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HMRC internal manual

Business Income Manual

Capital/revenue divide: introduction: expressions of judicial opinion are not words in an Act of Parliament

There are many tax cases concerning the question whether or not a particular item was capital or revenue. You need to exercise care when using the decided cases. The cases do not tell you that this item is capital and that item is revenue. The cases show the circumstances in which expenditure or income was held to be capital and the circumstances in which it was not. It is essential that you establish the particular circumstances of each individual case.

In Strick v Regent Oil Co Ltd [1965] 43TC1 (see BIM35560) at page 29D Lord Reid stressed the importance of the facts in individual cases and the danger of taking judicial commentary on particular cases as being of wide general application without regard to the underlying facts:

‘Whether a particular outlay by a trader can be set against income or must be regarded as a capital outlay has proved to be a difficult question. It may be possible to reconcile all the decisions, but it is certainly not possible to reconcile all the reasons given for them. I think that much of the difficulty has arisen from taking too literally general statements made in earlier cases and seeking to apply them to a different kind of case which their authors almost certainly did not have in mind - in seeking to treat expressions of judicial opinion as if they were words in an Act of Parliament. And a further source of difficulty has been a tendency in some cases to treat some one criterion as paramount and to press it to its logical conclusion without proper regard to other factors in the case … 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.’

You should use the tax cases with discretion. Just because a particular expense was found to be capital in one case does not mean that such expense will be capital in all other cases. The particular facts in individual cases are all important. The then Master of the Rolls, Lord Greene, explained the limited utility of tax case decisions in forming the correct view in individual cases. The nature of an item in law is inconclusive. What is important is the character of the payment as established from an examination of all of the circumstances. Commenting on the issues in CIR v 36/49 Holdings Ltd [1943] 25TC173 - (see BIM35310) Lord Greene cautions us in the lower half of page 182:

‘The true nature of a sum payable to a recipient for purposes such as the present is to be ascertained from all the circumstances relevant to that matter. The true nature of the sum is not necessarily its nature in law, but its nature in business or in accountancy whichever way one likes to put it, because from the legal point of view there may be no difference whatsoever as between the parties between a capital and an income sum. It may be totally irrelevant to the legal relationships into which they are proposing to enter. When, however, the … Revenue appears on the scene, that matter which as between the parties may have been a matter of not the slightest importance becomes immediately a matter of very great importance, and it is necessary to examine the circumstances of each individual case, including any documents which require to be construed, in order to ascertain what is the character to be attributed to the payment. That is why I say that I personally find very little assistance from examining the circumstances of other cases. In some of them a particular feature has appeared which the Court has regarded as turning the scale one way or another. In other cases that feature may have been absent, but another feature was present, and so on. Nothing can be more misleading than to take cases previously decided on the basis of the presence of a particular factor and to argue from that that the cases where that factor is absent ought to be decided the other way.’

In each individual case you should look to establish the effect of the payment. The issue is one to be decided by the specific facts. You should obtain all documentation, correspondence, minutes of meetings, agreements, etc. before entering into argument.