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Chapter BIM35450

Document Cited in Related
Vincent
Published date22 November 2013
Record NumberBIM35450
CourtHM Revenue & Customs
IssuerHM Revenue & Customs

Repairs remain repairs even if they have been deferred so long that an asset is in an extremely poor state of repair.

One potential exception to this is where an asset has been acquired in poor condition. In this situation the cost of the repairs may be capital expenditure as part of the cost of the asset. Whilst the cost of buying a basic version and upgrading to get the asset you want is clearly capital expenditure as part of the cost of acquiring the asset, the position is less clear with assets in poor repair.

If the work is simply routine maintenance work that recurs every few years, then it is allowable expenditure as a repair. For example, exterior painting of a building which has been deferred by the previous owner but which in the normal course of events falls to be expended shortly after the building is acquired, is allowable.

Guidance on when the cost of repairing an asset acquired in poor repair is allowable can be found in the contrasting cases of The Law Shipping Co Ltd v CIR [1923] 12TC621 and Odeon Associated Theatres Ltd v Jones [1971] 48TC257.

Although both companies purchased assets in poor condition, there were key differences between the two cases.

  • In Law Shipping, the company acquired a ship in poor condition that they would have to have repaired before they could use it. This was capital expenditure on acquiring a working asset.
  • In Odeon the Company was able to operate the cinemas for a number of years before they carried out the repairs. What was more, the price paid was not reduced to reflect the state of repair. The expenditure was found to be on repairs and allowable.

In Odeon, the Court of Appeal distinguished Law Shipping on the following grounds:

  • The purchase price of the ship was substantially less than if it had been in a fit state of repair.
  • The ship could not continue as a profit-earning asset without being repaired shortly after acquisition.
  • There was no evidence in Law Shipping...

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