BIM35450 - Capital/revenue divide: tangible assets: asset bought in a defective condition

The border between capital expenditure and repairs

Sometimes a trader acquires an asset in need of repair. After acquisition the trader expends money on repairs. In such a case the fact that the repairs are attributable to deterioration of the asset before acquisition is not of itself sufficient for you to treat the repairs as capital. If you would have treated the repairs as revenue if ownership had not changed, the repairs are normally revenue when expended by the new owner. Exceptionally you may be able to argue that the repairs are capital. For example, if:

• The asset was not in a fit state for use until the repairs had been carried out or could not continue to be used in the trade without being repaired shortly after acquisition. See BIM35455.
• There is evidence in, for example, the contract for the sale of the asset or in negotiations leading up to the contract or in the surrounding circumstances that the purchase price was substantially less because of the dilapidated state of the asset. You should not attempt to deny relief where the purchase price merely reflects the reduced value of an asset due to normal wear and tear (for example between normal maintenance cycles).
• In the case of leased property, the new tenant covenants as one of the terms of the lease to reinstate the property in a good state of repair (but bear in mind that the capital expenditure may qualify for relief under the premium legislation, see ICTA88/S34 (2) and (3) and BIM46250 onwards). See also BIM35620.

You do not have to establish the presence of all of these factors for the expenditure to be capital.

You should treat repairs expenditure following a change in the persons carrying on a trade, where the change is treated as a cessation/commencement, as revenue expenditure if the asset was in an adequate state of repair at the time of change. If abnormally heavy repairs expenditure is incurred on an asset shortly after the change of ownership the likelihood that it is capital is increased. But expenditure recurring at intervals of a few years (for example exterior painting of a building which has been deferred by the previous owner but which in the normal course of events falls to be expended shortly after the building is acquired) should be allowed.