Capital vs revenue expenditure

Produced by Tolley
Capital vs revenue expenditure

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

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 and loss account. An appropriate threshold for expenditure should be set and only individual items above it should be examined.

See the Simplified cash basis expenditure guidance note for more information on the treatment of capital expenditure for unincorporated businesses using the cash basis.

Definition of capital

The distinction between revenue and capital is often difficult to ascertain and must be determined based on the facts of each case.

In the absence of the statutory disallowance of capital, the deductibility of trading

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