Repairing an asset is one thing, replacing it another, and distinguishing between the two is of critical importance when it comes to calculating Corporation Tax (CT) liabilities. The First-tier Tribunal (FTT) gave guidance on where the line should be drawn in a case concerning extensive works carried out on a heavy goods vehicle yard.
The yard had over the years fallen into considerable disrepair. Weeds were growing through its surface, parts of its had broken up and filling in potholes with gravel was only an imperfect solution. The company that ran the yard had health and safety concerns and spent about £74,000 on having it resurfaced.
The company set off that cost against its CT liability for the year on the basis that it was a revenue expense arising from the yard’s repair. However, HM Revenue and Customs (HMRC) took a different view and later demanded £13,428 in additional tax on the basis that the works had resulted in the replacement or improvement of the yard. The cost of the works was said to represent a capital expense which was non-deductible for CT purposes.
Upholding the company’s challenge to that decision, the FTT noted that it could not be said that the whole of the yard had been reinstated or renewed in that its sub-surface was not replaced. There was no increase in the yard’s usable area or in its load-bearing capacity.
There was no improvement in the yard compared to its condition before wear and tear took their toll and the works were repairs in that they merely returned it to its previous standard. They did not bring something new into existence and, although the resurfaced yard would need fewer running repairs in the future, that did not render the expense capital in nature.
