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HMRC internal manual

Business Income Manual

Capital/revenue divide: tangible assets: repair or capital expenditure?

This following pages of this chapter look in more detail at how the capital/revenue divide applies to repairs to, improvements to, and replacement of tangible assets.

The guidance should be read in conjunction with the guidance at BIM46900 onwards which sets out HMRC’s view of how the principles drawn out in this chapter apply in practice.

A useful Judicial summary of what is a repair can be found in the judgment of Windeyer J in the Australian case of W Thomas & Co Pty Ltd v Federal Commissioner of Taxation (1965) 115 CLR 58 at page 72; (1965) 14 ATD 78 at page 87:

‘The words “repair” and “improvement” may for some purposes connote contrasting concepts; but obviously repairing a thing improves the condition it was in immediately before repair. It may sometimes be convenient for some purposes to contrast a “repair” with a “replacement” or a “renewal”. But repairs to a whole are often made by the replacement of worn-out parts by new parts. Repair involves a restoration of a thing to a condition it formerly had without changing its character. But in the case of a thing considered from the point of view of its use as distinct from its appearance, it is restoration of efficiency of function rather than exact repetition of form or material that is significant. Whether or not work done upon a thing is aptly described as a repair of that thing is thus a question of fact and degree.’

Australian cases are not binding on UK courts, but Windeyer J highlights in a single paragraph many of the issues that are considered here. The basic position is that:

  • the cost of repairing an asset is normally allowable revenue expenditure;
  • the cost of replacing an asset is normally capital expenditure and not allowable as a deduction;
  • the cost of altering an asset to do something else is normally capital expenditure and not allowable as a deduction;
  • the cost of improving an asset is normally capital expenditure and not allowable as a deduction.

What the result is in a particular case will often be a question of fact and degree. As a result it is important to establish the facts. In particular you need to look at what was actually done, not what might have been done.

The following sections look at the different questions that need to be asked when considering whether something is a repair or capital expenditure.

As with other questions over the capital/revenue divide it may ultimately be necessary to apply the test set out by Dixon J in the case of Hallstrom’s Pty Ltd v Federal Commissioner of Taxation 72CLR634, at page 648, see BIM35045:

‘What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view.’

In effect does the expenditure simply leave you with the same asset that you had before, but in a better state of repair, or not? This is referred to in some cases as looking to see if the ‘character of the asset’ has changed?

In some cases expenditure on ‘integral features’ of a building or structure is deemed to be capital expenditure on which capital allowances may be claimed. For guidance on integral features see CA22300 onwards.

This section contains the following guidance:

BIM35435 The entirety
BIM35440 Identifying the entirety
BIM35445 Improvements
BIM35450 Assets bought in a defective condition
BIM35455 Changes in technology or materials
BIM35460 Character of the asset
BIM35465 No deduction for notional repairs
BIM35467 Case law: a tale of two chimneys
BIM35470 Case law: a tale of two pipelines
BIM35475 Case law: a tale of two railways
BIM35480 Case law: modernising a property
BIM35485 Case law: embankments, barriers and roads
BIM35490 Case law: football stadium