BIM35465 - Capital/revenue divide: tangible asset: no deduction for notional repairs

Repairs avoided by enlarging and/or altering a building

Instead of simply repairing an asset a taxpayer may instead take the opportunity to improve the asset. The taxpayer in such circumstances is not entitled to a deduction for notional repairs – what it would have cost to repair the asset had that course been followed.

In William P Lawrie v CIR [1952] 34TC20 the firm’s business was the manufacture of concrete slabs and blocks. The trade was carried on in a wooden building with an asbestos, corrugated iron and glass roof supported by brick piers. The roof leaked and the pillars were shaky. The firm was advised to reconstruct the roof rather than attempt repairs. The firm decided to enlarge the building and have a new roof. The end walls were demolished and rebuilt to a greater height; the sidewalls were extended, heightened and reinforced; the brick piers were replaced by steel columns and the new roof was of corrugated asbestos and perspex. The firm claimed five-sixths of the cost of the roof as repairs, conceding that the balance arose through enlargement of the floor space.

The Special Commissioners thought that the entirety to be considered was the roof and held that the whole of the expenditure was capital. The Court of Session did not agree that the roof was the entirety; the building was. But the court upheld the decision that the expenditure was capital and dismissed the argument that it should be dissected to attribute part to a hypothetical repair. Lord Carmont explained the court’s decision at page 26 of 34TC:

Any sum claimed by the taxpayer as having been actually spent on repair can be analysed by the Inspector, or by the Commissioners, with a view to determining whether or not it is a repair or a renewal, but once it is determined that the matter is a renewal the whole of the sum must be treated as capital outlay and it is not allowable to split up the cost of renewal so determined, with a view to showing that a certain part of it should be debited to income because that amount would have been expended if the necessary work had been done as a repair, because that course would be going back on the decision that has already been arrived at, viz., that the work done should be charged as a renewal.

In Thomas Wilson (Keighley) Ltd v Emmerson [1960] 39TC360, the company’s mills included a three-storey building. The roof and top storey were in a dangerous condition. The work done involved replacing some four feet of stonework and building it up a further eight feet, inserting new windows and constructing a new floor and roof. Although the area was not increased, more floor space became useable. The additional space was not required or used. The company claimed the whole cost, or alternatively if the increase in height constituted an improvement, all except £2,000 attributable to this work. The General Commissioners considered that the entirety was the three-storey building; that the work was a reconstruction, extension, alteration and improvement of the third floor and that they must follow the Lawrie decision. This meant that the Commissioners could not apportion the cost and no part was allowable. Danckwerts J considered that there was ample evidence for the Commissioners to reach the conclusion that the work was one of improvement and not repair. He said that the Commissioners’ decision was not one with which he ought to interfere.

You should also look at Finlay’s comments in Margrett v The Lowestoft Water and Gas Co Ltd [1935] 19TC481 - see BIM35330.