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CapEx versus revenue expenditure
The fundamental distinction in business accounting is between capital expenditure (CapEx) and revenue expenditure (OpEx). CapEx is spending that creates or enhances an asset that will deliver economic benefit over more than one accounting period — for example, buying a commercial vehicle, installing machinery, or acquiring software licences. Revenue expenditure is spending on the day-to-day running of the business, such as fuel, maintenance, or wages, which is charged to the profit-and-loss account in the period it is incurred.
Misclassifying CapEx as revenue expenditure (or vice versa) distorts profitability figures and can affect tax positions, so getting the classification right matters both for management accounts and HMRC returns.
How CapEx appears in the accounts
When a company incurs CapEx, the cost is added to fixed assets on the balance sheet rather than charged immediately to the P&L. Over subsequent periods the cost is gradually expensed through depreciation (for tangible assets) or amortisation (for intangible assets), matching the cost to the periods that benefit from the asset.
On the cash flow statement, CapEx appears as an outflow under investing activities, which is why a growing business can show healthy operating profit alongside significant negative free cash flow — the cash has gone into asset acquisition rather than routine operations.
Tax relief on CapEx
HMRC does not follow accounting depreciation for tax purposes. Instead, companies claim capital allowances — primarily the Annual Investment Allowance (AIA), which allows immediate 100% deduction of qualifying plant and machinery spend up to the current threshold. Assets not covered by AIA fall into writing-down allowance pools, giving relief at 18% or 6% per year on a reducing-balance basis. Certain assets (cars, buildings) have specific rules.
Full expensing, introduced from April 2023 for companies, allows 100% first-year allowances on most new plant and machinery, providing a significant cash flow benefit by accelerating the tax deduction to the year of purchase.
CapEx and commercial lending
Asset finance — including hire purchase and finance lease — is commonly used to spread the cash cost of CapEx over the asset's working life rather than paying upfront. When a lender assesses a business, it will look at the mix of owned and financed assets, the depreciation policy, and whether the asset base is being maintained or allowed to age. A company with ageing, heavily depreciated assets may face capital replacement demands that a future lender will factor into affordability assessments.
Frequently asked questions
Does a leased asset count as CapEx?
Under IFRS 16 and FRS 102 (for larger entities), a right-of-use asset and corresponding lease liability are recognised on the balance sheet for most leases, making them broadly comparable to owned assets for accounting purposes. For smaller companies using FRS 102 Section 1A or FRS 105, operating leases may remain off-balance-sheet. The classification depends on the lease terms and applicable standard.
Can a limited company claim the AIA on second-hand assets?
Yes. The Annual Investment Allowance applies to both new and second-hand qualifying plant and machinery, with certain exceptions — for example, assets bought from connected parties or assets previously used outside the business. Cars are excluded from AIA regardless of their condition.
Funding for UK limited companies
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