BIM62030 - Measuring the profits (particular trades): Mineral extraction: restoration expenditure: capital or revenue
The term ‘restoration expenditure’ is often used to describe payments that are capital expenditure and inadmissible for tax purposes, as well as revenue expenditure that is an allowable deduction in computing the taxable profits of a business.
For example, in the case of Robert Addie and Sons’ Collieries Ltd v CIR [1924] 8TC671 the restoration payment was a capital cost of acquiring a right to dump debris on the land (see BIM62060). Similarly, in RTZ Oil and Gas Ltd v Elliss [1987] 61TC132 the provisions for capping the wells, clearing the sea bed of clutter, and restoring the rig and tankers to serve their original functions, were capital for tax purposes. As Vinelott J said:
‘All are part of a comprehensive installation designed to obtain access to and win and transport oil from the oilfield to onshore facilities.’ (see BIM62065).
The term is also used to describe payments that represent compensation for damaging another person’s property. Where no right over that person’s property has been acquired, such ‘restoration payments’ are revenue and an allowable deduction for tax purposes, when incurred in the course of carrying on a business. For example, compensation paid to surface landowners for damage to structures/crops caused by subsidence due to mining operations.
This distinction was noted by Rowlatt J in Bullcroft Main Collieries Ltd v O’Grady [1932] 17TC93 at page 102:
‘It is conceded on the one hand and, in fact appears from the Addie’s case, that if you buy outright the right to let down the surface from the surface owners, however you may describe that right in legal language - if you buy that so that you can let down the surface without paying anything more, at the beginning of your operations, that is capital expenditure; you pay that to enable you to start, really. That is clear. On the other hand, if you do not make any arrangement of this kind at all and, as the damage happens, you go to arbitration and you pay the persons whose property is damaged on the surface each time that you cause the damage, that, it is admitted, is a deduction and a revenue expense’ (see BIM62070).
The right to ‘let down the surface’ of land, or deposit waste on it, can also be acquired by a payment of rent, as well as by payment of a capital lump sum. These rental payments can also be described as ‘restoration expenditure’ or compensation for surface damages. For the tax treatment of such payments, see BIM62035.