Steadfast Manufacturing and Storage Limited (Steadfast) leased a factory and yard. Before and after the works in question were carried out, the whole of the yard was used to unload articulated lorries, move those lorries, and provide trailer storage.
Before the works were undertaken, the yard’s surface was in poor condition. Certain areas had become unstable and were unsuitable for use by forklift trucks, although they were used when necessary to turn the trailers for articulated lorries.
The works carried out
The yard had previously been repaired twice a year by patching with gravel. However, as this patching became less effective it gave rise to health and safety concerns and the taxpayer concluded that the yard should be resurfaced.
The works were undertaken as a single project. The scope of the works included removing the surface area of the yard, levelling the sub-surface to accommodate run-off for top water and infill, and resurfacing with reinforced concrete. A drainage channel was also added between the factory and the resurfaced area.
The cost of the works was approximately £74,000. The cost to replace the entire site would have been approximately £6.5m.
HMRC disallowed expenditure
HMRC disallowed the amounts spend on the yard as a deduction as it considered the expenses to be capital in nature. It amended the company’s corporation tax assessment, increasing it by £13,428.20.
Steadfast appealed against the closure notice [TC07770].
The FTT had to decide whether the expenditure amounted to a replacement of the yard, (a non-deductible capital expense), or a repair (a deductible revenue expense).
HMRC’s arguments
HMRC put forward several arguments as to why the expenditure should be considered to be capital, including:
- The size and importance of the yard to the site meant that, although the works only related to part of the whole asset, they could be regarded as being of sufficient scale and importance to be capital.
- Steadfast gained an enduring advantage because there would be no need for further repairs for potentially 20 years; Steadfast could have continued to repair the yard with gravel as it had done in the past.
- The extent and permanence of the works completed were such that they preserved part of the fixed capital of the business.
- In the alternative, the works amounted to an improvement of the yard.
Reduced need for repairs
As to HMRC’s argument that the works were capital in nature, because there would be no need for further repairs for potentially 20 years. The FTT noted that a reduced need for repairs does not of itself make expenditure capital. In this case, the reduction in need for repairs was an inevitable result of repairing the yard completely, rather than in patches.
In order for the work to be capital, a reduced need for repairs would have to result from bringing something new into existence that had an enduring benefit to the business, which was not the case for Steadfast’s yard.
FTT decision
The FTT agreed with the taxpayer that there had not been a renewal or reinstatement of the entirety of the yard as the sub-surface had not been replaced.
The FTT also found that there had been no improvement in the yard compared to its original condition, and that the works only returned the yard to its previous standard. There had been no increase in the size of the useable area and no increase in loadbearing capacity of the yard.
The additional drainage channel had been a minor addition to the works, with no evidence that it made a substantial difference to the yard or the factory.
The appeal was allowed.
Comment
It is best left to HMRC’s Business Income Manual to summarise what happened in this case: “What is and what is not capital expenditure has taxed the minds of judges, tax advisors, revenue officials, business people and others for more than two centuries. No one has produced a single simple test that will determine the issue in all circumstances.”
Indeed, HMRC’s arguments in this particular appeal fell short, with the works deemed to be revenue in nature and so it was an allowable expenditure.
Replies (7)
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More public money being thrown at a hopeless cause. There's nothing in the evidence that remotely suggests a capital element. The giveaway is in the last bullet point of HMRC's argument - "in the alternative". This demonstrates that the preceding bullet points were vexatious.
I agree, hopeless cause, it was a yard before and it was a yard afterwards.
HMRC's arguments do seem rather weak, especially the first point alluding to it being sufficiently important. My computer mouse is sufficiently important, but that doesn't mean it should be capitalised.
Their second point "no need for further repairs for potentially 20 years" - since when has that been a condition for capitalising something?
I agree and this was my case. Now the appeal period is passed I must say I couldn't understand why they would litigate this small case (still don't really) and that 'no future repairs' argument didn't make sense to me either. I can't see that it's for HMRC to effectively say to a taxpayer "you shouldn't repair something properly when you can bodge it annually"- apply that logic to, say, the braking system of an HGV and see how far that gets you!
Oh dear! How far HMRC's tax expertise has fallen that they could even consider that they might win this case. It matters, of course, that the experts are so poorly equipped to do their job but it matters even more that they are able so wantonly to waste the time and money of taxpayers, their agents and the Tribunal. At least someone within HMRC had sufficient grasp to abandon any thoughts of appealing.
Somebody should have their knuckles rapped over this one. It's not even a difficult point - and certainly not one which is arguable.
Afraid I don't agree the views put forward (so far) about the relative merits/strengths of the case. I certainly don't think it was clear-cut. But I don't really want to comment on such matters.
I would however like to address 2 different points.
Firstly, hmrc do not take cases to tribunal without a purpose and the officer who carried out the enquiry probably had little input into that decision. Given the fairly small amount involved, I suspect that it was felt that the facts of the case were such that a decision of the tribunal might cast light on the boundary between alteration (capital) and repairs (revenue).
In the context of the foregoing, it is unfortunate that the decision is so brief. It adds nothing to the sum total of knowledge / understanding in this area.
Secondly, the judgement does highlight another feature that is increasingly familiar, that of the tribunal simply accepting what someone says (in this case the director) without looking for evidence. Worryingly, the judge comments about what was the original state and yet no-one who was party to the appeal could speak with any authority on that point. The case makes clear that the property was purchased in 2004 and that the last time any re-surfacing etc would have been carried out, pre-dated that. All the director was capable of attesting to was the state etc when he bought the property.
This type of matter points to a decline in the standards of HMRC but also the tribunal, who should be concerned to get all the facts before making a decision (and clearly setting out those facts in the decision).
One final comment concerning the fact that HMRC has not appealed the decision, this is not a sign of any "improvement" (as seems to be suggested). It is simply that the tribunal decision is (well, should be) one of fact. In that context, no appeal would have been possible (or would have been bound to fail).
I should have thought that the principles established in Conn v Robins Brothers, as summarised at BIM35480, would have led HMRC to the same conclusion as the Tribunal.
I can see many differences, even with the fairly limited facts etc set out in the case and I don't really think it worthwhile setting out the many, potential issues. I simply re-iterate what I said before. HMRC don't take such small cases unless there is a good reason and whatever they may have hoped for, they clearly failed and the case itself has added nothing to the sum total of knowledge (which is probably why you and others seem convinced it had no chance of "success").