2024 said that predevelopment costs were spread evenly across the investment planning period.

However, the qualitative research found that costs were concentrated at specific points rather than being incurred evenly. For some businesses, expenditure peaked during the middle of the phase, driven by internal staff time, but for businesses involved in construction or infrastructure, costs were concentrated at the beginning, associated with groundwork and securing upfront architectural and regulatory services.

A quarter of businesses with predevelopment costs in the 2023 to 2024 financial year (28%) reported that their most recent occurrence of predevelopment costs for a project that did not go ahead was within the last year. The decision to proceed with a project beyond the predevelopment stage depended on several factors, including confidence in customer demand, the project’s overall financial viability, and the ability to secure external funding or partnerships. On average, businesses deducted 57% of predevelopment costs for investment projects that did not proceed when calculating taxable profits.

5. Tax treatment of predevelopment costs

Overall, 36% of businesses agreed and 31% disagreed that they understood the tax treatment of predevelopment costs. The qualitative interviews found that understanding of the tax treatment of predevelopment costs was influenced by previous experience, professional involvement and perceived tax complexity. Businesses with limited knowledge on tax affairs sometimes reported low engagement with the tax treatment of predevelopment costs. This was particularly the case where accountants managed these costs as part of the business’s wider accountancy arrangements. Perceived complexity, uncertainty about changing rules and uncertainty about eligibility also contributed to low engagement.

Among businesses with predevelopment costs in the 2023 to 2024 financial year that were uncertain about the tax treatment of predevelopment costs, 38% agreed that this uncertainty affected their investment decisions, although 58% said it did not. The qualitative research found that uncertainty, including limited awareness of the available tax treatments, affected how some participants handled predevelopment costs. For example, some treated these costs as standard business expenses or used Research and Development (R&D) tax credits where possible.

The topic of predevelopment costs was often not a business priority, as it was delegated to accountants or overshadowed by more immediate concerns. Consequently, it typically had no impact on investment decisions, although some businesses noted a negative effect where lack of tax relief increased a project’s financial risk.

Where businesses reported that the tax treatment of predevelopment costs had a positive impact on their business this focused on reliefs and incentives that encouraged or enabled further investment or business activities. For example, a business noted that being able to claim R&D credits in turn incentivised them to make more investments.