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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Trade profits: capital or revenue?

The distinction between capital and revenue goes back to a time when all trade profits, including profits of companies, were subject to Income Tax which, in principle, charged income and nothing else. This means that to be included in trade profits, a receipt must be of an income nature and not a capital receipt. This principle is not expressly stated in the Acts, which nowhere define ‘income’, but it is fundamental to the scheme of the tax charge for both Income Tax and Corporation Tax purposes. The Courts have endorsed it on many occasions. Similarly, a deduction in computing trade profits must be of a revenue nature and not a capital outgoing (S33 Income (Trading and Other Income) Act 2005 (ITTOIA 2005), S53 Corporation Tax Act 2009 (CTA 2009)). The capital/revenue divide is not just a peculiarity to tax but is also relevant in generally accepted accounting practice (GAAP). GAAP is in turn relevant to tax on trade profits because accounts prepared in accordance with GAAP form the starting point in computing trade profits (see BIM30510).

The distinction between income and capital is not one on which the statute provides any guidance; in any particular case it will turn on the facts of that case. Capital can be likened to the tree and income to the fruit of the tree. Many refinements of that simple statement have emerged from decided cases and these are considered further in BIM35000 onwards and BIM40060.

The treatment of both revenue and capital can be decided by specific statutory provisions which override any general principles which would otherwise apply. Capital sums, which on ordinary principles are not chargeable to Income Tax, are sometimes specifically brought into tax. An example of this is the treatment of profits from certain land transactions in SS752-772 Income Tax Act 2007 and SS815-833 CTA 2009 (see BIM60300 onwards). Conversely, deductions for capital sums are sometimes specifically allowed in computing profits when they would normally be excluded. Examples of this are the deductions allowed for:

  • certain premiums paid to obtain the lease of premises occupied for the purposes of a trade etc. by S61 ITTOIA 2005 or S63 CTA 2009: see BIM46250 onwards,
  • waste disposal site preparation expenditure and site restoration payments by S165 ITTOIA 2005 or S142 CTA 2009 and S168 ITTOIA 2005 or S145 CTA 2009 respectively (see BIM67400 onwards), and
  • certain expenditure on plant and machinery for persons who have elected to compute the profits of their trade on the cash basis by S33A ITTOIA 2005 (see BIM70000 onwards)

These statutory overrides are usually introduced for economic or other policy reasons and do not diminish the strength of general principles. If anything, they reinforce them by demonstrating the need for special treatment where wider policy considerations take precedence.