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Mmm...
I didn't advocate the £10k limit, I simply reported that that was what we used. However, I would staunchly defend the use of materiality in the judgement of capital and revenue. All accounting standards apply only to situations that are material, so why not this one? My organisation has a revenue 'turnover' of around £600m and fixed assets of about £4bn. In that context, I think a £10k materiality limit is a bit nit picking!
Accounting standards and tax
(showing I'm a tax person really, as I don't refer to FRS).
The law requires that profits for tax purposes are computed in accordance with GAAP. Which until 2005 was UK GAAP but now might be the international standards. However, the law also says that where accounts have been prepared in accordance with GAAP they are to be adjusted only as required or authorised by law - this is taken to mean both case law and statute.
What was S74(1) ICTA 1988 and is now CTA 2009 S 53(1) prohibits the deduction of expenses which are of a capital nature. I would therefore argue that capital expenditure is not in law subject to the principle of materiality, as the law provides that NO expenditure of a capital nature can be allowed as a trading deduction.
While this may seem petty, I lectured some years ago to Inland Revenue (sic) staff from LBO (in its early days) and over lunch I pumped them about current issues. They quite openly raised the issue of capital v revenue and materiality and indicated that they had made some very nice settlements with very large groups which had a high capitalisation threshold on the basis that the expenditure was capital, although not treated as such for accounting purposes. Here was one difference between tax and accounting standards embodied in statute.
It is likely that the new modern HMRC has a more realistic (pragmatic?) approach to this, but it is worth remembering that S74 and now S53 do not include the words "to the extent material". Argue materiality above the line by all means, but not here!
Materiality affects the risk review only
I've agreed with HMRC to review only items above 'materiality limits' (£20k was the most they've accepted) during enquiries as part of their risk review - with the understanding that they would only review the remaninder of repairs if a problem was found in the review of material items and they wanted to pursue the issue.
Other questions to consider are: Is the original asset fully worn out anyway? Does the repair amount to replacement of an entirety? Should I amend the prior year return to make a SLA election on the old asset if possible? Can I argue that the AIA means that no adjustment will be made to the return regardless of the treatment?
Not the point
I'm not arguing that you can disregard immaterial capital expenditure, I am saying that if the expenditure is immaterial, then it is not capital. I know this is splitting hairs, buit that's what this is about, isn't it?
Would someone
from HMRC like to offer a view here? This is a very interesting debate.
I'm not aware of any cases on capital vs revenue that have taken the size of the expenditure into account in the question - but of course to go to law there must be plenty of money at stake to be worthwhile.
Can I offer an example and see what anyone thinks?
Large company / organisation decides to equip all staff with PDA / Netbooks at a cost of £300 each. They are expected to have a life of 3 years at which point they will be worth nothing. There are 1,000 purchased. £300 is not material. However the taxable profit is understated by £300,000 less the capital allowances - let's say £60,000 WDA ignoring AIA and FYA for this year. So understated taxable profits of £240,000.
Neil, is your approach to treat material as individual items or to take a look at the whole picture as above? I would add that the whole example is based on a real case that I was asked to advise on.
It depends...
I would say that the reason for the purchase is important and what the items are used for. If the PDAs/netbooks are simply for general access to the web or email, then the usefulness of a single unit is not really increased by the existence of the other 299. If, however, the purchase is required because of the implementation of a web based application that is essential to the employees' way of working, then the 300 are vastly more useful than any single unit.
So in the first case I would say that each unit should stand on its own and thus the cost is revenue. In the second case, the totality of the units needs to be considered and thus is capital.
Or as I have put it in other discussions, one brick is a brick, 250,000 bricks is a building.
The tax effect is driven by the facts, not the other way around. There is no understatement of profits if the purchase is revenue, so the amount of tax payable is correct. Similarly, the deferral of tax allowances if the purchase is capital is also correct.
I don't doubt that HMRC would see it differently.