What is the difference between capital and revenue expenditure?
Answered 11 March 2026
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What is the difference between capital and revenue expenditure?
What the law says
The statutory rule is clear and unambiguous: capital expenditure cannot be deducted when calculating trade profits. Section 53(1) of the Corporation Tax Act 2009 (CTA 2009) states:
"In calculating the profits of a trade, no deduction is allowed for items of a capital nature."
The equivalent rule applies for income tax purposes under ITTOIA 2005. This prohibition is subject to any contrary provision in the Corporation Tax Acts. Notably, capital is not defined in the statute — the distinction has been developed entirely through case law.
HMRC guidance / practice
The core distinction
Capital expenditure is not allowable as a deduction, and capital receipts are not taxable as trade profits. Tax law takes precedence over accounting treatment, and the two are not fully aligned.
A common example of the difference is depreciation: it is a proper deduction for accounting purposes, but is disallowed for tax purposes on the basis that it is capital.
The classic legal test: "enduring benefit"
The leading judicial definition comes from Viscount Cave in Atherton v British Insulated and Helsby Cables Ltd [1925] 10TC155:
"…when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital."
However, "enduring" in this context means enduring in the way that fixed capital endures — not merely that it relieves a revenue payment for a number of years.
The "identifiable asset" test
Modern courts focus on the effect of the expenditure rather than its purpose. If the effect is to acquire, dispose of, or modify a capital asset, the expenditure is capital. HMRC guidance sets out the key criteria:
- Whether expenditure is capital is a question of law.
- Accountancy treatment may be informative but does not answer the question.
- Capital expenditure will generally result in the acquisition, disposal or modification of an identifiable capital asset (tangible or intangible).
- Capital expenditure will usually produce an enduring result.
- "Perpetual" (recurring) payments are unlikely to be capital.
- Where expenditure is abortive, the same result applies as would have applied if it had achieved its objective.
- If it is no part of the company's trade to deal in the asset in question, the expenditure is likely to be capital.
No universal formula
There is no single test that applies in all cases. As Lord Denning observed in Heather v P E Consulting Group Ltd [1972] 48TC293:
"The difficulty arises because of the nature of the question. It assumes that all expenditure can be put correctly into one category or the other: but this is simply not possible. Some cases lie on the border between the two: and this border is not a line clearly marked out; it is a blurred and undefined area in which anyone can get lost."
No symmetry required
Importantly, there is no requirement of symmetry: a sum that represents capital expenditure in the hands of the payer is not necessarily a capital receipt in the hands of the recipient — it depends on the nature of the trade.
Practical consequence
Where expenditure is capital, it may still attract capital allowances under the Capital Allowances Act where applicable.
Citation sources
The guidance that follows touches on the wide range of cases that have come before the courts and describes the various pointers that have proved useful determinants from time to time. It is important only to apply judicial pointers in the context that the judge had in mind; attempting to apply a particular test in very different circumstances can lead to incorrect results. Capital is not defined in the statute. One of the earliest and still a useful definition of capital expenditure was quoted
All business expenditure is likely to be made with the intention of securing some commercial advantage (see Lord Reid’s remarks in Commissioners of Inland Revenue v Carron Co [1968] 45TC18 quoted in BIM35565). To establish whether expenditure is capital or revenue, you have to establish the effect of the expenditure and how long it will likely endure. Where the expenditure is on an intangible benefit or advantage (for example, trading agreements, licences or other intangibles (see BIM46415)) you
Capital expenditure is not allowable as a deduction, and capital receipts are not taxable as trade profits. The tax law on trade profits and accountancy principles is not fully aligned on the treatment of capital expenditure. Tax law takes precedence. You therefore need to pay particular attention to those areas where tax and accountancy differ in their treatment of capital expenditure. For a description of the interaction between accountancy and tax on trade profits see BIM31000 onwards. Furthe
Part 3 Trading income Chapter 4 Trade profits: rules restricting deductions Capital expenditure 53 1 In calculating the profits of a trade, no deduction is allowed for items of a capital nature. 2 Subsection (1) is subject to provision to the contrary in the Corporation Tax Acts.
Alterations to a building may be so extensive as to amount to the reconstruction of the property. This will be capital expenditure and it can't be deducted as an ordinary revenue business expense. Rebuilding, whether forced on the customer or voluntarily undertaken, is capital expenditure and the whole cost can't be deducted in computing profits. Only the actual cost of normal revenue repairs to a part of the old building that is preserved in the rebuilt structure is allowable as an ordinary rev
o bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capital. It is not possible to draw up a list of items, the cost of which is capital, nor is it possible to draw up a list of items, the cost of which is revenue. The classification, capital or revenue, is not uniquel
nity for the business to make profits or losses. It is important that you recognise at the outset that there is no requirement of symmetry. A sum that represents capital expenditure in the hands of the payer is not thereby a capital receipt in the hands of the recipient. It depends on the nature of the trade. The capital/revenue distinction also applies in the context of whether a receipt is a taxable receipt of the trade, and the same principles apply.
You will be faced with cases where you will have difficulty in deciding if the expenditure is capital or revenue. These are the cases that are on the borderline, a borderline that can be difficult to identify. Lord Denning in Heather v P E Consulting Group Ltd [1972] 48 TC 293 (see BIM35210) made the following still very pertinent observations at page 321A: The question - revenue expenditure or capital expenditure - is a question which is being repeatedly asked by men of business, by accountants