Capital v Revenue Expenditure

Knowing whether business expenditure is revenue or capital is essential to the preparation of correct accounts and tax returns, but it is sometimes difficult to decide what is the right treatment. HM Revenue and Customs (HMRC) has recently updated its guidance on the most common errors.

First the basics: revenue expenditure is deductible in computing taxable profits; capital expenditure is not deductible, but it may qualify for capital allowances. Currently up to £500,000 a year of capital expenditure on plant and machinery (not cars) qualifies for the annual investment allowance and is deductible in full. This allowance will fall to £200,000 a year from 1 January 2016. Capital expenditure that is over the limit, and also the cost of buying most cars, qualify for writing down allowances at 8% or 18%.

Establishing the precise nature of expenditure is therefore essential. The key is to keep full and accurate records of each item of expenditure, what it is for and the circumstances in which it was incurred, especially where it is part of a bigger project. This will allow identification of all revenue costs that arise in conjunction with capital expenditure so that they can be deducted correctly. Conversely – and this is what concerns HMRC – we will be able to ensure your tax return does not claim any impermissible costs.

Refurbishment of property is one area that HMRC looks at carefully. The general rule is that the cost of repairs is revenue expenditure, but improvement and alteration are treated as capital costs. Work on a building may include both types of expenditure so your records need to be detailed enough to make an apportionment, and to determine the nature of capital expenditure so that the correct rate of writing down allowance can be claimed. 

HMRC says that where the records do not show a revenue-capital apportionment, the whole amount will be treated as capital. For example, if an invoice for legal costs includes capital elements, such as a new planning permission application, it will be treated as wholly capital even if it includes revenue items. To avoid this, you should make sure ‘mixed’ invoices are itemised.

Other areas of difficulty include legal and professional fees, costs connected with the structure of a business, training courses for proprietors, and IT and website costs.

We can help you categorise your expenditure correctly so please contact us.