Question 3: what is the difference capital expenditure and revenue expenditure

in tax Law

Capital expenditure
Tax law define capital expenditure as generally not deductible when computing
income but certain types of capital expenditure attract tax relief in the form of
standardised depreciation allowances known as capital allowance this cost is calculate
in respect of chargeable period. This cost that is going to benefit the organisation
more than one period for example depreciation also know as “capital allowance” of an
assets.[Rhodesia railways Ltd v income collector of Bechuanaland protectorate
(1933)] expenditure was caused due to the fact of renewal of sleepers and chains as
this considered as an asset then the expense. If the case were going to fix the torn
chairs and sleeps then this cost would be considers as revenue expenditure as it does
not affect the operation of the railway and this does affect the purchasing price.
Another example would be [Law Shipping Co Ltd v CIR] after the shipping had
purchases a second hand ship a survey was conduct and saw that the ship require
major repair. This survey was conducted after the initial shipping, this expenditure
was considered as a revenue expenditure and later changed to capital expenditure as it
has affect the operation of the shipi .

Revenue expenditure
This expenditure is seen as a cost that is going to affect the organisation current period
that accounting period [Odeon associated theatres Ltd v Jones (1972)] Odeon
acquired several repair and decorating, the cinemas continued to operate and were
repaired over a number of years. The state of the cinemas when purchased did not
affect their purchase price. It was held that the repairs were a revenue expense as the
cinemas continued to be operated. Revenue expenditure is the expenditure involves
the daily running of a business and this includes items such as repairs to properties
(but not improvements), staff wages, legal fees, interest paid (but not capital
repayments on a mortgage), any rent paid, council tax and such likeii
The difference between capital and revenue expenditure
The main difference between the two is the treatment between. Revenue expenditure
is treated in the income statement during the period it occurs this expenditure is
deductible against the profits. When as the capital expenditure is treated by the end of
each financial period. we can see that revenues does not affect the daily running of the
entity where and capital affects the entity ability to provide a service [Law Shipping
Co Ltd v CIR] this business had to stop shipping due to the fact they did not have the
equipment. Whereas [Odeon associated theatres ltd v Jones (1972)] repairs did not
affect they ability to generate profits. To tell the difference between capital and
revenue expenditure we need to determine is nature to an entity capital expenditure is
generally incurred when an entity purchases as asset for business whereas revenue
expenditure is about day to day use for example [CIR V SCOTTISH &
NEWCASTLE BREWERIES] this company purchased electrical lights, various
decorations and murals, these included pictures, sculptures, wall plaques and
tapestries. The decorations and lighting were chosen to create a specific atmosphere
and therefore the design performed a function of the business. As the purchase did not
an affect the company ability to generate profit, this expenditure would be seen as
revenue expense.

.
Provisions of sector 74 ICAT 1988
FRS12 defines provision is a liability of uncertain timing or amount[ACCA].
Liability is an obligation from pass event. The settlement of which is expected to
result in an outflow from the entity of resources embodying economic benefit. FRS12
state that provisions must be made when at the balance sheet date the entity present
the obligation .provisions of Section 74 ICTA 1988 requires that expenditure must be
incurred wholly and exclusively for the purposes of the trade. [HMRC, 2010]
Provisions are recognised when
• when a obligation arise from pass event
• it is probable that outflow of resources embodying economic benefits will be
required to settle the obligation
• a reliable estimate can be made of the amount of the obligation[ACCA]
A provision made in accounts will be allowable for tax purposes if (and only if):
• it is in respect of allowable revenue expenditure (and not, for example, in
respect of capital expenditure);Jenners princes street Edinburgh Ltd v CIR]
in this case the department store had to carry out a survey relating with the
external repairs and was in the process of granting the contracts to carry out
the repair work. This repair took 2years the special commissioner agreed with
the company that a specific provision had been made that is according with
sound accounting principles and therefore the amount had been expended in
accounting sense even though not paid out. As we have distinction the
difference between the capital and revenue, we can clearly see that this
expenditure was considered as revenue. Why? Because it did not affect the
organisation ability to generate income So this settlement of which is
expected to result in an outflow from the entity of resources embodying
economic benefit
a provision must be made where an existing contract becomes 'onerous', for example,
where a business vacates property held under a lease, but the obligation to pay rent
continues and the lease cannot be surrendered or assigned .[HMRC, 2010] Whether
such a provision is permitted by tax law depends on the final outcome of [Herbert
Smith v Honour] Herbert smith a solicitors deicide to move their oganisation from
four difference buildings into one building. The other two office still had an going
lease which . The solicitors made a provision of some £5.5 million for the expected
 loss on the two lease by the end of the accounting period. [HMRC, 2010] that
provisions were vulnerable to challenge under tax law if the making of the provision
was inconsistent with the true facts, or if the provision was not estimated with
sufficient accuracy. By the time the case reached the High Court it was common
ground that neither of these prohibitions applied
REFENCES
• HM Revenue and Customs, 2010. BIM42220 – Deductions : timing: deferred revenue
expenditure: reaching consistency of treatment [Online] (Updated 1st January 2010)
Available at: http://www.hmrc.gov.uk/manuals/bimmanual/bim42220.htm [Accessed
23rd October 2010]
• HM Revenue and Customs, 2010. BIM37300 – Wholly & exclusively : case law : the
‘capacity’ test [Online] (Updated 1st January 2010) Available at:
http://www.hmrc.gov.uk/manuals/bimmanual/bim37300.htm [Accessed 24th October
2010]
• HM Revenue and Customs, 2010. BIM37820 – Wholly & exclusively : expense of
earning or application of profits?:rent subject to abatement of profits [Online]
(Updated 1st January 2010) Available at:
http://www.hmrc.gov.uk/manuals/bimmanual/bim37820.htm [Accessed 24th October
2010]
• ACCA – the global professional accountants, 2010. Corporation Tax Cases -
HERBERT SMITH V HONOUR, CH D 1999, 72 TC 130; [1999] STC 173 [Online]
(Updated 1st January 2010) Available at:
http://uk.accaglobal.com/uk/members/technical/taxation/cases/corporation/herbert
[Accessed 24th October 2010]

• HM Revenue and Customs, 2010. BIM46555 – Specific deductions : provisions :

allowability for tax : accuracy [Online] (Updated 1st January 2010) Available at
http://www.hmrc.gov.uk/
````````````manuals/bimmanual/bim46555.htm [Accessed 23rd October 2010]

• The Accounting Review, 1941. Capital and Revenue Expenditures [Online] American
Accounting Associated. Available at: http://www.jstor.org/stable/240085?
origin=JSTOR-pdf [ Accessed 1st October 2010]
i http://uk.accaglobal.com/uk/members/technical/taxation/cases/ca/shipping

ii http://www.taxinsider.co.uk/368-Capital_v_Revenue_Expenditure_and_Associated_Relief.html#options