A recap of what is allowable when it comes to repair or capital.
The profits of a trade are calculated in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law.
The basic position is that:
the cost of repairing an asset is normally allowable revenue expenditure
the cost of replacing an asset is normally capital expenditure and not allowable as a deduction
the cost of altering an asset to do something else is normally capital expenditure and not allowable as a deduction
the cost of improving an asset is normally capital expenditure and not allowable as a deduction
the cost incurred on ‘integral features’ of a building or structure is deemed to be capital expenditure on which capital allowances may be claimed
costs incurred on or after 29 October 2018 that are incidental to the renovation or conversion of part of a building or structure are deemed to be part of the capital cost of that renovation or conversion.
What constitutes replacing the entirety of an asset is a question of fact which depends on each individual case. It should take into account the physical objects to which the test of repair has to be applied, as well as the work done.
A chimney that stood by itself, connected to the rest of the factory only by flues, was found to be a separate asset (Bullcroft MainCollieries Ltd v O’Grady). However, a chimney that stood within a factory and looked like a pillar in the factory building was simply a part of the factory (Samuel Jones & Co (Devonvale) Ltd v CIR).
In a recent case G Pratt & Sons v HMRC , the First-tier Tribunal decided that a 239m long farm drive which had been re-surfaced and new kerbing added as necessary to bring the drive up to modern standards, was a repair to the existing road. The Tribunal found that this was not an improvement as it did not change the character of the road. The road could not be used by larger trucks as a result of the works.
Scale and importance of the work
In Phillips v Whieldon Sanitary Potteries Ltd , the company’s factory was adjacent to a canal and had been protected by an embankment. The embankment suffered from subsidence and water seeped into the factory. As a result of colliery workings, the factory also suffered from subsidence. The old brick and earth embankment was removed and an iron and concrete barrier constructed. The work undertaken was considered ofsufficient scale and importance to be capital.
Judge Donovan J concluded ‘I reach this conclusion taking into account the extent of the work, the permanent nature of the new barrier, the enduring advantage it confers upon preserving part of the fixed capital of the business, and the contention of the company that it was essential to enable the trade to be carried on. There can be cases where the work done may result in no improvement, but merely reinstatement, and yet be work involving capital expenditure on account of its size and importance.’
Where extensive work is carried out on an asset, it is possible that although parts of the original asset remain, the character of the asset has changed.
The view taken seems to be that if the asset has been changed to do something else, or has been changed to do more, then the character of the asset has changed, and it has not merely been restored to its previous efficiency. It the asset has become something else, then this is capital expenditure.
In the case of The Law Shipping Co Ltd v CIR  12TC621, the expenditure turned a ship that had been acquired in an unusable condition into a ship that could be used to generate income. The character of the asset had been changed by the expenditure from something that was little more than a hulk to a merchant ship capable of carrying cargo. As a result, the expense was deemed to be capital in nature.
Changing the character of the asset
In Auckland Gas Co Ltd v IR Commrs (New Zealand)  BTC 249), upgrading a system of cast iron and steel gas pipes and returning it to a functional purpose by inserting new polyethylene piping was held to be capital. This was the case even though the insertion technique was less expensive than the traditional method of finding and fixing individual gas leaks. Following the upgrading programme, gas was distributed through the polyethylene pipes, thus substantially changing the character of the object in question, so that it constituted a replacement rather than repair.
The use of more modern materials or the use of new technology as part of a repair does not necessarily mean the repair becomes an improvement.
Care needs to be taken as the use of modern materials may give an apparent element of improvement because of the greater durability, superior qualities and so forth of the new materials. In such circumstances, the position is that:
the work is a repair and not an improvement if, after the work is carried out, the asset can just do the same job as before
the work is an improvement and therefore disallowable as capital expenditure if, as a result of the work, more can be done with the asset or the asset can be used to do something that it could not do before.
As technology changes over time, something that would be accepted as an improvement in year one may, by year five, be simply a repair. This is because that technology is no longer seen as an improvement and is simply what is used for the job - it has become the industry standard for that type of work.