BIM42220 - Deductions: timing: deferred revenue expenditure: reaching consistency of treatment

In February 1999 the Revenue published an article in TB39 explaining the view that the timing of the tax treatment of deferred revenue expenditure should follow the accountancy treatment. We became aware that despite this publication, deferred revenue expenditure was being dealt with in different ways. The lack of consistency may have been partly due to ambiguous guidance caused by some unamended advice that did not reflect our publicised change of view. For example, some guidance referred to ICTA88/S74 (1)(d) providing a timing rule for allowing a deduction for repairs expenditure etc regardless of accountancy treatment. Following the Special Commissioners’ decision in Jenners Princes St Edinburgh v Inland Revenue Commissioners (1998) we accept that there is no such authority. Other guidance reflected the correct view. Previous guidance also suggested a pragmatic approach in dealing with expenditure posted to fixed assets and this too had not been amended.

Where deferred revenue expenditure was posted to current assets on the balance sheet, following Threlfall v Jones [1993] 66TC77, our guidance was consistent in explaining that no deduction for such expenditure is due when it is incurred or paid, see BIM42210.

We know that there was not a consistent approach to dealing with deferred revenue expenditure. For example, some taxpayers:

• Volunteered to follow the new approach.
• Submitted returns on the old 'incurred' basis and the issue was never raised by either side.
• Submitted returns on the old 'incurred' basis and accepted the Inspector’s challenge to the computational adjustment.
• Submitted returns on the old 'incurred' basis and the point was still open under enquiry.
• Negotiated 'agreements' with their Inspector on this point.

We had to remove inconsistency to get everyone on the correct basis, but it would have been unfair to allow some taxpayers to delay computing their tax profits in accordance with the law, whilst others were at a disadvantage having complied with the law. We therefore introduced a cut-off date to enable any past inconsistencies to be removed as far as practically possible.

The cut off

30 June 1999 is the cut off date from which the correct view of the law should be applied. By this date we think that it is reasonable to assume that details of the new approach would have become known. Any income tax or CT return, to the extent that it includes profits or losses shown in accounts for periods starting after 30 June 1999, should be settled in accordance with the law, and should not reflect computational adjustments to give relief for deferred revenue expenditure before it is deducted in the profit and loss account.

Detail

The term 'accounts period' refers to a period for which accounts are drawn up.

A return and an accounts period 'relate to' each other, if the return includes business profits or losses of the accounts period (disregarding losses and other amounts which for tax purposes can be carried forward or back between one period and another).

A return is 'open' in the following circumstances:

1. for periods preceding SA:

2. for periods where SA applies:

Otherwise a return is 'closed'.

Open returns relating wholly to accounts periods beginning after 30 June 1999

If a return related to an accounts period beginning after 30 June 1999 is open, then the tax liability in respect of the profits in the accounts period should be settled in accordance with the correct legal position on deferred revenue expenditure (see above). But where a deduction for the expenditure has already been allowed on an incurred basis the expenditure cannot be allowed again.

Open returns relating wholly to accounts periods beginning on or before 30 June 1999

If a return related to an accounts period beginning on or before 30 June 1999 is open, then the tax liability in respect of the profits in the accounts period will depend on whether the expenditure has been posted to fixed or current assets.

1. Where expenditure is posted to fixed assets we will accept any related computational adjustment that accompanied the original return thus allowing relief for the expenditure on the old incurred basis. This caters for earlier uncertainty about the law, which gave rise to potentially ambiguous guidance.
2. Where the expenditure is posted to current assets the return should conform to the correct legal position (see above) so that no tax deduction is appropriate in full when the expenditure is incurred or paid. There should have been no doubt at all as to the correct way in law that this expenditure should have been dealt with, as explained in BIM42210.

Special cases

There may be cases where an open return relates both to an accounts period beginning on or before 30 June 1999, and to one beginning after that date. An example would be an income tax return where the profits for the year of assessment are those of a period straddling a 30 June 1999 accounting date.

In this situation, the two accounts periods are dealt with separately, applying the general principles described in this guidance for open returns related to periods of account beginning respectively on or before, or after, the 30 June 1999 cut off date.

Cases where the return is closed

If the return is closed, the treatment of deferred revenue expenditure can only be raised if the person dealing with the accounts makes a discovery.

Claims from taxpayers that the cut off date is retrospective

Our view of the correct position in law for the treatment of deferred revenue expenditure was published in February 1999 in TB39. It changed from our former view as a result of evolving case law, including the decisions in Threlfall v Jones [1993] 66TC77 and Herbert Smith v Honour [1999] 72TC130. The Revenue also issued a Press Release PR138/99 in July 1999 following the Herbert Smith case that confirmed our revised view. We therefore consider that tax practitioners would have been aware of our view before the cut off date.

Particular situations

In some circumstances inspectors have entered into explicit informal understandings, that are binding on HMRC, and which perpetuate the 'paid or incurred basis'. They preclude the parties from applying the correct treatment for their duration. Inspectors should revisit and unwind these as soon as possible, and no such informal understanding should be renewed. In any case of difficulty, contact CT&VAT (Technical).

A payment of tax, including a quarterly instalment payment of CT, may have fallen due for an accounting period before the taxpayer was aware that the informal understanding had been withdrawn. In these circumstances, you should be prepared to accept that the correct treatment of deferred revenue expenditure should apply to relevant expenses only in relation to subsequent accounting periods. However, if the tax computations reflect the correct treatment, or if the taxpayer agrees to the correct treatment, you should follow that treatment.

Cases where a non-depreciation policy has been adopted

Some companies, for example, property investment companies, adopt a non-depreciation accounting policy in which revenue expenditure is capitalised without being charged to the profit and loss account until a much later date. If you are in any doubt about whether such treatment is in line with UK GAAP in a particular case, you should obtain advice from your local HMRC accountant.

There is no rule of law that enables a business to obtain relief for revenue expenditure at a time when it is not written off to the profit and loss account and you should resist any claim that relief should be given in tax computations when it is not shown as a deduction in the accounts. Under generally accepted accountancy principles, capitalised revenue expenditure will be charged to the profit and loss account either on the sale of the asset or when there is a reduction in the value of the asset which is expected to be permanent such that the value falls below the asset’s original cost. Relief will only be available for tax purposes when the expenditure is charged to profit and loss account, even though this may be some time after the expenditure was incurred.

If part of an asset is sold or revalued below cost, you can accept a reasonable allocation of agreed revenue expenditure to the profit and loss account as the amount of deduction for tax purposes.

In every case where a non-depreciation policy is adopted in the accounts but the taxpayer wishes to pursue an appeal to the Commissioners, you should submit the case to CT&VAT (Technical) before listing for a hearing.

Double deductions

A taxpayer may have claimed expenditure when incurred in the past and may argue that if the same expenditure is subsequently debited in the profit and loss account as deferred revenue expenditure, HMRC is now constrained to accept that treatment for tax. The effect of this would be to allow a deduction twice for the same expenditure. We do not accept that a double deduction is possible. You should submit any case where a double deduction is claimed to CT&VAT (Technical) for further advice before engaging in detailed correspondence.

Combined capital and deferred revenue expenditure depreciated

The depreciation charge in the profit and loss account may include both capital depreciation and the write off of revenue expenditure. Any capital depreciation, together with any revenue expenditure that has already been allowed on the incurred/paid basis, should be added back. Revenue expenditure will otherwise be deductible. Accept any reasonable method of identifying the revenue element provided it is consistently applied. Taxpayers and Inspectors will need to keep track of the revenue expenditure that is deferred so that it can be identified when it is written off.

Appeals

Where attempts to settle a case by way of agreement fail, please submit the case to CT&VAT (Technical) to review before listing. Note that there is a mandatory submission instruction at IM5098e and AP3422 when any contentious case involves accountancy issues. This request for a submission will satisfy the ADM6.109 requirement about when further advice should be sought.