UK and International Tax news

FTT Finds For Taxpayer In Deferred Revenue Expenditure Case

Wednesday 23rd June 2021

The FTT has recently heard a case involving the tax treatment of deferred revenue expenditure.

In West Burton Property Limited v HMRC [2021] UKFTT 160 (TC), the FTT had to consider the tax treatment of the disposal of a coal fired power station to a group company.  The consideration for the sale was equal to the net book value of the assets of £244m, being the total cost of £698m less accumulated depreciation of £454m  and resulted in nil profit/loss for accounting purposes.

The net book value of the power station at the time of the sale included £65m of unamortised deferred revenue expenditure. The comprised of maintenance costs which were revenue in nature and were not modification or improvement costs. Such annually incurred costs were initially capitalised in the accounts and then amortised over four years. Over ten years, the appellant had incurred £156m of DRE of which £91m had been charged/depreciated to profit/loss leaving £65m undepreciated at the time of sale.

HMRC had accepted that the £91m depreciated in years prior to the sale was deductible but challenged the deductibility of the undepreciated amount in calculating the profits of the property business of the appellant, which leased the power station to the group company, on the grounds it gave rise to a capital receipt.

The FTT held that the transaction comprising the sale of the power station was a transaction which should properly be taken into account in calculating the taxable profits arising from the Appellant’s property business and therefore the items which were brought into account as credits and debits in calculating the profits shown in the  profit and loss were capable of being taken into account in the calculation of the taxable profits of the property business.

The taxpayers appeal was therefore allowed although right to appeal the decision was granted.

If you would like further information on this decision, please contact Keith Rushen on 0207 486 2378.

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