The First-tier Tribunal (FTT) has dismissed HMRC’s arguments in a row over whether a business’s expenditure represented a repair (revenue) or a significant improvement (capital). Why?

Where expenditure is revenue in nature it is deductible for tax purposes. If it is capital, it must be relieved under the capital allowances rules. In cases where the annual allowance is not sufficient to cover the expenditure, it can take many years to relieve in full.

This was the case in Steadfast Manufacturing and Storage Ltd (S). S leased a factory with an adjoining yard that was used by lorries and for storage of trailers. Over time, the surface of the yard become damaged by the heavy usage, and S typically had it patched twice a year. However, as the surface worsened, S decided to resurface the whole yard. The cost was over £70,000. S included this as a repair in its accounts, but HMRC disallowed it claiming that the expense was capital in nature as an improvement had been made. It issued a demand for almost £13,500. S appealed to the FTT.

One angle that HMRC tried to put forward was that the works meant that no further repairs were expected to be needed for a long time. However, the FTT commented that merely reducing the need for repairs does not automatically mean the expenditure should be capital. Instead, the question was whether something “new” had been brought into existence. This was clearly not the case here, and the FTT stated that the works had merely restored the yard to its original condition. The decision can be viewed here.

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