West Burton Property Ltd v HMRC

The First-tier Tribunal (Tax Chamber) has given a Decision dealing with the deductibility of capitalised “deferred revenue expenditure” in West Burton Property Limited v HMRC [2021] UKFTT 160 (TC). 

The Appellant owned a power station which it let out.  Over the years, it incurred costs in maintaining the power station.  Those costs were revenue in nature for tax purposes.  However, in its accounts the appellant capitalised those costs in the financial year in which they were incurred and then amortised them (“deferred revenue expenditure” or “DRE”).  The appellant sold the freehold of the power station for consideration equal to its net book value.  It recognised the difference between the sale proceeds and the net book value in its accounts (and therefore did not recognise any profit (or loss) on the disposal in its accounts). 

At the time of the sale, £65m of DRE remained undepreciated in the profit and loss account.  The question was whether the appellant was entitled to a deduction in computing the profits of its property business for the £65m of undepreciated DRE in the year in which it disposed of the power station.  The FTT held that the appellant was so entitled. 

First, the FTT considered that the sale of the power station was a transaction which was properly to be taken into account in calculating the taxable profits arising from the Appellant’s property business. 

Secondly, the FTT held that both the sale proceeds and the net book value of the power station had been brought into account (respectively) as a credit and as a debit in calculating the profits of the appellant’s property business.  As a result, the sale proceeds were to be excluded from the computation of the profits of the property business applying section 93 Corporation Tax Act 2009.  No adjustment, however, fell to be made in respect of the DRE (which, as a result, had been properly deducted in computing the taxable profits).

Malcolm Gammie QC appeared for the taxpayer.

Jonathan Bremner QC appeared for HMRC.