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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Capital/revenue divide: general themes: importance of the nature of the advantage obtained

Viscount Cave in his classic definition of capital expenditure (see BIM35010) refers to the bringing into existence of an advantage of enduring benefit. To determine if the cost is capital you need to consider the nature of the advantage that results from the expenditure in question.

It does not follow that because expenditure is advantageous to a business it must be incurred on capital account. It is most unlikely that a trader will knowingly incur expenditure that is detrimental to their business. So a simple finding that the expenditure was advantageous does not conclude the capital/revenue debate.

In CIR v Carron Company [1968] 45TC18 (see BIM35565) Lord Reid observed that in general companies do not expend money without intending to obtain an advantage of one sort or another. The important point is the nature of the advantage obtained.

To decide if the expenditure is capital or revenue you must determine whether the expenditure involves the acquisition, disposal or modification of an identifiable capital asset. At page 68C Lord Reid explained that Carron simply facilitated the carrying on of its existing trade under modern conditions:

‘The main argument for the Crown was that by obtaining the new charter the company obtained an enduring advantage in the shape of a better administrative structure. Of course they obtained an advantage: companies do not spend money either on capital or income account unless they expect to obtain an advantage. And money spent on income account, for example on durable repairs, may often yield an enduring advantage. In a case of this kind what matters is the nature of the advantage for which the money was spent. This money was spent to remove antiquated restrictions which were preventing profits from being earned. It created no new asset. It did not even open new fields of trading which had previously been closed to the company. Its true purpose was to facilitate trading by enabling the company to engage a more competent manager and to borrow money required to finance the company’s traditional trading operations under modern conditions.’