The difference between capital and revenue when it comes to expenditure?
Sometimes it can be difficult to separate the 👆 as the Rules and Guidance from HMRC can be "Open ended" and therefore, it requires judgement to be made subjectively
With the right experience and knowledge over time, it becomes easier to judge and allocate the expenses accordingly
Please note that the "Revenue" Expenditure are those costs written off in the Profit & Loss/Income Statement in the year incurred and offset against Income/Turnover/Sales to reduce the profit and in turn the tax.
"Capital" Expenditure is capitalised equipment/vehicles/buildings and included in the relevant Tangible Fixed Assets and usually Depreciated over time and the fixed asset is deducted for Tax Purposes either as a Capital Allowance, Writing Down Allowance or Annual Investment Allowance
The way to judge whether an expenditure is capital or revenue is usually down to some of the examples 👇
- Cost of Expenditure: Some capitalise £100 where as some capitalise costs, which are more
- Life expectancy of machine/tools/fixed assets: The long term use suggest that the expense should be capitalised.
- If there is any private use
- If it is something "New introduced" in the business then usually "Capital" or if replacing some item, which has broken then usually "Revenue"
Capital items e.g.
Fixtures and fittings e.g. shops shelving
Tools - Expensive and used over many years
Revenue items e.g.
General overheads e.g. Motor expenses, rent, utilities, salaries
Costs of Sales: Purchases
For Tax Purposes whether it is "Revenue" or "Capital" the costs is usually recognised in the year incurred when claiming the "Annual Investment Allowance", which is set up to £1 Million limit.
However, for presentation purposes and of course items where "AIA" is not being claimed then it is a timing difference.
For further consultation or discussion on this topic.
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