Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Business Income Manual

HM Revenue & Customs
, see all updates

Capital/revenue divide: intangible assets: expenditure in connection with loans and other liabilities

The costs of acquiring, modifying or disposing of a capital asset are capital. The courts have also considered expenditure directed at modifying liabilities; in particular of renegotiating the terms and conditions of loans. S58 Income Tax (Trading and Other Income) Act 2005 (see BIM45800 onwards) allows a deduction for certain expenses incurred in obtaining loan finance for Income Tax. But the legislation does not extend to the costs of changing or getting out of a loan agreement. Such costs are capital and there is no statutory relief. Expenses incurred on obtaining loan finance by corporate taxpayers are dealt with under the loan relationship regime — see CFM30110 onwards.

In Whitehead v Tubbs (Elastics) Ltd [1983] 57TC472 (a case which pre-dates the loan relationship rules) the company borrowed £80,000 to purchase machinery. The loan was repayable over nine years at 17½% interest. The terms of the loan agreement gave the lender an option to subscribe for equity in the borrower and imposed restrictions with regard to future borrowing, hire purchase and directors’ remuneration. The company subsequently considered that the restrictions would be obstacles to further development and expansion of the business. Concern increased when the company discovered that the lender had a financial stake in a rival. The company paid the lender £20,000 to cancel the loan agreement and substitute an ordinary mortgage for the loan.

The company’s auditors showed the £20,000 as a revenue expense and the Special Commissioner found that it was properly so shown as a matter of accountancy practice.

The court decided that the £20,000 was capital expenditure.

Oliver L J at page 494H identified an enduring advantage that resulted from the expenditure:

‘…if both the purpose and the effect of the transaction are analysed, what emerged from the 1978 agreement was a clearly identifiable and enduring advantage - no doubt an advantage which enabled the company to trade better and thus increase its profits, but one of a capital nature in the sense that it enabled the company to utilise its capital assets in a way in which it could not have utilised them before and to continue to enjoy the benefit of instalment repayment of the loan without the disadvantages imposed on it by the 1975 agreement. Prior to the agreement the company was disabled from raising further capital on the security of any of its assets. After the agreement its Denny Mill was available free from charge as were all its other fixed and current assets other than Sherston Mill.’