Capital expenditure is not allowable as a deduction, nor is it
income taxable as trade profits.
Income tax law and accountancy are not fully aligned on the
treatment of capital expenditure. Income tax law takes precedence.
You therefore need to pay particular attention to those areas where
income tax and accountancy differ in their treatment of capital
expenditure. For a description of the interaction between
accountancy and income tax see
BIM31000 onwards.
You are required to establish the correct measure of profits
for income tax purposes. The profits shown in a set of accounts
drawn up in accordance with UK GAAP will only coincidentally yield
the required figure. A major area of difference is in the treatment
of capital expenditure. Except in those cases where capital
expenditure is specifically allowed by statute (for example
ICTA88/S77 allows certain costs of raising loan finance - see
BIM45800 onwards) capital expenditure is
not allowable in computing profits for income tax purposes. A
common example of the difference is provided by depreciation. The
depreciation of a fixed capital asset constitutes a proper
deduction in computing profits under UK GAAP but for income tax
purposes the expense is not allowed on the basis that it is
capital.
In the CT field, however, there is a growing body of statute
law that recognises accounting entries for tax in computations of
income, notwithstanding the fact that they may be of a capital
nature as a matter of tax principle. In particular, from 1 April
2002 the depreciation of goodwill and other fixed intangible assets
(including intellectual property) becomes allowable for CT in
certain circumstances as a result of the legislation in FA02/SCH29,
(see
BIM35500 onwards).
Lloyd J in the recent Herbert Smith judgement (see
BIM35210) identified the following
circumstances where, apart from the treatment of capital
expenditure, accountancy can yield the wrong result for tax
purposes:
