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HMRC internal manual

Business Income Manual

Capital/revenue divide: introduction: what is capital expenditure: historical overview

What is and what is not capital expenditure has taxed the minds of judges, tax advisors, Revenue officials, business people and others for more than two centuries. No one has produced a single simple test that will determine the issue in all circumstances. A variety of judicial pronouncements has resulted in recipes that are applicable to particular circumstances but which lead to inconclusive or even incorrect results in others. As the body of case law has expanded the margins of uncertainty have retreated. But those margins remain to this day. Resolving a case on the borderline is far from easy. The various judicial recipes may point to conflicting conclusions. You will have to come to a balanced judgement. To do so you will need to establish the relevant facts that applied at the time the expenditure was incurred.

The day-to-day running costs of a business (staff wages, purchase of trading stock, rent of business premises, and so on) are referred to as revenue expenditure.

Revenue expenditure is sometimes described as circulating capital. This description reflects the fact that the capital in question leaves the owner’s possession (changes masters) to produce profit or loss. The capital may be considered as being ‘turned over’. In the process of turning over, profit or loss ensues.

Capital expenditure (goodwill, the purchase of business premises, plant and machinery used in the business process and so on) in practice is the opposite of revenue expenditure.

The profit making structure within which the business is conducted is sometimes called the fixed capital of the business. A trader does not part with the fixed capital (there is no changing of masters); it is retained and not turned over in the same way as circulating capital. The fixed capital provides the opportunity for the business to make profits or losses.

It is important that you recognise at the outset that there is no requirement of symmetry. A sum that represents capital expenditure in the hands of the payer is not thereby a capital receipt in the hands of the recipient. It depends on the nature of the trade.

The capital/revenue distinction also applies in the context of whether a receipt is a taxable receipt of the trade, and the same principles apply.