The costs of restoring capital assets, adapted during the course
of a trade, to their original condition is capital.
In the case of RTZ Oil & Gas Ltd v Elliss [1987] 61TC132
the company held a licence to exploit an oil field. It was a
condition of the licence that when the field was abandoned the
wells should be capped and the equipment removed. The company hired
a drilling rig and tankers and a condition of hire was that the
tankers had to be restored to their original condition. The company
made provision for the close down costs of the oil field and for
converting the tankers claiming that the expenditure was of a
revenue nature. The agreed accountancy evidence was that the
accounts were correctly drawn up in accordance with the ordinary
principles of commercial accountancy.
Vinelott J held that the accountancy evidence did not bear on
the issue as to whether the expenditure was of a capital or a
revenue nature as the same provision would have been made either
way. It may be necessary to give a true and fair view of the
profits earned by a trade in a given year to make an allowance for
the depreciation of a wasting asset on which capital has been
expended. But no such allowance should be made in assessing the
taxable profits for the year.
Relying on Granada Motorway Services [1979] 53TC92 (see
BIM35320), Vinelott J held that the fact
that the contract of hire was non-assignable and had no balance
sheet value was irrelevant. The rig and the tankers were
profit-making apparatus and the cost of re-conversion was capital
expenditure.
