Chapter BIM35401
| Published date | 22 November 2013 |
| Record Number | BIM35401 |
| Court | HM Revenue & Customs |
| Issuer | HM Revenue & Customs |
The cost of trading stock is revenue. But the cost of gaining access to minerals, that are to be sold in the course of trade, is capital. The day-to-day operating cost of a mine, oil well etc is on revenue account. The cost of the site and of gaining access to the minerals thereon is capital.
In Coltness Iron Co v Black [1881] 1TC287, the courts decided that the company was not entitled to deduct an estimated sum representing the cost of borings and pit sinkings exhausted during the year. The reasoning was that this was part of the cost of getting at the coal. In other words, a wasting asset cannot be written off over its life. You need to distinguish between the cost of acquiring a site and the works needed to gain access to the mineral, which are capital, and the cost of operating the mine, which is revenue expenditure. If the scale of operations is such that there is repeated capital expenditure year after year that does not make the expenditure revenue. The Lord President summarised the position at page 309:
‘Capital expended in the sinking of pits must necessarily become exhausted and lost sooner or later, and that is foreseen when the expenditure is made… A certain appearance of plausibility is given to the appellant’s argument by the great number and variety of pits sunk and worked by them. The constant employment of capital year by year in such sinking, by reason of the great extent of their business, gives to this expenditure a certain similarity to ordinary working expenses. But the likeness is merely on the surface. If a man buys an unwrought mineral field, and sinks one pit by means of which he works out all of the minerals, he has converted the dormant, inaccessible, and unproductive subject into a going mine. He has made a new subject which differs from the unwrought mineral field just as a railway or canal is a different subject altogether from what the ground on which it is constructed originally was. The miner has invested his capital in creating the subject, which consists partly of the minerals and partly of the access by which the minerals are approached and worked; but the cost of the one, equally with the cost of the other, is an employment of capital…’
This is a clear proposition. But an oil company pursued a different line, arguing that they were acquiring oil, not oil wells, by the special terms on which they took over their subsidiary. In Hughes v The British Burmah Petroleum Co Ltd [1932] 17TC286, the company’s business...
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