Setting a capitalisation threshold

A capitalisation threshold is a value below which a business writes off purchases of equipment straight to the profit and loss account instead of recording them as fixed assets. No accounting standard or law sets the figure: it rests on materiality under FRS 102 paragraph 10.3. The threshold only changes the accounts; for tax, capital items expensed under it are still added back and relieved through capital allowances.

What is a capitalisation threshold?

It is an accounting policy that says, in effect, “we will only record an item as a fixed asset if it costs more than a set amount”. Anything below that amount is charged as an expense in the year of purchase, even if it will be used for several years. A typical policy might read: “Individual items of property, plant and equipment costing less than a set amount are expensed when purchased; items above that amount are capitalised and depreciated over their useful lives.”

The point is efficiency. Capitalising a £40 stapler means adding a line to the fixed asset register, depreciating it for years and eventually recording its disposal. The information that produces is of no use to anyone reading the accounts, and the bookkeeping cost is real.

Is there an official threshold I have to use?

No. Neither FRS 102 nor the Companies Act 2006 accounting regulations set a monetary figure. What they set is the principle that a threshold has to sit inside.

• The Small Companies Regulations define fixed assets as assets intended for use on a continuing basis in the company’s activities (SI 2008/409, Schedule 8, paragraph 3), and require each fixed asset to be included at purchase price or production cost (Schedule 1, paragraph 17), written down by depreciation over its useful economic life where that life is limited (paragraph 18).
• FRS 102 paragraph 17.4 requires an item of property, plant and equipment to be recognised as an asset if, and only if, future economic benefits are probable and its cost can be measured reliably.
• FRS 102 paragraph 10.3 says an entity need not follow a requirement in an FRS if the effect of doing so would not be material.

The capitalisation threshold is the practical application of that last rule. The glossary to FRS 102 defines information as material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions of users of the accounts. So the test for any threshold is whether expensing everything below it could, in total, distort the picture of the business. For the detailed recognition and measurement rules, see FRS 102 Section 17.

How should a business choose its threshold?

There is no formula, but the same questions come up every time.

• Size of the business. A figure that is trivial for a company with a multimillion pound turnover could wipe out a large share of a small company’s fixed assets.
• Volume of small purchases. If the business buys hundreds of low value items, such as hand tools or laptops for a large workforce, the total can be material even though each item is small. Look at what the aggregate expensed figure would be in a typical year.
• Who uses the accounts. Lenders with asset based covenants, potential buyers and grant bodies may care more about the fixed asset figure than the owner does.
• Bulk purchases. Decide whether the threshold applies per item or per invoice or project. Fitting out a new office with thirty desks is a single capital project even if each desk is below the limit. Many policies say that groups of items bought together for one purpose are assessed as a whole.
• Spares and components. FRS 102 paragraph 17.5 says spare parts and servicing equipment are property, plant and equipment when they meet the definition, and inventory otherwise. Paragraph 17.6 requires replacement parts such as a roof to be added to the asset when they bring incremental future benefits.

Once chosen, the threshold should be written into the accounting policies and applied every year. FRS 102 paragraph 10.7 requires accounting policies to be applied consistently for similar transactions.

Does the threshold change how much tax is paid?

It should not. HMRC’s Business Income Manual at BIM35205 quotes Lord Wilberforce in Strick v Regent Oil Co Ltd: even if a trader prefers to charge the cost of a short term asset wholly against the revenue of the year of acquisition, “that decision cannot affect his liability for tax”. BIM35030 makes the same point more generally: tax law and accounting principles are not fully aligned on capital expenditure and tax law takes precedence.

The statutory bar is section 33 of the Income Tax (Trading and Other Income) Act 2005 for sole traders and partnerships and section 53 of the Corporation Tax Act 2009 for companies, which prohibit a deduction for items of a capital nature (BIM35002). So in the tax computation:

1. add back any capital items that were expensed under the threshold, along with depreciation on capitalised assets;
2. claim capital allowances on all qualifying plant and machinery, whether it was capitalised in the accounts or not.

For most small businesses the annual investment allowance gives a full deduction anyway. GOV.UK confirms the AIA amount is £1 million, but it cannot be claimed on business cars, which go into the writing down allowance pools instead. Companies may also be able to use full expensing on new main rate plant. For an overview of the pools and rates, see capital allowances explained.

Unincorporated businesses using the cash basis are different. GOV.UK says that for equipment you keep to use in the business, you claim allowable expenses under cash basis accounting and capital allowances under traditional accounting. Under the cash basis the accounting threshold and the tax treatment can largely line up; see cash basis or accruals accounting.

What does this look like in practice?

Illustration only. A company has a capitalisation threshold of £500 per item. In the year it buys four laptops at £450 each (£1,800 in total) and one machine for £3,000. It depreciates machinery over five years on a straight line basis.

Item	Accounts treatment	Charge in the accounts	Tax computation
Laptops, £1,800	Expensed under the threshold	£1,800	Added back; AIA claimed on £1,800
Machine, £3,000	Capitalised	£600 depreciation	Depreciation added back; AIA claimed on £3,000
Total		£2,400	Deduction of £4,800 through AIA

The accounts show a lower charge than the tax computation because of depreciation timing, not because of the threshold. The threshold only moved £1,800 from the balance sheet to the profit and loss account. Because the laptops are equipment kept for use in the business, they are capital for tax regardless of how the books treat them.

What about VAT?

For most purchases the threshold has no effect on VAT. Input tax on business purchases is reclaimed under the normal rules whether the item is capitalised or expensed.

The exception is the capital goods scheme. VAT Notice 706/2 says the scheme applies to capital expenditure on property of £600,000 or more (excluding VAT), including refurbishment or fitting out of a building that has been capitalised for accounting purposes, and to aircraft, ships, boats and other vessels of £50,000 or more. HMRC says capital expenditure for this purpose is usually, but not exclusively, expenditure capitalised in the accounts, and that it will not usually challenge a business’s capitalisation policy for the scheme except in cases of avoidance or abuse. So for a large refurbishment, the capitalisation decision can feed directly into a VAT adjustment period.

Can a business change its threshold?

Yes, but it should be a considered decision rather than a way of managing the profit figure. FRS 102 paragraph 10.8 allows a change in accounting policy only if it is required by an FRS or results in reliable and more relevant information. A business that has grown significantly may well justify a higher threshold. Record the reason, apply the new figure from a clear date and consider whether the accounts need to explain the change. Assets already capitalised under the old threshold are normally left on the register and depreciated out.

What mistakes come up most often?

• Treating the threshold as a tax rule. Expensing items in the accounts does not make them revenue expenditure for tax. Capital items still need to be added back and claimed through capital allowances.
• Forgetting disposals. If capital allowances were claimed on an item that was expensed in the accounts, its later sale still produces a disposal value for capital allowances, as explained on GOV.UK’s guidance on selling assets you claimed allowances on.
• Splitting invoices or treating parts of one system separately to get each piece under the limit.
• Confusing the threshold with the repair or improvement question. A £300 repair and a £300 improvement are treated differently for tax whatever the threshold says; see capital or revenue expenditure.
• Losing track of assets. Items below the threshold still need to be insured and controlled. Many businesses keep a separate register of expensed equipment such as laptops and phones.
• Inconsistency. Capitalising some £400 items and expensing others breaches the consistency requirement in paragraph 10.7.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Related Accountapedia entries

• Keeping a fixed asset register
• Repairs or improvements in the accounts
• Can I capitalise staff time on fixed assets
• Can start up costs be capitalised
• Writing the accounting policies note

Sources

• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• legislation.gov.uk: SI 2008/409, schedule 8
• legislation.gov.uk: SI 2008/409, schedule 1
• legislation.gov.uk: SI 2008/409, schedule 1
• GOV.UK: Manual page BIM35205
• GOV.UK: Manual page BIM35030
• GOV.UK: Manual page BIM35002
• GOV.UK: Annual investment allowance
• GOV.UK: Office property
• GOV.UK: Capital goods scheme notice 7062

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.