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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Capital/revenue divide: tax cases and summing up: a concluding thought

The capital/revenue divide is an ill defined area rather than a precisely delineated line

You will be faced with cases where you will have difficulty in deciding if the expenditure is capital or revenue. These are the cases that are on the borderline, a borderline that can be difficult to identify. Lord Denning in Heather v P E Consulting Group Ltd [1972] 48TC293 (see BIM35210) made the following still very pertinent observations at page 321A:

‘The question - revenue expenditure or capital expenditure - is a question which is being repeatedly asked by men of business, by accountants and by lawyers. In many cases the answer is easy: but in others it is difficult. The difficulty arises because of the nature of the question. It assumes that all expenditure can be put correctly into one category or the other: but this is simply not possible. Some cases lie on the border between the two: and this border is not a line clearly marked out; it is a blurred and undefined area in which anyone can get lost. Different minds may come to different conclusions with equal propriety. It is like the border between day and night, or between red and orange. Everyone can tell the difference except in marginal cases; and then everyone is in doubt. Each can come down either way. When these marginal cases arise, then the practitioners - be they accountants or lawyers - must of necessity put them in one category or another. And then, by custom or by law, by practice or by precept, the border is staked out with more certainty. In this area at least, where no decision can be said to be right or wrong, the only safe rule is to go by precedent. So the thing to do is to search through the cases and see whether the instant problem has come up before. If so, go by it. If not, go by the nearest you can find.’