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HMRC internal manual

Business Income Manual

Capital/revenue divide: intangible assets: general introduction

All business expenditure is likely to be made with the intention of securing some commercial advantage (see Lord Reid’s remarks in Commissioners of Inland Revenue v Carron Co [1968] 45TC18 quoted in BIM35565). To establish whether expenditure is capital or revenue, you have to establish the effect of the expenditure and how long it will likely endure. Where the expenditure is on an intangible benefit or advantage (for example, trading agreements, licences or other intangibles (see BIM46415)) you need to establish whether the identifiable asset is sufficiently substantial and enduring to count as capital.

General guidance on what may be considered sufficiently enduring was given in the case of Anglo-Persian Oil Company Ltd v Dale [1931] 16TC253. The case concerned the deductibility of a sum paid by the company to rid itself of a commission agent. At page 262 Rowlatt J commented on the use of ‘enduring’ in Lord Cave’s classic Atherton v British Insulated and Helsby Cables Ltd [1925] 10TC155 dictum (see BIM35010):

‘What Lord Cave is quite clearly speaking of is a benefit which endures, in the way that fixed capital endures; not a benefit that endures in the sense that for a good number of years it relieves you of a revenue payment. It means a thing, which endures in the way that fixed capital endures. It is not always an actual asset, but it endures in the way that getting rid of a lease or getting rid of onerous capital assets or something of that sort as we have had in the cases, endures.’

Further guidance was given in the later case of Strick v Regent Oil Co Ltd [1965] 43TC1 (see BIM35560). Lord Wilberforce at pages 58G to 59A (see his quote given below) explained that it is not possible to lay down minimum or maximum periods that expenditure must endure to be considered revenue or capital . In cases of doubt transience may be a factor but if expenditure is properly classified as capital then the fact that it may have a short life is irrelevant.

‘The principle seems to emerge that if, on a consideration of the nature of the asset in the context of the trade in question, it is seen to be appropriate to classify it as fixed rather than as circulating capital, the brevity of its life is an irrelevant circumstance. But it would still be correct, in my opinion, where the nature of the asset, taken together with other relevant factors, leaves the matter in doubt, to have regard, amongst other things, to its transient character. No rule can be laid down as to a minimum period of endurance for a capital asset or a maximum permissible period for an item of stock or circulating capital, though obviously the more closely the period of endurance is related to an accounting period the easier it is to argue for a revenue character, but no doubt there is a penumbra the width of which may vary according to the nature of the trade.’