Understanding the difference between capital and revenue expenditures is essential for businesses looking to manage their finances effectively. These two types of spending impact accounting, tax relief, and cash flow in different ways, making it important to classify them correctly.
In this article, we’ll break down the key differences between capital and revenue expenditures, explain why they matter, and explore how businesses can benefit from capital allowances. Let’s get into it!
What are Capital Expenditures?
Capital expenditures, otherwise known as CapEx, are the expenses companies make when they purchase new or improve existing fixed assets for their business. Fixed assets for businesses include things like buildings, machinery and technology that is used to improve a company’s capabilities in the long-term. These costs are not deducted from profits immediately; instead, they are recorded as assets and depreciated over time. In many cases, businesses can claim capital allowances to reduce their taxable income on qualifying CapEx. For a more detailed explanation on capital expenditures and what they cover, please read our article here!
What are Revenue Expenditures?
Revenue expenditures, on the other hand, are the expenses that companies make in order to gain revenue. RevEx expenses can include anything from employee wages to repairing day-to-day equipment. Unlike CapEx, revenue expenditure is fully deducted from profits in the financial year it is incurred, reducing taxable income straight away. Because these costs don’t create long-term assets, they are treated as operational expenses. To learn more about revenue expenditures and what they include, please read our article all about them here!
Capital Expenditure vs Revenue Expenditure: What’s the difference?
Now you’ve gained a brief insight of what capital expenditure and revenue expenditure are, let’s explore a more detailed comparison of each so you can have a clear understanding of the differences between the two!
| Capital Expenditure | Revenue Expenditure | |
| Purpose | Covers the purchase of long-term assets that improve the efficiency of business operations and help the company to grow over time. | Covers the day-to-day operational costs of running a business to ensure it operates efficiently. |
| Accounting treatment | Recorded as an asset and depreciated over several years. | Expensed immediately and deducted in the year it incurred. |
| Tax implications | May qualify for capital allowances, depending on what was purchased, meaning that businesses can claim tax relief on the assets bought or maintained. | Can be subtracted from a business’s total income when calculating taxable profits, immediately reducing the amount of tax needed to be paid. |
As outlined in the above table, the distinctions between revenue and capital expenditure affect various aspects of a business’s financials. These differences are really important when considering their impact on financial statements and cash flow.
When it comes to financial statements, capital expenditures are treated as long-term assets on the balance sheet, with their cost spread over time through depreciation. This method means that the expense is aligned with the asset’s usage and reflects its value over its useful life. Revenue expenditures, however, are recorded immediately as expenses on the income statement, reducing profits for the current period without impacting the balance sheet.
When it comes to cash flow, capital expenditures usually involve a hefty upfront expense, which can put a temporary strain on liquidity. However, as the cost is spread out over time through depreciation, the financial impact is reduced, easing long-term pressure on both profits and cash flow. On the other hand, revenue expenditures hit cash flow right away since it’s spent on day-to-day operations, directly affecting cash in the short term.
Capital vs. Revenue Expenditure examples
To help you better understand the difference between capital expenditure and revenue expenditure, let’s explore some real-world examples of each:
Capital Expenditure
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- Installing a new heating system: Installing a new heating system in a building is considered a capital expenditure, as it improves the property and provides benefits for an extended period of time, rather than being a short-term cost.
- Purchasing new computers for the office: Buying new computers for an office business also counts as a capital expenditure, because they will be used to support and improve business operations for several years.
- Buying a company vehicle: When a business purchases a new vehicle for employee use, it counts as a capital expenditure because the vehicle will be used for several years, contributing to the business’s long-term operations.
Revenue Expenditure
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- Fuel for vehicles: Although the cost of purchasing the vehicle counts as capital expenditure, paying for fuel for the vehicles used by the business is a revenue expenditure. This is because it’s a regular, ongoing expense that’s necessary to keep the vehicles running day-to-day.
- Routine maintenance of heating systems: Expenses like repairing or servicing a heating system fall under revenue expenditures since they’re recurring costs to maintain the functionality of the system, rather than improving or upgrading it.
- Paying employee wages: Because employee wages are a regular, recurring cost that is essential to keep the business operating, it counts as a revenue expenditure rather than a capital expenditure.
An easy way to distinguish between the two is to remember that, generally, the cost of buildings, equipment and machinery that will be used long-term (typically for over a year) count as capital expenditure. These costs are usually larger initial investments, so being able to spread the cost over a longer time frame is beneficial for cash flow. On the other hand, regular or recurring expenses that are necessary to keep the day-to-day operations of the company working effectively, like paying for rent or utilities bills, count as revenue expenditures, and so have to be expensed immediately.
Capital Allowances and tax relief on Capital Expenditure
Businesses can claim capital allowances on eligible capital expenditure to reduce their taxable profits. Capital allowances allow businesses to claim tax relief on the depreciation of qualifying assets over time, rather than writing off the full cost in one go.
Common qualifying assets for capital allowances include machinery, equipment, fixtures, and vehicles used for business purposes. These assets must be used in the operation of the business and meet certain criteria set by HMRC.
A key aspect of capital allowances is the Annual Investment Allowance (AIA), which allows businesses to claim 100% tax relief on certain capital assets up to a specified limit, typically in the year the purchase is made. The AIA provides immediate tax relief on qualifying investments, helping businesses manage cash flow and reduce their tax burden in the short term.
How Eureka Capital Allowances can help
At Eureka Capital allowances, we have decades of experience in capital allowances and helping our clients unlock thousands of pounds of hidden tax relief on capital expenditures. Our team of expert advisors are trained and experienced in helping our customers understand what capital allowances they are eligible for.
Contact us today to see how we can help you or for a free capital allowances review.
