BIM42215 - Deductions: timing: deferred revenue expenditure: overview

In a number of circumstances UK GAAP either permits or requires expenditure to be 'spread' or 'deferred' in accounts; in other words, the expenditure is charged to the profit and loss account of more than one year. For example SSAP13 'Accounting for Research and development' permits development expenditure, under certain conditions, to be deferred to future periods. Similarly FRS10 'Goodwill and intangible assets' requires expenditure on the purchase of intangible assets to be spread over the expected useful economic life of the asset. Finally, recent changes in GAAP may make it more common for expenditure on major overhauls of plant and machinery to be spread over a number of years after the overhaul has been carried out. (The changes in GAAP are FRS12 'Provisions, contingent liabilities and contingent assets', and FRS15 'Tangible Fixed Assets'.)

The accountancy treatment is not relevant for expenditure which is 'capital' in tax terms. But it is a separate issue whether revenue expenditure which is 'capitalised' by accountants is also disallowable for tax. Generally, the answer is 'no'.

Accountants often refer to 'capitalising' expenditure without implying anything about its treatment as revenue or capital expenditure for tax. They simply mean that expenditure is taken to the balance sheet because it relates to a later year. An alternative description for capitalised revenue expenditure is 'deferred revenue expenditure'.

The question of whether expenditure is capital or revenue for tax purposes is one of tax law. It follows that expenditure that is revenue for tax purposes does not, and cannot, lose that character whether it is charged wholly in one year's accounts, or spread over the accounts of more than one year. In other words expenditure does not become capital expenditure for tax purposes by being 'capitalised' in the accounts; 'capitalised' revenue expenditure is still revenue. Equally, capital expenditure does not become revenue expenditure when, say, depreciation is charged to the profit and loss account.

Accounting standards will be relevant for tax when it comes to deciding in which period revenue receipts and expenses fall, unless there is a specific tax rule that provides to the contrary. Examples of specific rules are the ICTA88/S592 (4) rule on contributions to exempt approved pension schemes and the FA89/S43 rules about late paid employment income.

Leaving aside these specific tax provisions, there is no rule of tax law that the 'right' time to deduct revenue expenditure for tax purposes is the year in which it is incurred, or the year in which there is a legal liability to pay it (Threlfall v Jones [1993] 66TC77, Herbert Smith v Honour [1999] 72TC130). It follows that where revenue expenditure is spread over the accounts of more than one year, and this treatment accords with GAAP, there is no rule of tax law which entitles a taxpayer to deduct it all 'up-front'. Equally, the fact that the accounts describe some deferred revenue expenditure as having been 'capitalised' does not mean that it cannot be allowed for tax as a business expense at some time.

The tax treatment of revenue expenditure should not differ from the accounts treatment where revenue expenditure is separated from capital depreciation, so no computational adjustments for deferred revenue expenditure will be necessary on a continuing basis. An adjustment is necessary if the tax treatment has differed from the accountancy treatment in prior accounting periods, see BIM42220.