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HMRC internal manual

Capital Allowances Manual

General: Definitions: Contracts

Under a contract

You may need to decide whether expenditure has been incurred under a contract. Treat expenditure as incurred under a contract if and only if:

  • the contract is a legally binding contract, and
  • the expenditure is expenditure to which the taxpayer was contractually committed by that contract.


In pursuance of a contract

Interpret the expression “in pursuance of a contract” like you interpret the expression “under a contract”. In the case of CIR v Mobil North Sea Ltd (60TC310) the courts took the view that “in pursuance of a contract” had the same meaning as “under a contract” and that both expressions should be interpreted in the way set out above. Expenditure that a taxpayer incurs by exercising an option in a contract is not expenditure incurred under that contract. It is expenditure that is incurred under the new contract which the taxpayer enters into when the option is exercised.

Performance of a contract

Performance of a contract occurs when both parties have performed their obligations under that contract.

Example Barry enters into a contract to buy a guitar for £15,000. Under the contract he pays a deposit of £5,000, he pays £7,000 when he takes delivery of the guitar and he pays the balance of £3,000 two weeks after delivery. The supplier performs his obligations under the contract when he delivers the guitar to Barry. Barry does not perform his obligations under the contract until he has paid the full amount due. This means that Barry does not perform his obligations under the contract until he has paid the final amount of £3,000 and so performance of the contract is when Barry pays £3,000 to the supplier two weeks after delivery.


Use the concept of “condition” under contract law to decide when a contract becomes unconditional. The word condition may refer either to:

  • an event, upon which the contract as a whole is conditional, or
  • a term in a contract.

When condition refers to a term in a contract, it is described as a “promissory condition”. There are a number of different kinds of promissory conditions of which the main ones are:

  • Condition precedent promissory condition: this term of a contract exists when the performance by one party of his promise is a condition precedent to the liability of the other to perform. Suppose George contracts with Andy for Andy to repair his car. Under the contract, George promises to pay Andy once Andy has finished the repairs. George’s legal obligation to pay Andy does not become unconditional until Andy has completed the work.
  • Concurrent promissory condition: this term of a contract arises if both contracting parties agree that the performance of their respective promises shall be simultaneous. Such conditions typically arise in contracts for the sale of goods where payment is due on delivery. We argue that payment is conditional on delivery and visa versa and thus the obligation to pay becomes unconditional at the time of delivery.
  • Independent promissory condition: such conditions arise when the parties agree that each party can enforce each other’s promise although he, she or it has not performed their own. Suppose that Cass contracts with Oliver for Oliver to build a machine. Cass is required to make payment two months from the date the contract was entered into. Cass’s payment is conditional only on the passage of time and is independent of any obligation imposed on Oliver.


No specific terms of payment

Where a sale is made without specifying payment terms, the transaction is governed by Section 28 Sale of Goods Act 1979 which states that “unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions, that is to say, the seller must be ready and willing to give possession of the goods, and the buyer must be ready and willing to pay the price in exchange of possession of the goods”.

This means that the obligation to make payment arises when delivery is made unless there is an agreement specifying some other arrangement.

Romalpa contract

A Romalpa contract is a contract under which goods are sold subject to reservation of title. In a Romalpa type case the supplier fulfils his or her part of the contract at the time of delivery of the goods. The buyer only fulfils his or her part of the contract when he or she chooses to make payment. Title in the goods does not pass to the buyer until payment is made. Even though the buyer has taken delivery of the goods they belong to the seller until the buyer pays for them.

Hire purchase agreement

A hire purchase agreement is an agreement under which someone (the hirer) hires an asset and which satisfies one of the following conditions:

  • under the agreement the asset shall eventually become the property of the hirer, or
  • the agreement gives the hirer an option to purchase the asset.


Hire purchase agreements are sometimes called lease purchase agreements.