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Distinguishing between capital and revenue expenditure

B2.304 The importance of the distinction between capital and revenue expenditure

Statutory provisions are in place which prohibit a deduction for items of a capital nature in calculating the profits of a trade¹. The disallowance of capital expenditure is the reason why depreciation may not be claimed as a deductible expense for tax purposes, for example, despite being deducted for accounting purposes, as it is merely the spreading of capital expenditure at a rate determined by accounting policies.

Revenue expenses are generally allowable, unless there are specific rules which are either set out in statue or established by case law denying a deduction for particular items.

Whilst these basic rules are fairly easy to understand, determining where the distinction lies between capital and revenue expenditure can be difficult to determine in practice. The treatment of a particular item of expenditure can have a significant impact on the final tax liability, which