Steadfast Manufacturing and Storage Limited (SM&S) successfully appealed against HMRC for a revenue amendment of £13,428.20 for the accounting period ending 31 October 2015. The appellants also appealed a consequential amendment of £1,489.80 for the accounting period ended 31 October 2014. The amount initially disputed by HMRC related to expenditure incurred on a yard used by vehicles, with the view that the expenditure should have been categorised as capital not revenue. Before and after the works, SM&S used the whole of the yard to unload articulated lorries, to move lorries and to provide trailer storage.

Documents provided by SM&S included photos of the yard before and after the works were completed and a builder’s estimate for the works. The works to the yard cost circa £74,000 and the replacement of the entire site and buildings was estimated to cost circa £6.5m.

The yard had not been resurfaced since before 2004 and was in poor condition, with the only repairs incurred being the patching of the yard with gravel twice a year. These repairs had proved to be ineffective and led to safety concerns which is why the larger works were undertaken. The works involved removing the surface, levelling off and resurfacing, along with the addition of a drainage channel. It is worth noting that the sub surface was not removed or replaced in this instance.

While HMRC accept that the cost of repairing an asset is normally allowed as a revenue expense, the cost of replacing a whole asset is normally deemed to be capital expenditure. They argued that the size and importance of the work was of sufficient scale and significance to be categorised as capital expenditure. HMRC referenced the case of Phillips v Whieldon Sanitary Potteries Ltd ((1952) 33 TC 213) as evidence, whereby a brick and earth embankment was removed and an iron and concrete barrier constructed to protect a factory from subsidence and the expenditure was reclassified as capital from revenue. However; in the instance of SM&S, as the sub-surface was not replaced and the works did not replace the whole yard, the case was distinguishable from Philips v Whieldon Sanitary Potteries Ltd where the entire barrier was replaced.

HMRC also argued an enduring advantage was gained due to the fact SM&S could have continued to use gravel patch repairs and now should not have the need to incur expenditure on repairs for a significantly longer period of time. They also indicated the usability of the yard had increased by concreting over grassy areas, referencing the case Conn v Robins Bros Ltd ((1966) 43 TC 266). HMRC contended that not all expenditure on an old site is allowable as repairs and expenditure should have been disallowed as revenue and viewed as capital alterations given they deemed the concreting of the yard was preserving part of the inherent value of the building. The appellant disputed this, stating there was no increase in usable areas and the works carried out only restored the site to the previous standard; the grassy areas were the result of the original surface deteriorating and therefore, concreting over them did not bring into use a previously unsurfaced area (which would have qualified as capital expenditure). Consequently, these points distinguish this case to that of Conn v Robins Bros Ltd ((1966) 43 TC 266).

The last case used as evidence by HMRC was Auckland Gas Co Ltd ([2000] STC 527). This case involved the use of newer materials for repairs to gas distribution pipes with the intention to restore the original system to a reliable state. However, the asset was essentially rebuilt in a different manner and the system had substantial upgrades with parts of the old distribution system no longer being used for the same purpose. The expenditure was therefore deemed as capital. For SM&S, HMRC stated that the reinforced concrete and drainage gave rise to improvements in the yard with the view that the works would only have been undertaken to achieve improvement. HMRC reasoned that this was demonstrated by the fact that forklift trucks could now safely use the area as the load bearing area was increased. But the appellant countered the original yard surface was unstable and uneven and modern materials used to replace it did not change the capacity or function of the area. So unlike the case of Auckland Gas Co Limited, there is no increased functionality and it would be correct to view the expenditure as revenue. They also submitted evidence that the levelling of the subsurface for drainage purposes simply redirected the water to run off to a different area, rather than being a new drainage system,which was a view shared by the judge.

After reviewing all the evidence the judge ruled in favour of the appellant, concluding that the reduced need for repairs did not deem the expenditure to be capital. Rather it is the result of repairing the yard properly. The judge reasoned that the expenditure did not bring something new into existence which provides an enduring benefit. The view taken indicates as long as expenditure is not on a new entirety or an improvement to the entirety which alters its nature, it is still likely to be revenue. After the conclusion of the appeal, the reviewing officer for HMRC noted “I do not think, on the balance of probabilities, that the new surface does anything more than the previous surface did, except so far as it may not require repairs as often as before”

The evidence provided by the appellant also underlines the importance of keeping good records. Being able to submit priced documents and photos pictures before and after works had been carried out greatly increased the chances of a decision in their favour. Whilst there is also a lenience when there is modern technology used to update old materials, it is still important to obtain a specialists view on whether expenditure is capital or revenue as the distinction between the two is not always clear and previous cases can be used to support either decision.

In today’s economic environment the potential tax savings that can be arise from verdicts such as these can make a significant difference on tax payable by individuals or companies. However, expenditure that is not considered revenue and is categorised as capital may qualify for capital allowances which only further highlights the need for specialist advice and the chance to obtain a tax saving. Lovell Consulting are dual qualified in both tax and quantity surveying which enables us to identify significant tax savings even when building information is not detailed. A capital allowances claim can be made on historic expenditure providing the assets are still in existence and the expenditure can be reconciled to accounts. It may therefore prove beneficial in the upcoming months for any individual or company to revisit any historical construction expenditure and contact us to review any scope for potential tax savings.

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