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HMRC internal manual

Business Income Manual

Capital/revenue divide: tangible assets: exploitation of land

Minerals lying on the land or being won from the land

The question arises from time to time, concerning artificial accumulations of material on the surface, whether they are merely on the land or have become part of the land such as to revert to the category of natural assets.

The general principle is that the costs of acquiring an interest in land on or under which there are raw materials, minerals etc in their natural state is capital expenditure. The cost of raw materials, minerals etc that are no longer in their natural state on or under the land is on revenue account.

In Golden Horseshoe (New) Ltd v Thurgood [1933] 18TC280, the company was incorporated to acquire from another company the latter’s rights in dumps of ‘tailings’; the residuals that remained after extraction of gold ore taken from mines. The tailings comprised a fine, powdery substance, which was known to contain some gold that could be recovered. Golden Horseshoe’s business consisted of the extraction of the gold from the tailings by a re-treatment process and the sale of the gold so obtained. Golden Horseshoe contended that the dumps did not form part of the land on which they stood and were not being mined; and so the dumps constituted stock-in-trade, the cost of which was deductible for tax purposes. The Court of Appeal decided that the deduction was admissible. Lord Hanworth explained why the purchase in this case was of stock in trade, stressing that the dumped material was no longer in its ‘natural state’; saying at page 298:

‘It seems, then, that the company bought these dumps - which were no longer in a natural but in an artificial condition; which were in such a state that they would not have passed under a lease of ‘beds opened, or unopened, or minerals … for the purpose of treating them as their stock in trade, lying stored and ready to their hand…They had not to win them from the soil; they had been gotten already.’

Rogers v Longsdon [1966] 43TC231 provides a contrast to Golden Horseshoe. A farmer was tenant for life of land that included 8 acres on which waste material from old lead workings had been dumped many years ago - certainly before 1874 in which year trees were planted on the dumps. Since then the surface had become covered with weeds and grass. The dumps contained fluorspar and other valuable minerals. In 1955 the farmer granted a merchant the right to remove the minerals in return for an agreed payment per ton. The minerals could not be removed without disturbing the soil and trees.

The court had to consider two issues:

  • whether or not the dumps were part of the land, and
  • whether extraction of the minerals constituted a mining operation.

Stamp J decided that the land having reverted to the natural state the minerals had become part of the land; saying at page 241H:

‘Having regard to the circumstances in which the materials came to be on the area in question, the fact that they had no value as chattels at the time they came to be there, that trees were planted on the materials, that the area had become covered with vegetation and was used for summer grazing, that there is no evidence that the materials can be removed without disturbing the soil on which they stand, that when one observes the area in the photographs it has the appearance which I have described (of land reverting to a natural state) and that the materials had lain there for nearly 80 years, I find that they had at the date of the agreement become part and parcel on the land on which they lay.’

So two superficially similar cases were decided in opposite ways because of their own individual facts. This emphasises the need to establish the facts in a particular case before entering into argument.