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HMRC internal manual

Business Income Manual

Capital/revenue divide: tangible assets: case law: embankments, barriers and roads

In Phillips v Whieldon Sanitary Potteries Ltd [1952] 33TC213, the company’s factory was adjacent to a canal and had been protected by an embankment. The embankment suffered from subsidence. Water seeped into the factory. As a result of colliery workings the factory also suffered from subsidence. The old brick and earth embankment was removed and an iron and concrete barrier constructed. The General Commissioners decided that this was a replacement and a proper deduction. Donovan J reversed the decision, explaining at page 216 that a finding that something was a replacement and not a new asset was inconclusive of the issue, capital or revenue:

‘That decision is one of fact, and I cannot interfere with it if there is some evidence to support it…to say that something is a replacement and not a new asset tells you nothing which enables you to conclude whether the expenditure involved was of capital or revenue. Supposing the whole factory wall had fallen into the canal and had to be rebuilt, would the cost of the new wall be revenue expenditure merely because the old wall had been replaced? Clearly not. I cannot, therefore, accept as evidence justifying the Commissioners’ decision the mere fact that the new barrier replaced the old. Before me, however a new point was taken, namely that the construction…was a repair…and therefore allowable.’

What is the entirety is a question of fact and degree calling for, at times, fine judgement. It does not have to be the physical whole of the trader’s site. The work undertaken can be of sufficient scale and importance to be capital. In Whieldon Sanitary Potteries, Donovan J reviewed the Bullcroft and Samuel Jones (see BIM35467) cases and explained the meaning of ‘premises’ in this context at page 219:

‘In my judgment, the “premises” for the purposes may sometimes be the whole of the trader’s business premises and may sometimes be a specific building forming part of these premises. Thus, if a factory window were blown out and had to be repaired, it would be obviously wrong to argue that as the entirety of the window had been restored it was not a repair to the premises. In such a case the “premises” would be the entire factory, in relation to which the window would be a repair and nothing else. But if, for example, a retort house in a gasworks was destroyed and had to be rebuilt, one would hardly call that a repair to the gasworks. The size of the retort house would compel one to regard that as the premises; and since it had been replaced in full it could not be said to have been repaired. These examples illustrate what I think is the truth, that there is no one line of approach to the problem which is exclusively correct. In some cases it will be right to regard the premises as the entire factory, and in others as some part of the factory. Whichever alternative is the right one to adopt will depend upon the facts of the particular case. Rowlatt J, took the view…[in the Bullcroft case]…that he must regard the chimney itself as the premises, or, as he described it, the “entirety”, and I would respectfully agree with him…

The Court of Session took the view…[in the Jones case]…that the whole factory must be regarded as the premises. The difference thus exhibited is not a difference of law, but of the right conclusion of fact to be drawn in particular instances…’

Donovan J concluded that:

‘…Having regard to the size and importance of the new barrier in relation to the factory as a whole, I think it is proper to regard the barrier itself as the premises…and as the barrier is a new one I cannot regard it as a repair to the old…I am of the opinion that this is a clear case of capital expenditure. I reach this conclusion taking into account the extent of the work, the permanent nature of the new barrier, the enduring advantage it confers upon preserving part of the fixed capital of the business, and the contention of the company that it was essential to enable the trade to be carried on. It is irrelevant, in my view, in the present case, to consider whether the new barrier, in point of size or effectiveness, is or is not an improvement on the old, and there is no finding upon the point. There can be cases where the work done may result in no improvement, but merely reinstatement, and yet be work involving capital expenditure on account of its size and importance. This, I think, is such a case…’

Donovan took the view that the barrier itself was the entirety (the premises). Since the barrier had been replaced with a new one, the work could not be regarded as a repair. You should also note that Donovan considered that there can be cases where the work done does not result in any improvement, merely reinstatement, but is nonetheless capital because of its size and importance. In the Auckland Gas case (see BIM35470) Lord Nicholls gives recent support for this line of argument.

As a decision of the First-tier Tribunal, the case of G Pratt & Sons v HMRC [2011] UKFTT 416 (TC) is not a binding precedent. It is, however, a recent case where the Tribunal was faced with the question of what was the entirety and it is useful to compare to Phillips v Whieldon Sanitary Potteries Ltd.

The case involved a 239m long farm drive. No major work had been carried out on the drive for 30 years and it had deteriorated to the stage where the local refuse collectors were refusing to drive up it. The tarmac was removed and the sub-surface repaired. The drive was then re-surfaced and new kerbing added as necessary to bring the drive up to modern standards.

The Tribunal distinguished the case from that of Whieldon Sanitary Potteries. The key point was that this was not a new road; it was a repair to the existing road. The road is more than the surface layer. The Tribunal also found that it was not an improvement as it did not change the character of the road. The road could not be used by larger trucks as a result of the works. Before the work, it was used by 20,000 litre tankers. After the work it was still used by 20,000 litre tankers.