Capital vs revenue expenses uk guide for self employed

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The Short Answer: What is the difference?

• Revenue Expenses are your day-to-day running costs. You buy them to use them up (e.g., petrol, stationery, rent). You deduct these from your profit immediately.
• Capital Expenses are one-off purchases of assets. You buy them to keep them in the business for a long time (e.g., a laptop, a van, machinery). You usually claim tax relief on these differently, depending on how you do your accounts.

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The “Cash Basis” Update (Important for 2024/25)

Before you read further, check if you use “Cash Basis” accounting.

• As of April 2024, Cash Basis is the default for most self-employed people in the UK.
• If you use Cash Basis: The line between capital and revenue is blurred. You can usually claim capital items (like a new computer or machinery) as a simple business expense, just like you would for stationery.
• The Big Exception: Cars. Even on Cash Basis, buying a car is almost always treated as a Capital Expense and cannot just be written off as a simple receipt.

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1. Revenue Expenses (Day-to-Day Costs)

These are the ongoing costs of keeping your business alive. You can deduct the full cost of these from your turnover to lower your taxable profit.

The Golden Rule: The expense must be “wholly and exclusively” for business purposes.

Common Examples:

• Cost of Goods: Materials or stock you buy to sell on.
• Office Costs: Stationery, phone bills, postage, printer ink.
• Travel: Train tickets, bus fares, fuel (if not using mileage rates), parking for business trips.
• Staff: Salaries, employer’s National Insurance, pension contributions.
• Premises: Rent, business rates, water, electricity, heating.
• Marketing: Website hosting, advertising, business cards.
• Financial: Business insurance, bank charges, accountant fees.

How to claim: You simply add these up for the tax year and enter the total in the “Allowable Expenses” box on your Self Assessment tax return.

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2. Capital Expenses (Long-Term Assets)

These are purchases that add lasting value to your business. You don’t buy a van every week; you buy it to help you earn money for years.

Common Examples:

• Equipment: Laptops, PCs, printers, cameras.
• Vehicles: Cars, vans, delivery bikes.
• Machinery: Tools, manufacturing equipment.
• Furniture: Desks, office chairs, filing cabinets.
• Intangible Assets: Patents, trademarks, or buying the “goodwill” of another business.

How to claim (Two Ways):

A. If you use Cash Basis (Most People):

For most equipment (laptops, tools), you just treat them like a revenue expense. You enter the cost in your allowable expenses and get the tax relief immediately.

• Warning: You cannot do this for Cars. For cars, you usually use “Capital Allowances” or simplified mileage rates.

B. If you use Traditional Accounting (Accruals):

You cannot deduct the cost immediately. Instead, you use Capital Allowances.

• Annual Investment Allowance (AIA): Allows you to deduct the full value of the item (up to £1 million) in the year you bought it.
• Writing Down Allowance: If you don’t use AIA, you deduct a percentage of the value each year (e.g., 18% or 6%), spreading the tax relief over many years.

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3. The “Repair vs. Improvement” Trap

This is the most common area where people get confused.

• Repair (Revenue Expense): Restoring an asset to its original condition.
  • Example: A storm blows tiles off your office roof. You pay to replace them with similar tiles.
  • Tax Treatment: Deduct immediately as a repair cost.
• Improvement (Capital Expense): Making the asset significantly better than it was before.
  • Example: You decide to take the whole roof off and add a loft conversion or install a significantly superior roofing system.
  • Tax Treatment: This is a capital expense. You cannot claim it as a simple repair.

Note: You cannot claim a “notional repair.” For example, if an improvement costs £10,000, but a repair would have cost £2,000, you cannot just claim the £2,000. The entire work is classified as an improvement.

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Summary Table

Feature	Revenue Expenses	Capital Expenses
Purpose	To run the business daily	To help the business grow long-term
Frequency	Recurring (monthly/weekly)	One-off (every few years)
Examples	Ink, Petrol, Rent, Wages	Laptops, Vans, Machinery
Tax Form	“Allowable Expenses” box	“Capital Allowances” box (unless Cash Basis)

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Why it is best to get an Accountant

While you can do this yourself, tax rules in the UK are complicated and change frequently (like the recent shift to Cash Basis). A qualified accountant will know exactly which expenses are allowable and can spot tax savings you might miss. More importantly, they prevent you from making accidental errors on your Self Assessment, which can lead to stressful enquiries or fines from HMRC. The money an accountant saves you in tax will often cover the cost of their fee.

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