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HMRC internal manual

Business Income Manual

Capital/revenue divide: tangible assets: provision for expenditure on future abandonment

The costs of restoring capital assets, adapted during the course of a trade, to their original condition is capital.

In the case of RTZ Oil & Gas Ltd v Elliss [1987] 61TC132 the company held a licence to exploit an oil field. It was a condition of the licence that when the field was abandoned the wells should be capped and the equipment removed. The company hired a drilling rig and tankers and a condition of hire was that the tankers had to be restored to their original condition. The company made provision for the close down costs of the oil field and for converting the tankers claiming that the expenditure was of a revenue nature. The agreed accountancy evidence was that the accounts were correctly drawn up in accordance with the ordinary principles of commercial accountancy.

Vinelott J held that the accountancy evidence did not bear on the issue as to whether the expenditure was of a capital or a revenue nature as the same provision would have been made either way. It may be necessary to give a true and fair view of the profits earned by a trade in a given year to make an allowance for the depreciation of a wasting asset on which capital has been expended. But no such allowance should be made in assessing the taxable profits for the year.

Relying on Granada Motorway Services [1979] 53TC92 (see BIM35320), Vinelott J held that the fact that the contract of hire was non-assignable and had no balance sheet value was irrelevant. The rig and the tankers were profit-making apparatus and the cost of re-conversion was capital expenditure.