Commentary on Sections Overview Overview Section 33: Capital expenditure
151.This section is based on section 74(1) of ICTA.
152.Section 74(1) of ICTA prohibits various deductions in computing a trader’s profits including:
(f)any capital withdrawn from, or any sum employed or intended to be employed as capital in the trade, profession or vocation, …(g)any capital employed in improvements of premises occupied for the purposes of the trade, profession or vocation.”
153.It is a long-established and generally accepted principle that capital items are ignored in calculating the profits of a trade.
154.Section 42(1) of FA 1998 requires that the profits of a trade:
“must be computed in accordance with generally accepted accounting practice, subject to any adjustment required or authorised by law in computing profits for those purposes.”
155.But the question of whether a sum is income or capital is ultimately a question of law, not accountancy. For judicial authority for this proposition, see, for example the words of Brightman J on page 173 of ECC Quarries Ltd v Watkis (1975), 51 TC 153 CD(1):
“…unchallenged evidence, or a finding, that a sum falls to be treated as capital or income on principles of correct accountancy practice is not decisive of the question whether in law the expenditure is of a capital or income nature.”
156.A sum which is of a capital nature may however be allowed as a deduction in computing the profits of a trade because of a statutory exception to the general rule on the deduction of such items in this section. See, for example, section 89 (expenses connected with patents).
157.Section 74(1)(g) of ICTA is not rewritten as the deduction of capital employed in the improvement of premises is covered by the general prohibition on the deduction of “items of a capital nature”. In the absence of general agreement on what constitutes capital expenditure “items of a capital nature” is not defined.