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HMRC internal manual

Business Income Manual

Capital/revenue divide: tangible assets: reinstating damaged land

The cost of reinstating land, used for an industrial purpose, to its original state is capital.

In Robert Addie & Sons’ Collieries Ltd v CIR [1924] 8TC671, the company was obliged, under the terms of a mining lease, to restore to an arable state all ground occupied by it or damaged by its workings. The damage comprised:

  • making roads and footpaths,
  • constructing buildings and machinery, and
  • the right to dump debris taken from the mine workings.

At the company’s option, it could pay the lessor for all such restoration works, at the rate of 30 years’ purchase of the agricultural value thereof. The company exercised its option and paid the lessor £6,104.

The Lord President, Clyde, explained at page 677 why the expenditure was capital:

‘…the expenditure was made for the acquisition of an asset in the form of the means of access and passage, which was part of the capital establishment of the company, and, accordingly, cannot be treated as other than a capital expense…The acquisition of rights (of a permanency equal to the duration of the lease) to make use of the lessor’s land for both purposes [constructing works and dumping debris] was one of the conditions precedent to the starting of the company’s business at the mine, just as much as the right to occupy his land for the purpose of the works at the pit-head; and the expenditure involved does not seem to me to be any less a capital expenditure than, for example, the cost of sinking the shaft.’

The Bullcroft Main Collieries Ltd v O’Grady [1932] 17TC93 case (see BIM35440), in addition to the cost of the replacement chimney, considered the issue of payments made by a lessee of coal seams in consideration of indemnity by the lessors against liability for surface damage. The indemnity payments were so much per acre. The Special Commissioners allowed the payments.

Rowlatt J held that the Commissioners were right and he allowed the payments. At page 102 Rowlatt J described the principles involved:

‘It is conceded on the one hand and, in fact, it appears from Addie’s case [Robert Addie and Sons’ Collieries Ltd v CIR [1924] 8TC671], that if you buy outright the right to let down the surface from the surface owners, however you may describe that right in legal language - if you buy that so that you can let down the surface without paying anything more, at the beginning of your operations, that is capital expenditure; you pay that to enable you to start, really. That is clear. On the other hand, if you do not make any arrangement of this kind at all and, as the damage happens, you go to arbitration and you pay the persons whose property is damaged on the surface each time that you cause the damage, that, it is admitted, is a deduction and a revenue expense.’

The Bullcroft case seems to be very much on the margin. The company paid annual sums for the right to damage the land. Not an upfront sum at the outset. But the company did not make good the actual damages resulting from its operations. The amounts paid bought it an indemnity against such costs. Rowlatt J obviously had some difficulty and finally decided not to disturb the Special Commissioners’ decision, giving his reasons at page 103:

`The Attorney-General puts a point, I think of some difficulty and some nicety, which has caused me a good deal of doubt, by his contention that this is really only doing, by a succession of cash payments, the same thing as doing it at the beginning once and for all, because, he says, you have got the right to let down the surface, you have got that to start with; you are under an obligation to pay as you go along for that right…I am not at all certain, on looking at the matter as a matter of substance and broadly, that it does not really come - as Lord Cave pointed out it might sometimes come in the Helsby case [see BIM35010] - to a question of fact: Have you provided by a capital payment for getting a right or are you really, however it is arranged, conducting your mine upon the principle of having to make incidental payments as you go along to enable you to conduct the mine? Not without some diffidence I think that the Commissioners’ way of looking at it cannot be disturbed.’