Costs of building or installing a fixed asset are collected in assets under construction and are not depreciated while the work is unfinished. Depreciation must start when the asset is available for use, meaning it is in the place and condition to operate as management intends, even if the business has not actually started using it. At that point the balance is transferred to the right class of fixed asset.
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What goes into assets under construction?
Assets under construction is a holding account for property, plant and equipment that the business owns but is not yet able to use: a building being put up, a production line being installed, or a fit out in progress. The amounts collected must be costs that FRS 102 allows into the cost of property, plant and equipment.
Paragraph 17.10 lists the elements of cost:
- the purchase price, including legal and brokerage fees, import duties and non refundable purchase taxes, after trade discounts and rebates;
- costs directly attributable to bringing the asset to the location and condition needed for it to operate as intended, such as site preparation, delivery and handling, installation and assembly, and testing of functionality;
- the initial estimate of dismantling, removal and site restoration costs, measured under Section 21; and
- borrowing costs, if the company has a policy of capitalising them under paragraph 25.2. See borrowing costs capitalisation.
Paragraph 17.11 lists costs that must be expensed instead: opening a new facility, introducing a new product or service including advertising, doing business in a new location or with a new class of customer including staff training, and administration and general overheads. Paragraph 17.12 adds that income and expenses of incidental operations during construction go to profit or loss if those operations are not necessary to get the asset ready. Internal labour can be included only where it is directly attributable; see capitalising staff costs on assets.
When exactly does depreciation have to start?
Paragraph 17.20 is the rule: depreciation begins when the asset is available for use, that is, when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. FRS 105 for micro entities uses the same wording at paragraph 12.19.
The trigger is capability, not activity. Common situations:
- Finished but not yet used. A warehouse is complete and signed off in March, but stock is not moved in until June. Depreciation starts in March.
- Waiting for final invoices. The asset is working but the contractor’s final account is still being agreed. Depreciation starts now, on the best estimate of cost, and is adjusted when the final figure is known.
- Commissioning and testing. Testing whether the asset functions properly is part of getting it ready, so the asset is not yet available for use while that testing continues.
- Usage methods. Where a units of production method is used, the charge can be nil while there is no production, as paragraph 17.20 allows. The asset still leaves assets under construction when it is ready.
For borrowing costs, paragraph 25.2D(c) stops capitalisation when substantially all the activities needed to prepare the asset are complete. That point and the start of depreciation will usually be close together, and a long gap between them is worth questioning.
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What if the project is completed in phases?
Where parts of a project can be used independently, each part should come out of assets under construction when that part is ready. A new office floor that is occupied while the next floor is still being fitted out is available for use, even though the overall project continues. Paragraph 17.16 also requires major components with significantly different patterns of consumption to be depreciated separately, so a building’s structure and its plant may need different lives from the day they are ready. See component depreciation.
Can assets under construction be impaired or written off?
Yes. Not depreciating an asset does not protect it from impairment. Paragraph 27.9 lists indicators the company must consider, including significant adverse changes in how an asset is expected to be used, evidence of obsolescence or physical damage, and internal reporting showing an asset will perform worse than expected. A project that has stalled, run far over budget or been overtaken by a change in strategy should be tested. See impairment of assets under FRS 102.
Where a project is abandoned, paragraph 17.27(b) requires derecognition when no future economic benefits are expected from use or disposal. The costs are written off to profit or loss. Where work is merely paused, paragraph 25.2D(b) requires capitalisation of borrowing costs to be suspended during extended periods when active development has paused.
How is it shown in the accounts?
Medium and large companies have a dedicated balance sheet item. Schedule 1 to SI 2008/410 lists “Payments on account and assets in course of construction” as one of the tangible fixed asset items. The small company formats in SI 2008/409 have only two tangible fixed asset lines, so a small company includes the cost under the relevant heading and identifies it in the note.
When the asset is completed, the balance moves to its permanent class. For small companies, paragraph 1AC.12 requires the fixed asset note to show the effect of acquisitions, disposals and transfers of assets to and from each item during the period. Depreciation starts in the class to which the asset is transferred. See the fixed asset note for the full reconciliation.
What does a worked example look like?
Illustration only. A company with a 31 December year end builds a workshop extension and installs a spray booth in it. Costs during the year:
| Cost | Amount | Treatment |
|---|---|---|
| Contractor’s certified work | £240,000 | Assets under construction |
| Architect and structural engineer | £18,000 | Assets under construction |
| Spray booth, delivery and installation | £60,000 | Assets under construction |
| Staff training on the booth | £4,000 | Expense (paragraph 17.11) |
| Opening event for customers | £3,000 | Expense (paragraph 17.11) |
The extension and booth are signed off as ready on 1 October, but the first job runs on 15 November. On 1 October, £258,000 is transferred to buildings and £60,000 to plant. Using straight line lives of 40 years and 10 years, the charge for the three months is about £1,613 on the building and £1,500 on the booth. Starting from 15 November instead would understate depreciation.
How does this affect tax?
Depreciation is not deductible for tax, so the accounting start date does not by itself drive relief. For plant, section 5 of the Capital Allowances Act 2001 treats expenditure as incurred when there is an unconditional obligation to pay. Section 5(4) has a special rule for milestone style contracts: where a certificate or other event creating the obligation occurs within one month after the end of a chargeable period, and the asset had become the purchaser’s property by that period end, the expenditure is treated as incurred immediately before the period end.
For the building itself, HMRC’s guidance on the structures and buildings allowance says the allowance period starts on the later of the date the building is first used for a non residential purpose and the date the qualifying expenditure is incurred. That is first use, not availability for use, so the tax and accounting start dates can differ. See structures and buildings allowance.
What mistakes come up most often?
- Waiting for first use, or for the final account, before starting depreciation.
- Leaving finished assets in assets under construction for years because no one makes the transfer.
- Capitalising training, launch costs or general overheads.
- Ignoring impairment on a stalled project because “it is not being depreciated yet”.
- Treating supplier deposits as construction cost before the company owns any work; see deposits paid on fixed assets.
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Related Accountapedia entries
- Rollover relief into depreciating assets
- When does the UK tax year start and end
- MTD for a new business: when you must start
- Tax Investigation Insurance for Construction Contractors
- Can start up costs be capitalised
Sources
- Financial Reporting Council: FRS 102 September 2024 tmKYWO6
- Financial Reporting Council: FRS 105 September 2024
- legislation.gov.uk: SI 2008/410, schedule 1
- legislation.gov.uk: SI 2008/409, schedule 1
- GOV.UK: Manual page BIM35201
- legislation.gov.uk: Act 2001 c. 2, section 5
- GOV.UK: Claiming capital allowances for structures and buildings
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.