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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Capital/revenue divide: intangible assets: acquisition of commercial advantages

When expenditure is incurred on commercial advantages that are dependent on a particular trading relationship you are only likely to be able to establish that the expenditure is capital if the expenditure secures a permanent advantage, such as the closing down of a potentially damaging competitor.

In the case of Walker v The Joint Credit Card Co Ltd [1982] 55TC617 the company paid a potential rival £75,000 in consideration of the rival agreeing to cease trading in credit cards. Legal fees were also incurred and claimed. The Revenue did not dispute that the £75,000 was expended wholly and exclusively for the company’s trade. Walton J found that the expenditure was on capital account and at page 632F identified two permanent results achieved by the expenditure:

‘The money was paid to obtain two particular permanent results: one, that henceforth Access would be the unchallenged member of Interbank with no rival; and, two, that its existing goodwill would be protected for all time by the closing down of an aggressive and possibly unscrupulous rival. The fact that it may be arguable that this result would have taken place in any event within a short, measurable space of time is in my judgement neither here nor there in the absence of conclusive evidence that that was inevitable, and that evidence just is not there at all.’

Here you see the importance of what the expenditure achieved; in this case the permanent advantage of closing down a potential rival.

At page 630A of The Joint Credit Card Co, Walton J referred to Associated Portland Cement Manufacturers Ltd v Kerr [1945] 27TC103 (see BIM35595) as giving authority to deny a deduction for the costs of protecting existing assets:

‘So it seems to me that that case quite clearly demonstrates that a payment which is made for the purpose of protecting the existing goodwill against a real, solid threat is a payment on capital and not on revenue account.’

We consider this to be a possibly misleading statement of the legal position. You should allow as a revenue deduction money spent to maintain assets or the title to assets. This follows the decision in Southern v Borax Consolidated Ltd [1940] 23TC597 - see BIM35540.

You should also refer to the guidance on CIR v Nchanga Consolidated Copper Mines Ltd (1 All ER 208) at BIM35635 for discussion of a case where a competitor was paid to restrict production for a period.