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HMRC internal manual

Business Income Manual

Capital/revenue divide: tangible assets: changes in technology and materials

The borderline between what is an alteration and what is a repair can cause difficulties in cases involving advances in technology or changes of technique. Changes in technology and the way that work is carried out will often give the impression that the work may be an improvement (disallowable as capital expenditure) rather than simply a repair (allowable revenue expenditure).

The issue was considered in the case of Conn v Robins Bros Ltd [1966] 43TC266. Further detail on this case can be found at BIM35480 but it is worth noting the considerable amount of work that was carried out in this case.

The case involved a 400-year-old property that, in the view of the builder, was in an ‘unsafe and dangerous’ condition. The company themselves described the property as having been ‘gutted and modernised’.

Oak salvaged from the property was used to maintain the façade of a 400-year-old building but otherwise the modernisation was carried out using modern materials including concrete, asbestos roofing and steel joists. There were some structural changes, due to the use of steel girders, but no additional space created by the work. The work had simply transformed the property from a dangerously run-down condition to a property in a good state of repair. It was found that there was no improvement involved in the work under consideration, simply a repair.

The judgment of Buckley J shows that the approach to take is to look at the asset and see what the result of the work is:

  • has the asset been altered or improved - capital expenditure, or
  • has it simply been repaired so as to do the same job that it was doing before - allowable revenue expenditure.

The fact that different materials have been used is, of itself, unimportant. The key was that ‘the result of this work was not to produce something new but to repair something which had previously existed’. The exact form may not have been replicated, but the asset had been restored to do what it previously did, not something more. The character of the asset was unchanged by the work.

It is important to look at the position when the work is carried out. As technology and industry practice change over time, there will be changes in what amounts to simply repairing the asset. Something that was seen as an improvement ten years ago may now be the industry standard for that type of work, for example due to changes in building regulations.

If the material used is simply what would normally have been used for that type of job at the time the work was done then it would be likely that this would be seen as a repair. Applying 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) from a practical and business point of view, using that part or that material is simply the way that a repair, to do the same job as before, is done today.