BIM35460 - Capital/revenue divide: tangible asset: repairs to old building where techniques have changed over the centuries

If building was useable when acquired and the work simply restores function - expenditure is likely allowable

The cost of repairs is normally allowable whereas the cost of alterations is not. This is because the cost of alterations is capital as it involves improving or changing an asset, rather than simply restoring it to its previous state.

What is an alteration and what is a repair can cause difficulties. This is particularly so in cases involving advances in technology or changes of technique.

In Conn v Robins Bros Ltd [1966] 43TC266 the company traded from very old premises in the town of Banbury. The company held the premises, on a 21-year tenant’s repairing lease with some three years remaining, from one of the directors and family members. It was expected that the tenancy would continue after the current lease expired. Part of the premises was at least 400 years old and was scheduled as an ancient monument. Part was about 200 years old. The premises were in an advanced stage of decay, with rotten roof and floor timbers and crumbling stone and brickwork. The company instructed a builder to reinstate the property and to do whatever works he, in the course of uncovering various defective parts of the building, should find to be necessary for that purpose. No additional space was created anywhere in the building.

The total cost of work carried out over two years was about £8,500. In the year under appeal it was £3,817 of which about £1,000 was admitted to be for alterations. The work done included demolishing a chimney stack and interior wall and rebuilding on steel joists, re-roofing, re-flooring and replacing the shop front (a bow window, which was replaced with a less expensive alternative). The company used the phrase 'gutted and modernised' and had entered into an 'agreement as to capital improvements' with the lessors to provide against the remote risk of losing the tenancy.

The Commissioners having heard detailed evidence found that the £2,736 was expended on repairs. Buckley J said that the primary facts were certainly capable of supporting this conclusion. Buckley J went on to consider the effects of the changes in techniques over the more than four centuries since the building had first been constructed; saying at page 274:

No doubt in the course of carrying out these works certain structural alterations were made, as one would expect with any extensive repair of a building over 400 years old, when repairs were being carried out at a time when building techniques have completely altered. But the fact that there were alterations in the structural details of the building does not seem to me to be a good ground for proceeding upon the basis that the work produced something new. On the contrary, I think it is implicit in the Commissioners' finding that the result of this work was not to produce something new but to repair something which had previously existed. Upon that basis it seems to me that there is no ground for regarding this expenditure as a capital expenditure.

Buckley J considered if there were any circumstances which would lead to the conclusion that the expenditure was capital. The expenditure was not associated with the acquisition of the premises (as in the Laskers case, see BIM35620). If the work had not been carried out it would have been impossible to carry on the business. The work was incurred to allow the company to continue to earn profits by putting its existing asset into a proper state of repair. There was no evidence that the asset when acquired by the company was not in a fit state and that the cost of acquisition reflected it being in an unusable state (see BIM35455).

You may therefore accept:

1. where work is carried out to an old building, not acquired in an unusable state at a reduced price, and
2. which does no more than reinstate the building, and
3. as a result of changed techniques some structural alterations are made.

that this does not make the expenditure capital if all that has been achieved is to reinstate the building. This does not mean that the case is authority to allow any expenditure on works to an old building. After all in the case itself a significant element of the expenditure was disallowed as alterations.