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HMRC internal manual

Business Income Manual

Capital/revenue divide: general themes: emphasis on what the expenditure achieves

The ‘identifiable asset’ test

In Atherton v British Insulated and Helsby Cables Ltd [1925] 10TC155 (see BIM35010) when Viscount Cave refers to expenditure made ‘with a view …’ he is arguably looking to the purpose or motive of the expenditure. The modern authorities do not follow this approach. Instead, you should seek to identify on what the expenditure was incurred or what was obtained (or, following ECC Quarries Ltd v Watkis [1975] 51TC153, would have been obtained if the expenditure had not been abortive - see BIM35325). You should establish the effect of the expenditure. If the effect is to acquire, dispose of or modify a capital asset then the expenditure is capital. The expenditure will usually result in the acquisition, disposal or modification of an identifiable capital asset. It does not matter that the expenditure is not reflected in the payer’s balance sheet.

In Tucker v Granada Motorway Services Ltd [1979] 53TC92 the company paid a sum to its landlord to amend the terms of its non-assignable lease on the Toddington motorway services site. Initially the lease provided for the rental to include a variable element, based on a percentage of takings excluding petrol duty. The percentage increased as the takings increased. Following an increase in tobacco duty the variable percentage element exceeded the gross margin on cigarette sales. The company paid a lump sum to remove tobacco duty from the quantum of takings on which the variable percentage was levied. The lump sum was calculated on the basis of six years tobacco duty. But you should not confuse the method of computing a quantity with the true nature of that quantity. The effect of the payment was to modify the terms of the lease. Lord Wilberforce at page 106H described the lease as an ‘identifiable asset’:

‘So how is [the payment to amend the lease] to be regarded? On the one hand the payment was designed to enable the company to earn more profits: from this point of view it might be thought that the payment should have a revenue character. On the other hand, the payment produced a modification in the lease, which could be regarded as an identifiable asset, making the lease less disadvantageous: from this point of view it might be thought that the payment should be regarded as a capital payment. It is common in cases which raise the question whether a payment is to be treated as a revenue or as a capital payment for indicia to point different ways. In the end the courts can do little better than form an opinion which way the balance lies.’

Lord Wilberforce went on to comment on the lack of a universal formula and the importance of identifying an asset (the so-called ‘identifiable asset’ test). Money spent on:

  • the acquisition of an asset, or
  • getting rid of a disadvantageous asset, or
  • improving an asset to make it more advantageous

is capital. But you should not seek to disallow routine maintenance costs under the third bullet point - expenditure that restores an asset to normal function is not (outside the circumstances described in this chapter) capital. Lord Wilberforce summarised the approach at page 107A:

‘There are a number of tests which have been stated in reported cases which it is useful to apply, but we have been warned more than once not to seek automatically to apply to one case words or formulae which have been found useful in another (see Commissioner of Taxes v Nchanga Consolidated Copper Mines Ltd [1964] AC 948 (see BIM35635)). Nevertheless reported cases are the best tools that we have, even if they may sometimes be blunt instruments. I think that the key to the present case is to be found in those cases which have sought to identify an asset. In them it seems reasonably logical to start with the assumption that money spent on the acquisition of the asset should be regarded as capital expenditure. Extensions from this are, first, to regard money spent on getting rid of a disadvantageous asset as capital expenditure and, secondly, to regard money spent on improving the asset or making it more advantageous, as capital expenditure. In the latter type of case it will have to be considered whether the expenditure has the result stated or whether it should be regarded as expenditure on maintenance or upkeep, and some cases may pose difficult problems.’

In CIR v Carron Company [1968] 45TC18 (see BIM35565) at page 75G Lord Wilberforce had also referred to the need to identify an asset:

‘…the principle that in some sense or other an asset of a capital nature, tangible or intangible, positive or negative, must be shown to be acquired.’

In Tucker v Granada Motorway Services Ltd [1979] 53TC92 Lord Wilberforce explained that what he said in Carron had been directed at excluding cases where no capital asset could be ‘seen’ or ‘identified’. Lord Wilberforce goes on to tell us at page 108G what the payment in Granada was about:

‘…once for all expenditure on a capital asset designed to make it more advantageous. It is true that the lease was non-assignable, so it had no balance sheet value before or after the modification. But it was none the less an asset and a valuable one for the Appellant company’s trade, and, if an asset, was a capital asset.’

So a payment that has the effect of improving a capital asset is capital notwithstanding that the asset in question does not appear on the balance sheet. Where an asset is purchased in a condition requiring restoration/repair you should consider the guidance at BIM35450.