A particularly difficult area in our tax system is the question of whether expenditure on the farm is revenue or capital expenditure. Revenue expenditure reduces the profits in the business before tax is charged. However, tax relief for capital expenditure is often not received until the farming asset is sold. The margin between whether work on the farm is repair work or capital is often very narrow and therefore open to argument with H M Revenue and Customs (HMRC). It is therefore an area often targeted by HMRC, particularly if in one year repair expenditure increases significantly.
There have been a number of recent cases where the ruling has been in the taxpayer’s favour and helps clarify certain expenditure that may be carried out on many farms.
First of all in G Pratt & Sons v HMRC (TCO 1269), a farming partnership claimed a deduction for the cost of resurfacing the driveway at its farm. HMRC rejected the claim on the basis that this was capital expenditure as the effect of concreting the drive was to provide an entirely new and better surface than before. However, the Tribunal allowed the partnership’s appeal, holding that it was revenue expenditure because there was not a renewal of the entirety of the drive but a repair to an existing asset. Had the track been a new track or if it was previously a grass path HMRC would have had a much stronger case. The Tribunal also noted that they may have reached a different decision if the drive had been altered in some way to accommodate access for larger lorries.
In the case of Cairnsmill Caravan Park v HMRC (TCO 2580) the First-tier Tribunal agreed that the replacement of a grass surface on the caravan park by a hard-core surface was properly treated as being a revenue cost and allowed the deduction. This was a potentially surprising decision and a case that HMRC might have been expected to win. However, the case was lost by HMRC on three counts:
1. The Tribunal ruled that as only 3 acres out of a total of 51 acres had been re-surfaced it was a repair to part of the asset and not a replacement of the entirety.
2. Despite something being a repair, if there is a significant improvement in the asset, it will be treated as being capital. HMRC suggested that the hard-core surface was more durable than grass and therefore should be an improvement. However, the Tribunal found there was no improvement because the original grass surface had been in existence for about 50 years, the maintenance costs of the new hard-core surface are marginally higher and the hard-core has less aesthetic appeal and is, in fact, less practical with customers complaining that their camping awnings were not being capable of attachment to the hard-core surface.
3. Valuations undertaken before and after the resurfacing work had been completed showed no demonstrable increase in the value of the Park.
Finally the case of Hopgear Properties Ltd v HMRC (TCO 2734) concerned the expenses on the repairs and widening of the main entrance to an industrial estate including re-laying of fibre optic cables, landscaping and changes to an existing car park. HMRC argued that the entire expenditure was capital. However, once again the Tribunal found in favour of the taxpayer allowing the deduction on the basis that only part of the site was repaired and there was no scheme of alteration, no reconstruction, replacement or renewal of the asset or substantially the whole of the asset. However, the costs of widening the road were agreed to be capital costs.
These cases provide more clarity and allow us to give more hope to clients who wish to claim a deduction for expenditure on work to the farm. However they also highlight the importance of planning ahead and really understanding what work is being undertaken, the entirety of the works, what the character of the asset was before and will be afterwards as well as the values. Having evidence is the key to successfully arguing any case with HMRC.