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HMRC internal manual

Business Income Manual

Capital/revenue divide: tangible assets: case law: modernising a property

Conn v Robins Bros Ltd [1966] 43TC266.

The facts were that the company traded from very old premises in the town of Banbury. The company held the premises, on a 21-year tenant’s repairing lease with some three years remaining, from one of the directors and family members. It was expected that the tenancy would continue after the current lease expired. Part of the premises was at least 400 years old and was scheduled as an ancient monument. Part was about 200 years old. The premises were in an advanced stage of decay, with rotten roof and floor timbers and crumbling stone and brickwork.

The company instructed a builder to reinstate the property and to do whatever works he, in the course of uncovering various defective parts of the building, should find to be necessary for that purpose. No additional space was created anywhere in the building.

The total cost of work carried out over two years was about £8,500. In the year under appeal it was £3,817 of which about £1,000 was admitted to be for alterations. The work done included demolishing a chimney stack and interior wall and rebuilding on steel joists, re-roofing, re-flooring and replacing the shop front (a bow window, which was replaced with a less expensive alternative).

The Commissioners having heard detailed evidence found that £2,736 was expended on repairs. It is worth noting their finding that:

‘No additional space was created anywhere. The inside appearance of the ground floor was somewhat changed: the upper two floors and roof were as before, except for the chimney and changes in materials.’

Buckley J said that the primary facts were certainly capable of supporting the conclusion that the work was simply a repair. He went on to consider the effects of the changes in techniques over the more than four centuries since the building had first been constructed; saying at page 274:

‘No doubt in the course of carrying out these works certain structural alterations were made, as one would expect with any extensive repair of a building over 400 years old, when repairs were being carried out at a time when building techniques have completely altered. But the fact that there were alterations in the structural details of the building does not seem to me to be a good ground for proceeding upon the basis that the work produced something new. On the contrary, I think it is implicit in the Commissioners’ finding that the result of this work was not to produce something new but to repair something which had previously existed. Upon that basis it seems to me that there is no ground for regarding this expenditure as a capital expenditure.’

Buckley J considered if there were any circumstances which would lead to the conclusion that the expenditure was capital.

  • The expenditure was not associated with the acquisition of the premises.
  • If the work had not been carried out it would have been impossible to carry on the business. The work was incurred to allow the company to continue to earn profits by putting its existing asset into a proper state of repair.
  • There was no evidence that the asset when acquired by the company was not in a fit state and that the cost of acquisition reflected it being in an unusable state (see BIM35450).

The key was that ‘the result of this work was not to produce something new but to repair something which had previously existed’. The character of the asset (see BIM35460) was unchanged by the work.

It is worth noting that the case does not support the view that all expenditure on works to an old building are allowable. The parties agreed that a quarter of the expenditure was disallowable as alterations.