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HMRC internal manual

Business Income Manual

Capital/revenue divide: intangible assets: assignment of onerous lease

Where a property is leased and that lease is a capital asset of the trade then any expenditure on altering, extending, assigning or exiting the lease is on capital account.

In Southern Counties Agricultural Trading Society Ltd (SCATS) v Blackler (SPC198) SCATS occupied office premises for the purposes of its trade. The office was occupied under a lease subject to a dilapidation provision. SCATS considered that it might have failed to meet its obligations under that provision and wanted to be rid of the burden before the next rent review.

SCATS agreed to assign the lease to AT&T Products (ATTP) for £1. SCATS granted ATTP an underlease and paid ATTP a sum of £150,000 plus VAT (referred to in the negotiations as a ‘reverse premium’ and described in the agreement as the ‘compensation payment’). ATTP accepted that there was no implied covenant that SCATS had complied with the dilapidation provision and agreed to indemnify SCATS for any claims for breach of the dilapidation provision that might arise.

The Special Commissioner found that the £150,000 was a payment made to secure the disposal of a disadvantageous capital asset (the lease) and held that no deduction was due:

‘Mr Goodfellow [Counsel for SCATS] wishes me to look only at one aspect of the agreement between SCATS and AT&T Products, namely the acceptance by the latter company of the obligation to make good the dilapidations. The inspector on the other hand asks me to look at the whole picture involving the assumption of the burden of the dilapidations by AT&T Products, the disposal of the lease of the Northgate premises by SCATS and the acquisition by SCATS of its new premises at Capital House.

Bearing in mind the guidance which I have received from the authorities it is my judgment that the arguments of Mr Goodall, the Inspector, are to be preferred and the appeal therefore fails. In my view the payment made by SCATS is to be characterised as a payment of a capital nature. It was made to ensure the disposal of a disadvantageous capital asset (and incidentally to acquire a less disadvantageous capital asset).’

See also Tucker v Granada Motorway Services Ltd [1979] 53TC92 described at BIM35320.