Capital expenditure buys, creates or improves an asset that gives the business an enduring benefit; revenue expenditure is the day to day cost of running the business and keeping existing assets working. Revenue costs are deducted from profits, while capital costs are blocked by section 33 ITTOIA 2005 (section 53 CTA 2009 for companies) and get relief, if at all, through capital allowances. Repairs that restore an asset are revenue; replacing the whole asset or making it do more is capital.

Why does the distinction change your tax bill?

Section 33 ITTOIA 2005 says that, in calculating the profits of a trade, no deduction is allowed for items of a capital nature. Section 53 CTA 2009 says the same for companies. Capital spending is not ignored: plant and machinery usually qualifies for capital allowances, and the annual investment allowance, currently £1 million, gives an immediate deduction for most qualifying items other than cars. But some capital spending, such as the cost of buildings, gets no plant and machinery allowances, so the label can mean the difference between full relief now, relief over many years, or none.

The accounts do not settle the question. BIM35030 explains that tax law and accounting are not fully aligned on capital expenditure and tax law takes precedence. Depreciation, for example, is a proper accounting charge but is added back for tax because it relates to capital (see depreciation methods).

What tests do the courts use?

Capital is not defined in the legislation, and BIM35010 stresses that there is no universal recipe. Whether something is capital is a question of law. The main pointers HMRC draws from the case law are these.

  • Enduring benefit. In Atherton v British Insulated and Helsby Cables Ltd [1925] 10 TC 155, Viscount Cave said that expenditure made once and for all with a view to bringing into existence an asset or advantage for the enduring benefit of a trade is properly treated as capital, absent special circumstances.
  • Fixed or circulating capital. Adam Smith’s distinction, approved in John Smith and Son v Moore [1921] 12 TC 266: fixed capital is kept and turned to profit; circulating capital, such as stock, is parted with.
  • An identifiable asset. BIM35901 says capital spending must be on the acquisition, improvement or disposal of a capital asset, tangible or intangible. It is not enough that it is merely connected with one.
  • What the spending achieves. Modern authorities look at what was obtained rather than the motive. In Tucker v Granada Motorway Services Ltd [1979] 53 TC 92, a payment made to reduce rent under a lease was still capital because it was spent on the lease, a capital asset.
  • Recurrence is not decisive. BIM35305 notes that a lorry paid for in 36 monthly instalments is still capital. Equally, a one off payment can be revenue.
  • Very short life. Where a tangible asset’s economic life is less than a year, HMRC accepts revenue treatment (BIM35415, drawing on Hinton v Maden and Ireland Ltd [1959] 38 TC 391).
  • Abortive spending. Costs on a project that fails take the treatment they would have had if it had succeeded (BIM35010).

Is a repair always revenue?

HMRC’s starting point at BIM35430 is that repairing an asset is normally revenue, while replacing the asset, altering it to do something else, or improving it is normally capital. The difficulty is deciding what “the asset” is.

The courts call this the entirety. Buckley LJ in Lurcott v Wakely and Wheeler [1911] described repair as restoration by renewal or replacement of subsidiary parts of a whole. Replacing a worn washer repairs the tap; replacing a battery or exhaust repairs the car (Auckland Gas Co Ltd v CIR [2000] 73 TC 266).

Two chimney cases show how the entirety decides the outcome (BIM35467). In Bullcroft Main Collieries v O’Grady [1932] 17 TC 93 a freestanding colliery chimney was replaced with a better one nearby; the chimney was its own entirety, so the cost was capital. In Samuel Jones and Co (Devonvale) Ltd v CIR [1951] 32 TC 513 a chimney inside a factory complex was replaced; the entirety was the factory, so the cost was a repair and allowable.

When does work become an improvement?

BIM46920 gives the working rule. If, after the work, the asset can do the same job as before, it is a repair. If more can be done with it, or it can do something it could not do before, it is an improvement and capital.

  • Modern materials are not improvements in themselves. Replacing rotten timber floor beams with steel is a repair if the floor carries about the same load; it is capital if forklift trucks can now use it (BIM46920).
  • Technology moves on. BIM46925 says replacing single glazing with double glazing was once an improvement but is now simply replacing like with currently available like, so it is a repair.
  • Extra capacity is the warning sign. Rewiring 1960s premises with a larger system to take more equipment is an improvement; the electrical system is an integral feature, so capital allowances may be available instead (BIM46925).
  • Refits can still be repairs. In HMRC’s example at BIM46911, a landlord who strips out and replaces a kitchen with units of equivalent quality has repaired the house; the free standing fridge freezer replaced later is a separate asset and capital.

Assets bought in poor condition need care. In Law Shipping Co Ltd v CIR [1923] 12 TC 621, repairs needed before a ship could be used, reflected in a lower price, were capital. In Odeon Associated Theatres Ltd v Jones [1971] 48 TC 257, cinemas were used for years before deferred repairs were done and the price was not reduced, so the repairs were allowable (BIM35450).

How is software treated?

GOV.UK’s guidance for the self employed allows as an expense software the business uses for less than two years, and software paid for by regular licence renewals even if used for longer. Other software is claimed through capital allowances, unless the business uses the cash basis.

BIM35810 adds that periodic licence payments are deductible unless they are really instalments of a capital sum, and that a lump sum for a licence is analogous to a lease premium and so capital. HMRC officers are told not to argue that software with an expected life under two years is capital. In house development can be capital even though it is paid as programmers’ salaries. For websites, BIM35815 compares the site to a shop window: building it is capital, changing the display is revenue.

Companies are different. Under the corporation tax intangible fixed assets regime, most software acquired or created from 1 April 2002 follows the accounting treatment, so the capital and revenue divide has no effect for assets within it (BIM35801).

Does the cash basis change the answer?

From 6 April 2024 the cash basis became the default for eligible sole traders and partnerships without corporate partners, unless they opt for traditional accounting. Under section 33A ITTOIA 2005, capital spending is generally deductible on the cash basis, but not where it relates to acquiring or disposing of a business, education or training, cars, financial assets, assets not used on a continuing basis, assets not expected to wear out or lose 90% of their value within 20 years, and real property including buildings, walls, windows and drainage. Cars still go through capital allowances. See cash basis or accruals accounting.

How would common items be treated?

Illustration only, for a trader using traditional accounting.

Spending Treatment Why
Repainting the shop exterior Revenue Routine maintenance restoring the building
Building a rear extension Capital The building can now do more; no plant allowances, but possibly structures and buildings allowance
New laptop Capital Equipment kept for use; claim annual investment allowance
Monthly accounting software subscription Revenue Regular licence payments
Bespoke booking system built by a developer Usually capital Enduring asset, unless its useful life is under two years
Replacing a broken van gearbox Revenue Subsidiary part of the van

What mistakes come up most often?

  • Following the accounts without checking. A business may expense an item under its accounting policy that is capital for tax, or the reverse.
  • Calling an improvement a repair because the old item was worn out. If the asset is replaced as a whole, or does more afterwards, it is capital whatever its condition.
  • Claiming a notional repair. Where the business chose to alter or improve the asset instead of restoring it, it cannot claim what the repair alone would have cost; relief depends on what was actually done (BIM35465).
  • Missing capital allowances. Capital treatment is not the end of the matter; most equipment still gets full relief through allowances.

For the separate purpose test every expense must also pass, see the wholly and exclusively rule.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.