The apportionment of expenses between capital and revenue is an issue arising in many cases. This applies to cases where the management agreement, or other relevant agreement, sets the one, undissected sum for a mix of services of both a capital and a revenue nature. We believe, on the basis of long established authority, that we need to identify the extent to which the sum is of a capital nature.

We take the view that we may apportion undissected sums in accordance with the terms of the agreements entered into. Apportionment will be called for in circumstances where a fee, or a portion of a fee, is directed to various objects - some of which are of a capital character, and some of which are of a revenue character.

Our view is that the terms and the circumstances surrounding execution of the management agreement in the Merchant case generally distinguish that case from the products now being considered (which as a rule are quite precise about what is being purchased).

In cases where the management agreement does not expressly impose identifiable fees or charges for the different components of work to be done you will save time by anticipating the issue, and providing an apportionment. Where the management agreement does impose identifiable fees, but these amounts are directed to both capital and revenue expenditure, an apportionment of the fees should be provided. Overheads or indirect costs, such as marketing of the prospectus, should be apportioned between capital and revenue in the same proportions as capital and revenue items bear to each other.

If your application involves agreements where separate fees are set for the separate capital and revenue services, you may wish to expedite consideration of the application by providing material (especially copies of, or references to, established third party information) that demonstrates that those separate fees are commercial, arm's-length amounts.

    Last modified: 19 Jun 2014QC 17801