HMRC internal manual

Business Income Manual

BIM35660 - Capital/revenue divide: intangible assets: proprietor's training courses

Expenditure incurred by the proprietor of a business on training courses for themselves is revenue expenditure if the course merely updates existing expertise or knowledge. Expenditure on a course which provides new expertise or knowledge is capital.

In Dass v Special Commissioner and others [2006] EWHC2491 (Ch), the taxpayer traded as a tutor in English and as an advisor in relation to the bringing of appeals before various tribunals. He took a course which would have led to a diploma in law (LL Dip) qualification and claimed a deduction for re-sit examination fees (having missed the original examinations due to illness). The Special Commissioner decided that the fees were capital in nature:

‘I agree with HMRC that the particular course was one to equip Mr Dass with a new qualification that would have enabled him to venture into new areas of practice, and it was not merely a “refresher” in relation to his existing expertise. This seems to me to be a correct way of distinguishing between the costs (in relation to courses) that constituted capital as distinct from revenue expenditure … I think that HMRC applied the test correctly and, I was told, in a manner consistently with the treatment of all other taxpayers.’

In the High Court Lightman J upheld the Special Commissioner’s decision on the capital/revenue distinction:

‘The line between the two may often be difficult to draw, but in this case the Commissioner was fully entitled on the material before him to draw the line where he did. Indeed I think that, far from his decision being open to challenge, it was clearly correct.’

Tax Bulletin article

The decision in Dass is consistent with HMRC’s view published in Tax Bulletin 1G in November 1991, which read as follows:

‘There is some uncertainty whether the cost of proprietors of a business attending a training course, directly related to the business activity, is deductible in arriving at the [trade] profits chargeable to tax…

Where attendance at a course is intended to give business proprietors new expertise, knowledge or skills, which they lack, it brings into existence an advantage that is of enduring benefit to the business. We take the view that the expenditure is therefore of a capital nature, and deduction is prohibited by [S33 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)].

On the other hand, where attendance is merely to update expertise etc. which proprietors already possess, the expenditure is normally regarded as revenue expenditure and will be deductible if it satisfies the “wholly and exclusively for the purposes of the trade” test in [S34(1)(a) ITTOIA 2005]’ - see BIM42105.

You should therefore allow proprietors a deduction for expenditure that merely updates existing expertise or knowledge but disallow any expenditure that provides new expertise or knowledge (particularly where it brings into existence a recognised qualification like a Master of Business Administration).