joogy06 Business expenses and assets
The decision that gets made hundreds of times a year and is wrong often enough to matter: is this a cost, or is it a thing the company now owns?
1. Capital or revenue — the question that decides everything else
| Capital | Revenue | |
|---|---|---|
| Test | Lasting benefit beyond this period | Consumed in the running of the business |
| Examples | Laptop, phone, drill, van, machinery, office fit-out | Paper, ink, fuel, rent, software subscription, repairs |
| In the accounts | Balance sheet, then depreciated | P&L immediately |
| For tax | Capital allowances | Deducted in the year |
The practical test is durability, not price. A £900 laptop lasting three years is capital. A £900 stock of paper consumed this year is revenue. A £900 repair restoring something to working order is revenue; a £900 upgrade making it materially better is capital.
Repairs vs improvements is the pair that catches people: replacing a broken part is a repair (revenue); replacing the whole thing with something better is an improvement (capital).
Set a capitalisation policy and write it down
Below a stated threshold, treat purchases as revenue regardless of durability. £200–£500 is typical for a small company. A drill at £80 is not worth an asset register entry and a decade of depreciation lines.
A policy only works if it is consistent and recorded — applied the same way every year, and written down so the treatment can be explained later. Ad-hoc capitalisation of whatever happens to feel large is what makes a fixed-asset register untrustworthy.
2. Depreciation — the accounting view
Depreciation spreads a capital asset's cost across the periods that benefit. It is an accounting estimate, and it is NOT the tax deduction — see §3.
| Method | How | Use for |
|---|---|---|
| Straight line | Cost ÷ useful life, same each year | Most small-company assets — simple and defensible |
| Reducing balance | Fixed % of the written-down value | Assets losing value fastest early — vehicles |
Typical useful lives (a judgement, applied consistently, not a rule):
| Asset | Life |
|---|---|
| Laptop, phone, tablet | 2–3 years |
| Office furniture | 5–10 years |
| Tools and small equipment | 3–5 years |
| Vehicles | 4–5 years |
| Fit-out / leasehold improvements | Over the lease term |
Residual value is what it will be worth at the end. For a laptop, usually nil. Do not invent a residual value to reduce the charge.
Entries: Dr Depreciation (P&L) / Cr Accumulated depreciation (balance sheet). Never credit the
asset account directly — cost and accumulated depreciation are shown separately, and netting them
loses the asset's history.
On disposal: remove cost and accumulated depreciation, and put the difference against proceeds as a profit or loss on disposal. An asset scrapped but left on the register overstates the balance sheet indefinitely.
3. Depreciation is not the tax deduction — the point people miss
Depreciation is added back in the corporation tax computation, every year, without exception.
Tax relief comes instead through capital allowances (uk-corporation-tax §2–§3).
So for a laptop:
- Accounts: capitalise, depreciate over ~3 years, and add the depreciation back for tax.
- Tax: claim capital allowances — often 100% in year one under the Annual Investment Allowance, or full expensing for qualifying new plant.
The two run on completely different timetables and that is normal. The consequence worth understanding: the tax relief is usually faster than the depreciation. A company can have a laptop still depreciating in year three whose full cost was relieved in year one.
Rates and limits are not repeated here — accounting-uk-ltd/references/rates-2026-27.md.
4. Mixed business and private use
A phone used for both, a laptop used at home, a car. Apportion honestly and record the basis.
- Claim only the business proportion, in the accounts, for VAT, and for capital allowances.
- Record how the split was reached — a call log, a mileage log, a stated percentage with a reason. "50%" with nothing behind it is the number an inspector asks about first.
- VAT: input VAT is recoverable only on the business proportion. Cars are effectively blocked
entirely; commercial vehicles differ (
uk-vat§4). - Assets made available to a director for private use can create a benefit in kind — a
P11D matter, not just an apportionment (
uk-payroll§6).
A rule cannot make this judgement, which is why mixed-use purchases must never be auto-added by
a bank rule (quickbooks-bookkeeping §3).
5. The categories a small company actually spends on
| Category | Treatment | Watch |
|---|---|---|
| Consumables — paper, ink, cleaning | Revenue | Bulk buys spanning periods are a prepayment if material |
| Software subscriptions | Revenue | Annual licence paid up front spans periods — prepay it |
| Perpetual software licence | Often capital | Depends on term and substance |
| Tools and small equipment | Policy threshold decides | Be consistent |
| Repairs | Revenue | Improvement ≠ repair |
| Professional fees | Revenue — unless capital-related | Fees on buying an asset are capital |
| Entertaining clients | Revenue but disallowed for tax, VAT blocked | Staff entertaining differs |
| Staff costs | Revenue | Employer's NI and pension are company costs, not deductions |
| Motor | Depends on vehicle and use | Cars are treated very differently from vans |
| Home office | Apportioned | Use a defensible basis |
| Stock | Neither — it is an asset until sold | Not an expense on purchase |
Stock is the one that is neither. Buying stock is not a cost; it becomes cost of sales when sold. Treating purchases as an expense with no stock adjustment misstates profit in both directions.
6. Keep a fixed-asset register
For every capital item: description, date acquired, cost, supplier, invoice reference, useful life, method, depreciation to date, net book value, and disposal details when it goes.
Without it, depreciation becomes a guess, disposals never get removed, and the balance sheet slowly
fills with assets that no longer exist. It is also what a capital-allowances claim is built from —
financial-document-ingestion §6 stores the invoice; the register links it to the asset.
7. Anti-patterns
- Expensing a capital item — overstates costs now, loses the allowance claim, and is an add-back waiting to be found.
- Capitalising consumables to flatter profit.
- Forgetting to add back depreciation in the tax computation.
- Assuming depreciation is the tax deduction. It never is.
- Claiming 100% on a mixed-use asset without a basis.
- Capitalising ad hoc, with no written policy or threshold.
- Leaving disposed assets on the register.
- Treating stock purchases as an expense.
- Netting depreciation against cost, losing the asset's history.
- Auto-categorising a mixed-use purchase by bank rule.