What is the difference between revenue and capital spending?

• Corporation Tax Act 2009, section 53: in calculating the profits of a trade, no deduction is allowed for items of a capital nature, subject to provision to the contrary in the Corporation Tax Acts. HMRC's Business Income Manual (BIM35010) says capital is not defined in the statute.

• BIM35005: no one has produced a single simple test that will determine the issue in all circumstances. A trader does not part with the fixed capital; it is retained.

• BIM35010 quotes John Smith & Son v Moore [1921]: fixed capital is what the owner turns to profit by keeping it in his own possession, circulating capital what he makes profit of by parting with it. It calls Atherton v British Insulated and Helsby Cables Ltd [1925] the classic definition: where expenditure is made with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, there is very good reason, absent special circumstances, to treat it as capital.

• The deductions that remain are those charged under generally accepted accounting practice (section 46), less items of a capital nature (section 53) and expenses not incurred wholly and exclusively for the trade (section 54), subject to any other adjustment required or authorised by law. BIM42100 points to the capital and revenue guidance at BIM35000 onwards and the wholly and exclusively guidance at BIM37000 onwards.

• There is no requirement of symmetry: a sum that is capital spending for the payer is not thereby a capital receipt for the person paid (BIM35005).

SourcesThe law·HMRC

BIM35010 lists these criteria: whether expenditure is capital is a question of law; accountancy treatment may be informative but does not answer the question; the question is answered by the effect of the expenditure and not the purpose; generally capital expenditure results in the acquisition, disposal or modification of an identifiable capital asset, tangible or intangible; capital expenditure will usually produce an enduring result; "perpetual" payments are unlikely to be capital; if it is no part of the company's trade to deal in the asset, the expenditure is likely to be capital; where expenditure is abortive, the same result applies as if it had achieved its objective. HMRC says to apply judicial pointers only in the context the judge had in mind. BIM35300 covers general themes from court decisions on the divide.

SourcesHMRC

• BIM35305: expenditure of a recurring nature on the acquisition of assets which are fixed capital remains capital. For example, a haulier may acquire a lorry under a deal that allows the consideration, net of interest, to be paid over (say) 36 monthly instalments. The consideration remains capital.

• BIM35310: payment of a defined lump sum by a series of recurrent payments may represent instalments of a capital sum; payments that go on in perpetuity will not. If the true bargain is that a capital sum shall be paid, instalments do not give the payments the character of income. Where there is no capital obligation, and only an undertaking to pay annual sums, those may be payments of an income nature.

SourcesHMRC

BIM35415: where a tangible asset's economic life is less than one year, you should accept that expenditure on it is of a revenue nature. In Hinton v Maden & Ireland Ltd [1959], an average life of three years was not too short for capital assets, and a life of 12 months was near the line.

SourcesHMRC

• BIM46901: the cost of a repair is normally allowable, but the cost of replacing an asset or of making a significant improvement to it is capital and not allowable. Replacing a part of an asset is a repair; replacing the whole asset is not. As a final check, if the asset can be used to do the same job as before, it is likely to be a repair; if it can do more or something different, its character has changed and the work is likely not allowable. A deduction for repairs is given when the cost is deducted in the profit and loss account in line with generally accepted accounting practice.

• BIM46915: restoring an asset to what it originally had been is a repair. Altering or improving it is not; the expenditure is capital. Whether something has been repaired or improved is a question of fact, found by looking at the nature and extent of the work. Where the work amounts to an alteration or improvement, there is no revenue deduction for any part of it, including redecoration after the main work (which would ordinarily be a revenue expense). In HMRC's example, a new roof that returns the roof to its original condition and a refurbished staff kitchen are repairs; extending a showroom is an improvement.

SourcesHMRC

• Capital Allowances Act 2001, section 11: allowances are available if the company carries on a qualifying activity and incurs capital expenditure on plant or machinery wholly or partly for the purposes of that activity, and owns it as a result.

• HMRC's Capital Allowances Manual (CA21010): plant and machinery are not defined in the legislation and take the meaning the courts have given them. Machinery includes machines and the working parts of machines, and computers and similar electronic devices. Plant is apparatus used for carrying on the business, not stock in trade, and kept for permanent employment in the business. Usually, business premises or setting are not plant.

• GOV.UK lists what you can claim on, including items you keep for use in your business, and what you cannot, including land, structures and buildings.

• Writing down allowances: the main rate is 14% for chargeable periods beginning on or after 1 April 2026 for Corporation Tax, and was 18% for chargeable periods beginning on or after 1 April 2012 and before 1 April 2026 (Capital Allowances Act 2001, section 56; CA23220). If an accounting period includes 1 April 2026, you must work out a hybrid rate.

SourcesThe law·HMRC·GOV.UK