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HMRC internal manual

Business Income Manual

Capital/revenue divide: intangible assets: payment to change existing business or asset structure

A payment that secures an enduring benefit to the business in terms of a change in organisation or structure is likely to be capital.

In Watneys London Ltd v Pike and Watney Combe Reid & Co Ltd v Pike [1982] 57TC372 the brewer made ex gratia payments to tenants of tied public houses to obtain vacant possession. The brewer did this to allow the trade at those premises to be conducted on a managed basis. This gave a larger return on capital. In law the tenants had no security of tenure but in practice they had enjoyed considerable security. The Special Commissioners held that the payments were capital. The court upheld their decision. At page 398I and 399A Walton J described the result of the payment:

‘The main, if not the only, factor in favour of the expenditure being classed as revenue expenditure is that it created no new asset. On the other side, it is quite clear that the object of the expenditure was to enable, or at any rate to facilitate, the replacement of one tenant (who might well in himself be a perfectly satisfactory tenant) with another tenant in order to enable the premises in question to be exploited in an entirely new way.’

At page 399D Walton J considered that it made no difference, to the finding that the expenditure was capital that the advantage passed on to another group company rather than the one making the payment:

‘The only question can be whether the fact that the advantage passed to the group (the Watney Mann Group) and not to the appellants, makes any difference. I cannot see that it does.’

If the payment were made for the purpose of another company, it would inevitably fall foul of the ‘wholly and exclusively’ requirement in S34(1)(a) Income Tax (Trading and Other Income) Act 2005 or S54(1)(a) Corporation Tax Act 2009 - see BIM37000 onwards.