BIM35901 - Capital/revenue divide: tax cases and summing up: making sense of the various decisions

In Strick v Regent Oil Co Ltd [1965] 43TC1 at page 29 (see BIM35560) Lord Reid described the difficulties in making sense of the large number of decisions on this topic:

‘It may be possible to reconcile all the decisions, but it is certainly not possible to reconcile all the reasons given for them. I think that much of the difficulty has arisen from taking too literally general statements made in earlier cases and seeking to apply them to a different kind of case which their authors almost certainly did not have in mind - in seeking to treat expressions of judicial opinion as if they were words in an Act of Parliament.’

There is no simple recipe to decide cases at the margin; is the expenditure (or income as the case may be) capital or revenue? You will need to consider some or all of the following issues.

Recurring payments

Expenditure which is not ’once and for all’ may nevertheless be capital. Expenditure of a recurring nature on the acquisition of assets which are clearly fixed rather than circulating capital (for example a fleet of vehicles used by a concern’s sales representatives) remains capital. Moreover, an outgoing does not cease to be of a capital nature merely because it is payable by instalments. See CIR v Adam [1928] 14TC34 - BIM35305. But there can sometimes be a fine line between the payment of a capital sum by instalments and revenue payments for the use of an asset, particularly finance lease rental payments. But a ‘once and for all’ payment may not necessarily be capital (for example, paying off an unsatisfactory employee).

Object of expense

The Atherton test (see BIM35010) arguably looks to the purpose or motive of expenditure (‘…with a view to…’). The modern authorities, however, reject that approach. Instead, you should seek to identify on what the expenditure was incurred or what was obtained for it (or would have been obtained if the expenditure had not proved to be abortive). Thus, in Tucker v Granada Motorway Services Ltd [1979] 53TC92 (see BIM35320) expenditure for the purpose of reducing a revenue outgoing (rentals due over a period of years under a lease of land) was nevertheless capital because it was incurred on a capital asset (the lease of land). See also Lawson v Johnson Matthey Plc [1992] 65TC39, discussed at BIM35650.

Expenditure must be incurred on acquisition, improvement or disposal of an asset

For expenditure to be capital it must be spent for the acquisition (Rolfe v Wimpey Waste Management Ltd [1989] 62TC399, see BIM35605), improvement (Tucker v Granada Motorway Services Ltd [1979] 53TC92, see BIM35320) or disposal (Mallet v The Staveley Coal & Iron Co Ltd [1928] 13TC772, see BIM35625) of a capital asset. It is not sufficient that it was paid in connection with (or on the occasion of) the acquisition, improvement or disposal of the asset. For example, the goodwill of customers may be a valuable capital asset. But that is not enough to make expenditure such as the pay of staff (who, by serving customers well, may have helped create the goodwill) a capital outgoing. See also Lawson v Johnson Matthey Plc [1992] 65TC39 - discussed at BIM35650.

Identifiable asset test, tangible assets

It is necessary to identify a specific capital asset for which the expenditure is incurred. See Tucker v Granada Motorway Services Ltd [1979] 53TC92 (see BIM35320). The asset may be tangible or intangible. Where the asset is tangible the question will usually be straightforward - either the asset is held as a current (revenue) asset such as trading stock (or otherwise for resale at a profit) or it is held as a fixed (capital) asset. (See below for intangible assets.)

Short-life tangibles

But even a tangible asset may have a very limited economic life. Where that life is less than one year it should be accepted that expenditure on it is of a revenue nature (see Hinton v Maden and Ireland Ltd [1959] 38TC391 - see BIM35415).

Loose tools

For expenditure on implements, utensils and articles including loose tools see BIM46960.

Expenditure on intangibles

Under the Corporation Tax intangible fixed assets regime, capital receipts and expenditure relating to intangible assets, including intellectual property, are normally brought into the computation of trading profits in accordance with their accounting treatment. The following considerations apply only where that regime does not.

All business expenditure is intended to procure some commercial advantage, and where the expenditure is on an intangible benefit or advantage (for example, trading agreements, licences or other intangibles - see BIM46415) it will be necessary to ask whether the identifiable asset is of a sufficiently substantial and enduring nature to count as capital. See for example:

  • Heather v P E Consulting Group Ltd [1972] 48TC293 - see BIM35210,
  • Anglo-Persian Oil Company Ltd v Dale [1931] 16TC253 - see BIM35505, and
  • CIR v Carron Company [1968] 45TC18 - see BIM35565.

Expenditure on licences etc

Expenditure on material commercial rights which are well defined in law is likely to be capital if the rights endure for, as a rough rule of thumb, two years or more. Expenditure on the acquisition of a business franchise (see BIM57600 onwards) or on a licence needed before a trade can begin are common examples of capital expenditure of this type.

Expenditure on exclusivity ties

For exclusivity tie payments by oil companies to petrol retailers see:

  • Bolam v Regent Oil Co Ltd [1956] 37TC56 - see BIM35555, and
  • Strick v Regent Oil Co Ltd [1965] 43TC1 - see BIM35560.

In Strick there is detailed discussion of whether the tie on its own (had there been no lease/sublease arrangement) would have been a capital asset.

Expenditure on commercial advantages generally

Expenditure on commercial advantages dependent on a particular trading relationship is likely to be capital only if a permanent advantage, such as the closing down of a potentially damaging competitor, is secured by the payment. See Walker v The Joint Credit Card Co Ltd [1982] 55TC617 - see BIM35510. On the other hand expenditure on the temporary closure of such a competitor was found to be of a revenue nature in CIR v Nchanga Copper Mines [1964] 1 All ER 208 - see BIM35635.

Profit-making structure test

Expenditure on the acquisition or cancellation of trade agreements will normally be revenue in nature. See, for example Vodafone Cellular & Others v Shaw [1997] 69TC376 - BIM35585, concerning a lump sum payment to relieve the company of an obligation to pay annual sums for a 15 year period under an agreement for the supply of future know-how. If the agreement is one the loss of which would cripple the trade, such expenditure may be capital following the authority (on the receipts side) of Van den Berghs Ltd v Clark [1935] 19TC390 - see BIM35530. See also BIM46435. For guidance on the profit-making structure test in relation to income, see BIM40060 and BIM40120.

Meaning of ‘enduring’

There is no simple yardstick of the length of time for which an asset or advantage must endure before it may be regarded as capital. There are other important considerations such as: how the asset or advantage functions in the context of that particular trade; how it benefits the business, and whether it is obtained by a lump sum or by periodical payments.

Extraction of minerals, including oil

Minerals are part of the land until extracted from it. A mining concern buying land to gain access to the minerals incurs expenditure acquiring a capital asset, an interest in land. See:

  • Coltness Iron Co Ltd v Black [1981] 1TC287 - see BIM35401,
  • Hughes v The British Burmah Petroleum Co Ltd [1932] 17TC286 - see BIM35401,
  • Knight v Calder Grove Estates [1954] 35TC447 - see BIM35401,
  • H J Rorke Ltd v CIR [1960] 39TC194 - see BIM35401,
  • Golden Horseshoe (New) Ltd v Thurgood [1933] 18TC280 - see BIM35405, and
  • Rogers v Longsden [1966] 43TC231 - see BIM35405.

Purchase of growing crop

You have to distinguish between those things growing on the land that belong to the owner, and other crops which belong of the tenant. Trees and bushes that produce a succession of crops are, together with their crop, the property of the landlord. On the other hand, the normal annual crops of an arable farm are the property of the tenant. See CIR v Pilcher [1949] 31TC314, BIM35410.

Expenditure on acquisition of a business

Expenditure on the acquisition of a business is incurred on capital account. The factors taken into account in computing the consideration given for a business do not change what is capital expenditure into revenue expenditure. Early cases include The City of London Contract Corporation Ltd v Styles [1887] 2TC239, Royal Insurance v Watson [1896] 3TC500 and John Smith and Son v Moore [1921] 12TC266 - see BIM35655. The approach established in these early cases has been reinforced by the more recent Privy Council decision in CIR v New Zealand Forest Research Institute [2000] 72TC628 - see BIM35655. The Privy Council decision gives unequivocal support for the principle that payments made to acquire a business are on capital account.

No infallible criterion

Finally, despite the huge volume of case law, novel situations still arise and the courts have warned against attempts to apply the words of judges too rigidly, almost as if they were statute law. In the Strick v Regent Oil Co Ltd [1965] 43TC1 case mentioned above, Lord Reid underlined a statement made in 1935 by Lord Macmillan:

‘While each case is found to turn upon its own facts, and no infallible criterion emerges, nevertheless the decisions are useful as illustrations and as affording indications of the kind of considerations which may relevantly be borne in mind in approaching the problem.’ (Van den Berghs Ltd v Clark [1935] 19TC390 at pages 428-429 - see BIM35530).

Some of these issues will be more important/relevant in some circumstances and less so in others. In marginal cases the indicators may point in different directions. No single issue or test is likely to be decisive. You need to come to an overall balanced view. It is essential that you establish all the relevant facts before entering into argument.