Tribunal – Capital or Revenue write-down
The Tribunal recently considered whether the write down of an asset acquired by a company as a bonus for its directors was capital or revenue. The taxpayer company claimed tax relief for the write-down of £400k. HMRC denied the claim asserting that it was capital, notwithstanding the accounting treatment.
The company, which handled the image rights of Mr ‘Lion’, had acquired the property in 1998 for £800k. The company always intended to transfer ownership of the property to Mr and Mrs ‘Lion’ (the company directors), as an NIC-efficient discretionary bonus, once repairs and improvements had been carried out. Total expenditure on the property was £1.6m although its agreed value at the date of transfer to Mr and Mrs ‘Lion’ was only £1.2m.
The taxpayer company accounts, audited by E&Y, included the write-down as an expense. HMRC argued that no tax relief was available as the company was not involved in ‘dealing in land’ and the property was by definition ‘capital’.
The taxpayer argued that the property had only ever been a current rather than a fixed asset. It had been acquired with the specific intention of being used to provide a discretionary bonus in the short-term.
The Tribunal determined that the means adopted for the payment of the bonus was the acquisition and improvement of an identifiable asset of enduring quality. That expenditure, and the loss or write down in value, was accordingly on capital account. The Tribunal was satisfied that the correct accounting treatment of the property as a current asset did not determine its status for tax purposes.