B2.407 Assets—expenditure connected with purchase of asset
Where a taxpayer enters into an obligation to incur expenditure (other than the pure purchase price of a capital asset) and the obligation is assumed as part of that purchase, the expenditure when incurred is likely to be capital expenditure. In Robert Addie & Sons' Collieries Ltd 1, the company obtained a 31-year lease to extract minerals from land on terms that it would restore the land to an arable state or, at its option, pay the landowner a sum in lieu of restoration. On the termination of the lease, the mining company elected to pay the compensation and sought to deduct it in computing its profits. The expenditure was held to be capital expenditure as it related to the acquisition of an asset, namely the right to use the land, which was essential for it to carry on its trade. It was a right which was only obtained by agreeing to make good the land on termination of the lease. Similarly, the rights it acquired to dispose of waste on the lessor's land were rights needed to enable it to start its trade and expenditure on dealing with the various waste dumps was capital expenditure.
Where, however, the expenditure is incurred in connection with the purchase of an asset or the obtaining of contracts which will constitute the taxpayer's trading stock or work in progress, the expenditure is likely to have a revenue character and so be deductible2.
Purchase of a business
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