Owner-Managed Businesses

Capital vs revenue expenditure

Produced by Tolley
  • 01 Jul 2022 09:33

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

  • Capital vs revenue expenditure
  • Definition of capital
  • The enduring benefit test
  • The identifiable asset test
  • The entirety test
  • Is interest capital?
  • Tangible assets
  • Intangible assets
  • Deciding whether expenditure is capital or revenue

Capital vs revenue expenditure

Expenditure of a capital nature is not allowed as a deduction when calculating trading profits. Expenditure of a revenue nature is allowable, provided there is no specific statutory rule prohibiting a deduction and the expenditure also satisfies the wholly and exclusively test. See the Wholly and exclusively guidance note.

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.

In some cases, 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 benefit to be gained from spending time analysing the potential for being able to treat the expense as revenue. The amount of tax relief would ultimately be the same.

The focus should be on items of expenditure which will not be eligible for capital allowances, such as certain legal expenses or extraordinary expenditure.

If it is determined that the expenditure is in fact capital, it is possible that it qualifies as an allowable cost of acquisition or disposal of an asset and tax relief will become available on the disposal of that asset through a chargeable gain calculation. This often applies in the context of legal and professional fees. See the Introduction to capital gains tax guidance note.

The risk-based approach can be further developed in the context of larger businesses. It is impractical to review all potentially capital expenses in the profit

Access this article and thousands of others like it
free for 7 days with a trial of TolleyGuidance.

There's no margin for error. Think Tax.
Think Tolley.

TolleyGuidance gives you direct access to critical, comprehensive and up-to-date tax information and expertise you can rely on.

Related documents:

Popular Articles

Definition of plant and machinery

Legislative definition of plant and machineryThe general rule allowing capital allowances on plant and machinery is given at CAA 2001, s 11. There is no statutory definition of the term ‘plant and machinery’ but there is confirmation in the legislation on what constitutes a building or a structure

01 Jul 2022 09:32 | Produced by Tolley Read more Read more

Tax returns to date of death

Personal representatives are responsible for finalising the deceased’s tax affairs. They must file outstanding tax returns and claim any repayments due.For many estates where the deceased’s tax was deducted under PAYE on pensions or employment, a refund is likely to arise because the deceased is

23 Mar 2022 10:48 | Produced by Tolley Read more Read more

Terminal trading loss relief

Terminal loss relief for trade losses in the final 12 monthsTrading losses incurred by a company in the final 12 months leading up to the discontinuance of trade may be carried back for up to three years from the period beginning immediately before that 12-month period. So if the final accounting

27 Jun 2022 10:00 | Produced by Tolley Read more Read more