BIM42215 - Deductions: timing: deferred revenue expenditure
In a number of circumstances GAAP either permits or requires expenditure to be ‘spread’ or ‘deferred’ in accounts; in other words, the expenditure is charged to the profit and loss account of more than one year.
The accountancy treatment is not relevant for expenditure which is ‘capital’ in tax terms. But it is a separate issue whether revenue expenditure which is ‘capitalised’ by accountants is also disallowable in computing taxable trade profits. Generally, the answer is ‘no’.
Accountants often refer to ‘capitalising’ expenditure without implying anything about its treatment as revenue or capital expenditure for tax. They simply mean that expenditure is taken to the balance sheet because it relates to a later year. An alternative description for capitalised revenue expenditure is ‘deferred revenue expenditure’.
The question of whether expenditure is capital or revenue for tax purposes is one of tax law. It follows that expenditure that is revenue for tax purposes does not, and cannot, lose that character whether it is charged wholly in one year’s accounts or spread over the accounts of more than one year. In other words, expenditure does not become capital expenditure for tax purposes by being ‘capitalised’ in the accounts; ‘capitalised’ revenue expenditure is still revenue. Equally, capital expenditure does not become revenue expenditure when, say, depreciation is charged to the profit and loss account.
GAAP determines in which period revenue receipts and expenses fall, unless there is a specific tax rule that provides to the contrary. Examples of specific rules are the spreading rules for contributions to registered pension schemes (see BIM46010) and the rules about late paid employment income (see BIM47130).
Leaving aside these specific tax provisions, there is no rule of tax law that the ‘right’ time to deduct revenue expenditure for tax purposes is the year in which it is incurred or the year in which there is a legal liability to pay it (Threlfall v Jones [1993] 66TC77, Herbert Smith v Honour [1999] 72TC130). It follows that where revenue expenditure is spread over the accounts of more than one year and this treatment accords with GAAP, there is no rule of tax law which entitles a taxpayer to deduct it all ‘up-front’. Equally, the fact that the accounts describe some deferred revenue expenditure as having been ‘capitalised’ does not mean that it cannot be allowed for tax as a business expense at some time. The deduction will be allowable when the expenditure is charged to the profit and loss account in accordance with GAAP. You should refuse any claim that relief should be given in tax computations when it is not shown as a deduction in the accounts.
Cases where a non-depreciation policy has been adopted
Some companies, for example, property investment companies, adopt a non-depreciation accounting policy in which revenue expenditure is capitalised without being charged to the profit and loss account until a much later date. If you are in any doubt about whether such treatment is in accordance with GAAP in a particular case, you should obtain advice from an HMRC Advisory Accountant.
As indicated above, there is no rule of law that enables a business to obtain relief for revenue expenditure that has not been charged to the profit and loss. Relief will only be available for tax purposes when the expenditure is charged to profit and loss account, even though this may be some time after the expenditure was incurred.
Combined capital and deferred revenue expenditure depreciated
The tax treatment of revenue expenditure should not differ from the accounts treatment where revenue expenditure is separated from capital depreciation, so no computational adjustments for deferred revenue expenditure will be necessary on a continuing basis.
The depreciation charge in the profit and loss account may, however, include both capital depreciation and the write off of revenue expenditure. Any capital depreciation should be added back. Revenue expenditure will be deductible. Accept any reasonable method of identifying the revenue element provided it is consistently applied. Customers will need to keep track of the revenue expenditure that is deferred so that it can be identified when it is charged to profit and loss account.