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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 aim is to determine the balance of profits

After describing the difficulties of reconciling the reasons for the many decisions on this subject (see BIM35040), Lord Reid in Strick v Regent Oil Co Ltd [1965] 43TC1 reminds us that what we are attempting is to compute the amount of the profits assessable to tax. In doing so we have to exclude items of a capital nature. At page 29 of 43 TC Lord Reid said:

‘One must, I think, always keep in mind the essential nature of the question. The Income Tax Act requires the balance of profits and gains to be found. So a profit and loss account must be prepared setting on one side income receipts and on the other expenses properly chargeable against them…it is not surprising that no one test or principle or rule of thumb is paramount. The question is ultimately a question of law for the court, but it is a question which must be answered in light of all the circumstances which it is reasonable to take into account, and the weight which must be given to a particular circumstance in a particular case must depend rather on common sense than on a strict application of any single legal principle.’

When considering some of the pre 1965 cases you should bear in mind that the distinction was of particular importance at that time because there was no Capital Gains Tax (there was a limited tax on certain ‘short-term’ gains for 1962 onwards). If a particular receipt was capital then it would escape taxation altogether.