In Steadfast Manufacturing & Storage Limited v HMRC TC7770, HMRC were unsuccessful in attempting to disallow the costs of resurfacing a yard as capital. The First Tier Tribunal (FTT) found there was no improvement and allowed the costs as a revenue deduction for repairs.
- The company spent approximately £74,000 resurfacing its lorry park. In the past, it had simply resurfaced using gravel.
- HMRC disallowed the costs as capital, arguing that:
- The extent and permanence of the works completed were such that they created an enduring advantage upon preserving part of the fixed capital of the business, being essential to enable the trade to continue and so should be considered to be capital.
- In the alternative, the works amounted to an improvement of the yard.
The FTT found that:
- There was no improvement in the yard compared to its original condition. The works only returned the yard to its previous standard.
- There was no increase in the useable area compared to the original.
- There also was no evidence of any increase in the load-bearing capacity of the yard.
- An additional drainage channel was a minor addition to the works and there was no evidence that it made a substantial difference to the yard or the factory.
HMRC's reviewing officer noted in his review conclusion letter that, “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 judge said that the reduced need for repairs does not of itself make the expenditure capital. In this case, it would be an inevitable result of repairing the yard properly, rather than in patches. In order to be capital, the reduced need for repairs would have to result from the bringing into existence of something new that had an enduring benefit to the business.
A novel line of argument from HMRC in that carrying out decent repairs will create an 'enduring advantage' for the taxpayer. The judge found that this is not supported by any case law. HMRC have not got a good track record when it comes to resurfacing, as the decisions in Hopegear Properties, Cairnsmill Caravan Park and G Pratt & Sons etc reveal (see Repairs & Renewals, subscriber guide)
Repairs & renewals
What expenses can you claim for tax? In what situations are repairs disallowed and treated as capital expenditure?
Plant & machinery
What expenditure qualifies for capital allowances?
Fixtures and integral features
What are the rules for property repairs and renewals?