Resurfacing A Haulage Yard: Repair Or Capital Improvement?

Work was carried out on a haulage yard to improve the surface. HMRC claimed it was a capital cost that improved a fixed asset, but the company disputed this at a tribunal ...

The haulage company leased a combined factory and yard. The whole yard was used for loading and unloading of articulated lorries as well as trailer storage. You can imagine the surface would get quite broken up with all that weight rolling over it.

Although the articulated lorries were quite happy going over the ever-increasing potholes, the forklift trucks started to have problems when loading and unloading pallets, and when it became a Health & Safety hazard, the company decided that the entire yard needed resurfacing!

The remaining surface of the yard was removed, the sub-surface was levelled and strengthened, and then reinforced concrete was placed on top. The work also included drainage channels to extend the life of the new surface.

"This cost around £74,000 whereas moving to a new site would have been £6.5million!"

When the haulage company submitted their Corporate Tax return, HMRC disallowed the amount spent on the resurfacing as it considered it to be a capital expense. It was at this point that the company took HMRC to a First Tier Tribunal which needed to decide if the expenditure was a non-deductible capital expense (as HMRC claimed) or a deductible revenue expense.

HMRC argued that:

- The size and importance of the yard meant it was a capital expense - The company had an advantage because they would not need to repair the yard for at least another 20-years - The works amounted to an improvement of the yard

However, the tribunal noted that a reduced need for future repairs does not in itself make the expenditure capital. Also, the company had not completely replaced the 'entirety' of the sub-surface, and there was no improvement to the yard compared to its original condition.

What is, and what is not, considered capital expenditure by HMRC has confounded both tax advisors and business people alike for centuries, and no one has yet to produce a simple test to determine the issue.

HMRC accepted the result of the appeal, but believed it to have fallen short of the ruling.

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