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HMRC internal manual

Business Income Manual

Capital/revenue divide: tangible assets: case law: a tale of two chimneys

In Bullcroft Main Collieries Ltd v O’Grady [1932] 17TC93 the colliery chimney which carried away the smoke and fumes from the furnaces became dangerously unsafe. The chimney was a structure quite separate from the other surface buildings, connected to the furnace only by the flues. The company constructed a new chimney on a site nearby. The new chimney was admitted to be an improvement over the old. The old chimney had been replaced, not repaired, and the company claimed an allowance based on the estimated cost of a like for like replacement. The Special Commissioners decided that the cost of replacing the chimney was capital.

The High Court concurred with that decision. At page 101 Rowlatt J explained that every repair involves a replacement but the critical question is what is the ‘entirety’. Replacing the entirety is not repairing the old, but having something new:

‘Of course, every repair is a replacement. You repair a roof by putting on new slates instead of the old ones, which you throw away. There is no doubt about that. But the critical matter is…what is the entirety? The slate is not the entirety of the roof. You are repairing the roof by putting in new slates. What is the entirety? If you replace in entirety, it is having a new one and it is not repairing an old one. I think that it is very largely a question of degree, but it seems to me the Commissioners have taken the only possible view here.’

The case of Samuel Jones & Co (Devonvale) Ltd v CIR [1951] 32TC513, provided a contrast to Bullcroft. The company carried on a trade of paper processing. The company’s factory chimney was situated in the middle of the factory in a block of buildings containing furnaces and steam boilers. The chimney was old and had become unsafe. A new chimney, which was not an improvement, was built close to it. The flues were extended and connected to the new chimney. The old chimney was demolished. The Special Commissioners regarded themselves as bound by Bullcroft. They decided that the cost of the new chimney was capital expenditure. But they decided that the cost of removing the old chimney was getting rid of an encumbrance and was revenue.

On appeal, the Lord President decided that the whole of the expenditure was admissible. The new chimney was physically, commercially and functionally an inseparable part of an entirety. The entirety was the factory. The chimney was doubtless an indispensable and integral part but nonetheless one of many subsidiary parts of a single industrial profit-earning undertaking.