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HMRC internal manual

Business Income Manual

Capital/revenue divide: intangible assets: making good dilapidations as a condition of the lease

There can be more than one way of achieving a particular result. The tax consequences follow from the route chosen. You should not accept that the tax consequences should be determined as if a different route to that actually followed had been adopted. If a taxpayer achieves their end by means of capital expenditure then the cost is disallowed. That the same end could have been achieved by revenue expenditure does not convert actual capital expenditure into a revenue deduction.

In Jacksons v Laskers Home Furnishers Ltd [1956] 37TC69 the company leased premises as a shop. The premises had been empty for 18 years and as a result had become very dilapidated and were unfit for occupation. The company covenanted to reinstate the premises, at a cost of some £2,300, and obtained a fourteen-year lease at a peppercorn rent for the first year, £700 for each of the next six and £1,000 for each of the next seven. The General Commissioners decided that the £2,300 was allowable in respect of reinstatement and repairs. At page 77 Danckwerts J distinguished accumulated repairs and alterations from current repairs:

‘It seems to me plainly that it was work of a capital nature, expenditure of a capital nature, and was dealing with the accumulation of repairs or alterations (of a small nature perhaps but none the less alterations) of the premises to suit their business. Therefore it had nothing in common with the current expenditure on repairs of the property which fall to be made naturally under a lease. Consequently, it seems to me that the only possible and reasonable conclusion upon the facts in this case is that this work and expenditure was of a capital nature, and the Commissioners must have misdirected themselves in law, as it is not a conclusion which seems to me a reasonable one in the circumstances of the case.’

Danckwerts J also considered what the position might have been under a different agreement whereby the full rent might have been paid and allowed, and the landlord might have undertaken the reinstatement. At page 77 he quote from Lord Greene in Henriksen v Grafton Hotel Ltd [1942] 24TC (a case involving payment for a monopoly by instalments):

‘…This argument has a familiar ring. The answer to it is that this was not the contract which the parties chose to make. It frequently happens in income tax cases that the same result in a business sense can be secured by two different legal transactions, one of which may attract tax and the other not. This is no justification for saying that a taxpayer who has adopted the method which attracts tax is to be treated as though he had chosen the method which does not, or vice versa.’