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HMRC internal manual

Business Income Manual

Capital/revenue divide: the role of accountancy: accountancy treatment not conclusive

In Strick v Regent Oil Co Ltd [1965] 43TC1 (see BIM35560) Lord Wilberforce explained, at page 59G, that the accountancy treatment does not determine the consequences for tax on trade profits where the capital/revenue divide is in question:

‘There is one other argument on which some observation is necessary, namely, that based on accountancy considerations. It was argued, generally, that an asset of this kind - a short-term advantage - ought more appropriately to appear in the profit and loss account than in the balance sheet. This is, in part, to beg the question, but it may be useful to use this way of stating the issue as a cross check. So doing, I know of no reason why a short-term lease, for which a sum has been paid, or the benefit of a short-term covenant, should not rank as a capital asset. Of course, its value ought in prudence to be written off over its life out of revenue, and it is no doubt fiscally unpleasant for the trader that (the income tax code allowing no depreciation of such assets to be charged) he must do so out of taxed income. But this tax disadvantage cannot be used as an argument against the insertion of the item in the balance sheet rather than the profit and loss account; it is merely an argument against resorting to this type of transaction.

Even if the trader prefers for reasons of his own to charge the cost of a short-term asset wholly against the revenue of the year of acquisition, that decision cannot affect his liability for tax.’

The Special Commissioners in the building society conversion cases (SpC239, SpC240, SpC241, and SpC242 - see BIM35645) considered the various authorities. At paragraph 151 of SpC239 the Special Commissioners said that for expenditure to be capital it was not necessary to identify a capital asset on the balance sheet:

‘In the light of the authorities cited to us we conclude that a payment may be of a capital nature even if not made for the acquisition or disposal of a particular asset. Also, for a payment to be capital it is not necessary to show the acquisition of an asset which appears on the balance sheet. If such an asset does appear then that would lead to the conclusion that the expenditure was of a capital nature but the lack of an asset on the balance sheet does not necessarily mean that the expenditure is of a revenue nature.’

Special Commissioners’ decisions are not binding but in this particular case the Commissioners (who included the presiding Commissioner) were taken through the authorities by leading counsel and undertook a thorough review. There is no reason to believe that the First-tier Tribunal (which has now replaced the Special Commissioners) would take a different line in another case. There is every expectation that the Tribunal will take the same line should the issue again come before them.