Capital expenditure or revenue expenditure? The great divide

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20 July 2011

Whether expenditure is capital or revenue is a key question for traders in computing their profits for tax purposes. This is because revenue expenditure is deductible immediately.

A recent case heard by the Upper Tribunal, Markets South West (Holdings) Ltd v Revenue and Customs Commissioners, considered the nature of expenditure incurred by a company

involved in a dispute concerning a planning permission which restricted the days on which it could exercise its right to trade (regarded as a capital asset for corporation tax purposes).

In computing its profits the company argued that the professional fees incurred in this dispute were revenue expenditure and therefore deductible. The First Tier Tribunal had held that the expenditure was of capital nature; the legal fees relating to the disputed planning permission did not relate to an existing right to trade because the company wanted to enlarge the scope of its trading. Therefore, the expenditure was not linked to the maintenance of an existing capital asset, but to either the acquisition of a new capital asset or the extension of the existing one.  

The company appealed to the Upper Tier Tribunal arguing that the professional fees should be classified as revenue expenditure because they related to expenditure incurred in defending an existing right to trade it had at any time.

The Upper Tribunal held:

  • The issue is whether the expense is incurred on defending the existing right to trade on Wednesdays (income) or acquiring that right (capital).
  • No single test applies, two factors are relevant: the 'nature of the payment' and the 'nature of the advantage obtained by the payment';
  • The latter is more important. You should ask whether the expenditure relates to a planning consent which is an intangible asset of a capital nature.
  • The First Tier Tribunal made an error of law in deciding that the whole expenditure was capital.
  • The expenditure should be apportioned between revenue and capital expenditure since some did relate to the defence of existing rights. A helpful analogy was made, likening the expenditure related to a building which may be apportioned between repairs (income) and improvements (capital). The case was remitted to the First Tier Tribunal for apportionment.

For more information, please contact Nigel Popplewell on +44 (0)117 902 2782 or email or Helene Castro on +44 (0)117 307 6859 or email

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