Chapter BIM35595
| Published date | 22 November 2013 |
| Record Number | BIM35595 |
| Court | HM Revenue & Customs |
| Issuer | HM Revenue & Customs |
The cost of securing a lasting business advantage by buying out a competitor was found to be capital in the case of Walker v The Joint Credit Card Co Ltd [1982] 55TC617 (see BIM35510).
A payment to bind an employee under a restrictive covenant not to compete in the same line of business in various geographical locations was held to be capital in Associated Portland Cement Manufacturers Ltd v Kerr [1945] 27TC103. At the end of 1939 the (69-year old) managing director and another (60-year old) director were due to retire. Both had extensive knowledge of and contacts in the cement industry. Both would be free to set up in competition with the company. The company entered into agreements with directors where in exchange for payments of £20,000 to one and £10,000 to the other the retiring directors agreed not to compete with the company anywhere in the world. The £30,000 was included in the company’s profit and loss account under the heading ‘sundry special reserves’. At page 116 the Master of the Rolls, Lord Greene, discusses the role of accountancy evidence and the means used to finance a purchase in determining the nature of the expenditure. Accountancy is not determinative and how the purchase was funded is immaterial. What matters is whether the expenditure results in the acquisition (modification or disposal) of a capital asset:
‘On the question of whether an item of expenditure is of a capital or a revenue nature, it is no doubt helpful to consider the circumstances from the accountancy point of view. But one must be careful to define one’s terms. Whether or not an item of expenditure is to be regarded as of a revenue or capital nature must in many, and indeed in the majority of cases I should have thought, depend upon the nature of the asset or the right acquired by means of that expenditure. If it is an asset which properly appears as a capital asset in the balance sheet, then that is an end of the matter. But it must never be forgotten that, an asset which may properly and quite correctly appear and only appear in the balance sheet as an asset, may be acquired out of revenue. There is nothing in the world to force a company or a trader who buys a capital asset to debit the cost of it to capital. Conservatively managed companies every day pay for capital assets out of revenue if they are fortunate enough to have the revenue available. It is, therefore, no sufficient test to say that an asset has been paid for out of revenue, because the...
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