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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Capital/revenue divide: intangible assets: changes to company charter

Expenditure to permit a taxpayer to trade more effectively (and which does not involve the acquisition, modification or disposal of a capital asset) is likely to be on revenue account.

In CIR v Carron Company [1968] 45TC18 a company incorporated by Royal Charter in 1773 decided that its constitution was unsuited to modern trading conditions. In particular there were restrictions on borrowing, transfer of shares and voting rights. The company applied for a supplementary charter to remedy the perceived defects. After the application a shareholder took proceedings claiming that the procedure adopted was invalid. The company settled the action by buying out the shares of the aggrieved shareholder and paying the costs. At 48G Lord President Clyde considered that the payments did not result in the acquisition of any new asset:

‘…it appears to me that what was achieved by these payments was the removal of disabilities to the company’s trading operations which prejudiced its operations in its competition with its rivals. This was achieved without the acquisition of any tangible or intangible new asset and without the creation of a new branch of its existing trading activities. From a commercial and business point of view nothing in the nature of additional fixed capital was thereby obtained. The benefit was essentially of a revenue character because the company became able more easily to finance its day-to-day transactions, and more efficiently to carry on its day-to-day manufacture.’

Lord Migdale at 54F considered that nothing had been added to Carron’s capital and that the effect of the expenditure was to ’oil the workings’:

‘…these outlays were for the purpose of improving the working of the existing machinery of the company. “To oil the workings”… and not to create new machinery or to add to the capital assets of the company.’

Before commencing proceedings, both parties agreed that the payment for shares should be dealt with in the same way as the payment to amend the charter.

Again you should note the judges’ emphasis on the result of the expenditure.