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HMRC internal manual

Business Income Manual

Capital/revenue divide: intangible assets: payment to another company to cease production for a period

The costs of securing that a competitor ceases to trade were found to be capital in Walker v The Joint Credit Card Co Ltd [1982] 55TC617 - see BIM35510. But the costs of securing that a competitor reduces or ceases production for a temporary period may be on revenue account.

In CIR v Nchanga Consolidated Copper Mines Ltd [1964] (1 All ER 208) the company carried on the business of copper mining and with two other companies formed the Anglo-American group of copper mines. Each company was independent of the others but there were overlapping directorates, the same deputy chairman, a common sales department and the copper itself was not sold as the product of any one of the three mines. There was a steep fall in the market price of copper and the three companies, in common with other producers, decided to cut production by 10%. To effect the cut the three companies agreed that one of them, Bancroft, should cease production for a year and that the other two would compensate it for so doing. Nchanga paid £1,384,569 under the agreement and claimed a deduction.

Nchanga is a Federation of Rhodesia and Nyasaland case that was heard by the Privy Council. As explained at BIM24235, Privy Council decisions are of ‘persuasive’ authority only in the UK; this means that courts and tribunals should treat them with respect but are not bound in law to follow them. The Privy Council in their decision in Nchanga referred to UK cases and had this been a wholly UK case there is no reason to believe that the decision would have been any different.

At page 24 Viscount Radcliffe explained why the payment was incurred on revenue account:

‘What Nchanga did was to charge its 1958-59 production with the payment of this money in order to settle its share of the group’s production programme in the way that suited it best. The payment was wholly related to and an incident of its output of the year, and it is of no moment…that the factors of the calculation that produced the sum were certain financial requirements of Bancroft itself. Nchanga’s arrangement with [the other two companies] out of which the expenditure arose, made it a cost incidental to the production and sale of the output of the mine. As such its true analogy is with an operating cost.’

As a general rule you should always take care not to confuse the method of computing a sum with the reality of what the sum represents.

If you need a copy of the decision it can be obtained from Business Profits.