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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Capital/revenue divide: introduction: what is capital expenditure: the beginnings

The guidance that follows touches on the wide range of cases that have come before the courts and describes the various pointers that have proved useful determinants from time to time. It is important only to apply judicial pointers in the context that the judge had in mind; attempting to apply a particular test in very different circumstances can lead to incorrect results.

Capital is not defined in the statute. One of the earliest and still a useful definition of capital expenditure was quoted by Viscount Haldane in John Smith & Son v Moore [1921] 12TC266, at page 282, referring to the work of the famous economist, Adam Smith:

‘My Lords, it is not necessary to draw an exact line of demarcation between fixed and circulating capital. Since Adam Smith drew the distinction in the second book of his ‘Wealth of Nations’, which appears in the chapter on the division of stock, a distinction which has since become classical, economists have never been able to define much more precisely what the line of demarcation is. Adam Smith described fixed capital as what the owner turns to profit by keeping it in his own possession, circulating capital as what he makes profit of by parting with it and letting it change masters.’

Viscount Haldane went on to explain how Adam Smith’s definition is applied in practice - see the extensive quote in BIM35655.

The classic definition in the body of the decided cases comes from Atherton v British Insulated and Helsby Cables Ltd [1925] 10TC155. The company claimed the cost of a contribution that it had made to setting up the nucleus of a pension fund for the benefit of its clerical and technical salaried staff. At pages 192 and 193 Viscount Cave gave his much quoted definition:

‘…when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital.’

It is not possible to draw up a list of items, the cost of which is capital, nor is it possible to draw up a list of items, the cost of which is revenue. The classification, capital or revenue, is not uniquely determined by the nature of the item involved, rather it is determined by the circumstances of the transaction. What is capital in one person’s hands may well be revenue in another’s. Although there is no universal recipe to decide in any given circumstance if an expenditure is on capital or revenue account, there are a number of broad criteria. Some may be more useful than others in particular cases. The criteria include the following:

  • Whether expenditure is capital is a question of law - see BIM35035.
  • Accountancy treatment may be informative but does not answer the question, capital or revenue - see BIM35205.
  • ‘Perpetual’ payments are unlikely to be capital - see BIM35310.
  • The question (capital or revenue) is answered by the effect of the expenditure and not the purpose - see BIM35320.
  • Generally capital expenditure will result in the acquisition, disposal or modification of an identifiable capital asset, tangible or intangible - see BIM35320.
  • Capital expenditure will usually produce an enduring result - see the quotation from Viscount Cave above.
  • Where expenditure is abortive, the same result applies as would have applied if the expenditure had achieved its objective - see BIM35325.
  • If it is no part of the company’s trade to deal in the asset in question then the expenditure is likely to be capital - see, for example, the cases of Glenboig (BIM35600) and Bullrun (BIM35625).