Capital or revenue

By Tolley

The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Capital or revenue
  • Definition of capital
  • Enduring benefit test
  • Identifiable asset test
  • Entirety
  • Tangible assets
  • Intangible assets
  • Depreciation and amortisation
  • Deciding whether expenditure is capital or revenue

Expenditure of a capital nature is not allowed as a deduction from trading profits. For both companies and individuals, the basis of this derives from ICTA 1988, s 74(1). Following the tax law rewrite, these are now located separately for income tax and corporation tax but the relevant case law is still applicable to both taxes.

CTA 2009, s 53; ITTOIA 2005, s 33

Note, however, that from 2013/14, unincorporated businesses with turnover of less than the VAT threshold (or double the VAT threshold for universal credit claimants), can opt to use the simplified cash basis. This extensively replaces the rules on capital expenditure and receipts.

See the Simplified cash basis expenditure guidance note for more information.

The distinction between capital and revenue can be incredibly difficult to make. In some cases, it will be impossible to categorically determine whether expenditure is an allowable deduction.

It is better to avoid drawing a distinction if possible. For example, where any capital element is potentially covered by the annual investment allowance, there is no point spending too long worrying whether a revenue expense is allowed.

The focus should be on items of expenditure which will not be eligible for capital allowances, such as legal expenses or extraordinary expenditure. Rather than receiving relief through capital allowances, relief will only become available on the disposal of an asset through a chargeable gain calculation.

For larger businesses, this risk-based approach can be further developed. It is impractical to review all items treated as revenue in the profit and loss account. An appropriate threshold for expenditure should be set and only individual items above it should be examined.

In this way, it should be possible to limit the amount of items for review in preparing a computation or return to only contentious items.

Definition of capital

The distinction between revenue and

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