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Cite as: [2010] UKFTT 500 (TC)

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Moonlight Textiles Ltd v Revenue & Customs [2010] UKFTT 500 (TC) (15 October 2010)


[2010] UKFTT 500 (TC)



Appeal number TC/2009/15545


Corporation Tax – Schedule D – expenditure involving substantial alterations and improvements – whether cost of works were allowable expenditure in computing the Company’s taxable profits or non-deductible capital expenditure












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TRIBUNAL: Mr Michael S Connell (Tribunal Judge)

Mr T Ratcliffe (Member)


Sitting in public at  Leeds on 16 August 2010


Having heard Mr David Sutton FCA for the Appellant and

Mr J P Osborne, officer of HMRC, for the Respondents







1. This Decision relates to an appeal against HMRC’s amendment of the Appellant’s self-assessment for its accounting period ending 31 January 05.


2. The issue to be determined is whether expenditure incurred by the Appellant on the business premises at 77-88 Abbeydale Road Sheffield constituted repairs rather than a scheme of alterations and improvements and was therefore revenue rather than capital expenditure, and hence an allowable deduction from profits.


3. During the period 1 February 2004 to 31 January 2005 the Appellant company carried out extensive work on its premises, purportedly totalling £67,987.00.  This was treated in the company’s accounts as follows :


repairs £53,333.00

expenditure qualifying for capital allowances £11,494.00

professional fees £  3,160.00


4. The Appellant claimed the cost of repairs and professional fees as revenue deductions in its accounts.  The deductions claimed in the company’s tax return were the subject of an enquiry by HMRC which opened on 18 November 2005.


5. The company’s principal activity is the manufacturing and retailing of curtains and accessories.  Its principal place of business consists of a 2-storey building with a showroom and warehouse on the ground floor together with a workshop, offices, boardroom and kitchen on the first floor.


6. The work included a complete replacement of the roof, major alterations, redecoration and improvement of the kitchen.  The work involved a reconfiguration of the stairs, removal of the wall, extension of the floor, installation of new steps, a false ceiling and disabled access.  This resulted in a larger refurbished showroom at the premises and a reduced warehouse facility.


7. The nature of the Appellant’s business previously, was the selling of ready-made curtains.  The alterations were designed to accommodate a shift in the business to providing a bespoke curtain/blind-making service along with their installation.  This shift in the nature of trade reduced the need to hold stocks of material.  The works involved substantial alterations and improvements to the layout of their premises.  It was however accepted by both parties that the entirety had not been replaced.


8. It was agreed by HMRC that the expenditure on the roof repairs totalling £7,131.00 and that element of the cost of kitchen refurbishment, constituting repairs rather than alterations and improvements in the sum of £1,650.00, should be treated as revenue expenditure and allowed as a deduction from profits.


9. HMRC however regarded the majority of the rest of the expenditure as having been incurred on a scheme of alterations and improvements to refurbish and increase the size of the showroom and reduce the size of the storeroom.  Accordingly, HMRC determined that this expenditure was capital and should be disallowed as a deduction from profits - although certain expenditure would be regarded as ‘plant and machinery’ and hence qualify for capital allowances.


10. HMRC, in a letter dated 26 March 2009, set out its view on how the deductions claimed for repairs of £53,333.00 and professional fees of £3,160.00 should be categorised.  A schedule was attached to the letter which showed how expenditure should be properly apportioned and which resulted in an addition to trading profits of £34,022.00 (to £80,364.00).


11. The Appellant did not agree HMRC’s view as to how the cost of the works and legal expenditure should be categorised and, in the absence of any agreement, HMRC’s enquiry was closed on 08 May 2009 by the issue of a notice under paragraph 32 Finance Act 1998.  A Revenue amendment was issued on 24 June 2009, resulting in an increase in the Appellant’s corporation tax for the year ended 31 January 2005 of £6,473.39 (to £15,742.64).


12. The Appellant appealed the amendment.


13. The Appellant contended that :


·       As the disallowed expenditure had not created an asset or removed a liability, it is not capital expenditure

·       The Appellant company was endeavouring to make better use of existing space.  It had not created any additional accommodation. There had been no overall increase in the size of the premises.  The storeroom had been adapted to become shop space and therefore the work could not be regarded as capital. Accordingly, the costs incurred were allowable as revenue expenditure

·       There had been no increase in the capital value of the premises and therefore the expenditure could not be regarded as capital expenditure

·       There is case law authority to the effect that alterations are not always capital unless they are extensive

·       There is also case law authority for the contention that structural alterations may sometimes consist of revenue expenditure.  It is a question of the extent to which the alterations are necessary and whether there had been reconstruction, which the Appellant said in this particular case there had not

·       There had been a replacement of parts and an alteration of the layout without any additions and consequently the work was not capital

·       Any improvement had been restricted to using modern equivalents and, in essence therefore, involved replacement and repair rather than alteration and improvement



14. HMRC contended that :


·       The works amounted to a scheme of alterations and improvement which should be taken as a whole rather than a piecemeal series of works.

·       Although there had not been a replacement of the entirety, this did not alone determine whether expenditure is revenue or capital

·       The creation of an asset or removal of a liability does not on its own determine the category of expenditure

·       The expenditure need not result in an increase in capital value to determine its category

·       HMRC guidance PIM 2020 – Deductions : General Matters : Repairs – does not support the Appellant’s contention that alterations are not always capital.  HMRC Guidance contained in BIM 35460 and 46904 shows that alterations or improvements, no matter how small, are not repairs

·       Because the Appellant had offered no analysis of the expenditure of like-for-like replacements, restorations to original condition or replacement necessitated by modern equivalents, HMRC had to assume that none of these applied

·       On the basis of established authority, any alteration or improvement is not a repair and, as such, is categorised as capital expenditure

·       A repair, by definition, is restoration to former or original condition.  Anything beyond this is not a repair and does not fall to be treated as such


15. As the Appellant appeals HMRC’s amendment to its assessment for the year in question, the onus of proof rests with the Appellant to show that the revised assessment is incorrect.


16. The Tribunal examined plans of the premises “as existing” and as “proposed,” together with other documentation including a breakdown of the various items of expenditure relating to the work which had been undertaken. 


17.            In the words of Buckley LJ in Lurcott –v- Wakeley and Wheeler [1911] 1KB905 (at page 924) “repair is restoration by renewal or replacement of subsidiary parts of a whole. Renewal as distinguished from repair is reconstruction of the entirety meaning by the entirety not necessarily the whole but substantially the whole subject matter under discussion”. Mr Sutton on behalf of the Appellant argued that the work that had been undertaken was simply a replacement of what, physically, commercially and functionally had previously existed and was therefore a repair, the cost of which was deductible as a Revenue expense. He also argued that expenditure to the extent attributable to repairs obviated by improvements were an allowable Revenue expense. As HMRC had pointed out however, the Appellant had not provided a list of items of expenditure which might have distinguished between repairs and improvement in any kind of detail.


18.             From the plans and other documentation available it was clear that there had been a significant improvement of the premises through the repairs and alterations effected. The work had changed the character of the building as a whole. It was also clear that the Appellant company had chosen to adapt its premises to its needs and failing compelling reasons to the contrary this would be regarded as capital expenditure as an alteration. The Appellant argued that expenditure is not endued with a capital nature merely because repairs involve the replacement or renewal of parts of the premises. However instead of simply undertaking repairs the Appellant company had taken the opportunity of substantially altering and improving them and in the absence of any itemised breakdown of expenditure distinguishing between repairs and improvements in detail no deduction can be allowed for “notional repairs”, that is what it would have cost to simply repair the asset had that course been taken.


19. It was therefore clear that there had been a scheme of alteration of the company’s showroom and storeroom/warehouse areas and, as such, save for those items allowed by HMRC as referred to above, the expenditure was capital expenditure and therefore not an allowable deduction from profits.  HMRC identified £40,480.00 as expenditure which should be capitalised, of which £12,917.00 represented qualifying expenditure for plant and machinery and therefore attracted first year capital allowances of £6,459.00.  This resulted in an adjustment to the Appellant company’s profit and an addition of £34,021.00 (£40,480.00 minus £6,459.00).


20. On the basis of the above, the Tribunal dismissed the Appellant’s appeal and upheld HMRC’s amendment to the company’s return for year to 31 January 2005 as detailed in the amendment issued on 24 June 2009.


21. This Decision Notice contains full findings of fact and reasons for the decision. The Appellant has the right to apply for permission to appeal against this Decision pursuant to Rule 39 of the Tribunal Procedure First-Tier Tribunal (Tax Chamber) Rules 2009. The parties are referred to ‘Guidance to Accompany a Decision from the First-tier Tribunal (Tax Chamber)’ which accompanies and forms part of this Decision Notice.






RELEASE DATE: 15 October 2010



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