Kevin Read reviews recent case law on re-surfacing land.
Whether re-surfacing work is allowable revenue expenditure or extra capital expenditure on the land will depend on whether it can be seen to enhance the working area or value of the site.
Resurfaced yard
The recent case Steadfast Manufacturing & Storage v Revenue and Customs [2020] UKFTT 286 (TC) concerned an appellant that leased a factory and yard. The latter had not been resurfaced since before the site was acquired and was in poor condition. Some areas were unstable and unsuitable for use by forklift trucks, although they were used when necessary to turn the trailers for articulated lorries.
Historically, the yard was repaired twice a year by patching with gravel. The forklift trucks would quickly damage this material and, with this patching becoming less effective, there were health and safety concerns. The company thus decided to resurface the yard.
As well as resurfacing, a drainage channel was added between the factory and the re-surfaced area. The cost of this channel was only £740, out of a total of about £74,000.
Overall, there was no increase in size of the useable area and no increase in the loadbearing capacity of the yard. Was the expenditure capital or revenue in nature? If the former, it would be disallowable capital cost.
Tribunal decision
The First-tier Tribunal (FTT) said there was:
- no improvement, the works only returning the yard to its original condition;
- no increase in the useable area; and
- no evidence of any increase in the load-bearing capacity of the yard.
The additional drainage channel did not alter the outcome, as it was a minor addition to the works and there was no evidence that it made a substantial difference to the yard or the factory. The appeal was allowed.
Other cases
In G Pratt & Sons v Revenue and Customs [2011] UKFTT 416 (TC), the dispute was over the re-surfacing of a farm drive at a cost of £23,000. HMRC argued that the drive should be regarded as an ‘entirety’ in its own right and that the aim of concreting it was to provide an entirely new and better surface than before; it should therefore be considered a capital renewal, rather than a repair.
The appellant’s counterargument was that the new surface of the drive had been laid over the old tarmac surface, filling potholes and creating a hard-core base over the original stone; nothing new had been added to the drive.
The FTT, allowing the appeal, held that the work was a repair to an existing asset.
In Cairnsmill Caravan Park v Revenue and Customs [2013] UKFTT 164 (TC), CCP spent around £89,000 to restore the surface of the pitches let out short-term to touring caravan customers. These pitches were about three acres out of a total of 51 acres. The original grass surface, which had deteriorated over 50 years, was replaced with a hard-core surface and a top surface of loose gravel, with an area of grass remaining between each strip.
Valuations produced before and after the works were undertaken showed, crucially, no resulting increase in value. However, HMRC still argued that, since the hard-core surface was more durable than grass, there had been an improvement.
The FTT disagreed, saying that the area resurfaced was only a very small part of the whole caravan park. The idea of an improvement in durability was questionable, as the original grass surface had been in existence for 50 years. Indeed, maintenance costs of the new surface were likely to be higher and hard-core had less aesthetic appeal.
The appeal was allowed, as the part of the area allocated to touring caravans had not been enhanced or improved and neither had the caravan park as a whole.
Practical tip
Even where different materials are used, re-surfacing work can still be revenue expenditure, as evidenced by these cases.
