Capital or revenue expenditure

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Steven Collings
Audit and Technical Partner
Leavitt Walmsley Associates Ltd
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Steve Collings looks at a common question that frequently causes confusion amongst accountants; that of the capital versus revenue debate.

When is it appropriate to recognise expenditure on an existing fixed asset in the balance sheet and when should it be written off to profit and loss?

In financial reporting terms, this cost is referred to as ‘subsequent expenditure’. This issue is clarified in FRS 15 ‘Tangible Fixed Assets’ and in paragraph 6.22 of FRSSE (effective April 2008), as well as in IAS 16 ‘Property, Plant and Equipment’. This article concerns the provisions in FRS 15, although the FRSSE equivalent is a condensed version of FRS 15.

What is an asset?

In order for an asset to be recognised on a reporting entity’s bal...

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By Jobtel
21st Oct 2009 13:55

Capital and Revenue

Whilst I understand your comments and thought that having been an accountant for some years I knew it all - I was then completely baffled by what seems to be a difference between this and the taxation position.  I was even told by a so-called expert that some expenditure was neither Capital nor Revenue and I just wondered what was going on and if indeed there was a difference between an Accountancy Position and a Taxation position.  The points that were at issue were

a)  I was converting two upper floor of a building to Student Accomodation - in order to comply with modern rules I had to invest in considerable expenditure to introduce a fire alarm and detection system - this had to be on a different circuit to the normal ecectricity systems as should the normal systems fail the alarm systems still have to work - of course they were not required when the building was put up in 1828.  So would this be regarded as an improvement from which I can only gain tax benefit when I sell it or a revenue item? Of course without it I could not let the premises for residential use.

b) Similarly the whole electrical cabling was renewed - It replaced a former system for the most part and conclude that it ewas therefore a revenue item

c) Doors were replaced because both the old doors were now poorly fitting but also because they did not conform to the time delay require for fire controls but I have assumes these were Revenue on the basis that any room must have a door and after some 100 years its come to the end of its life

But are there expenditure which from the Revenue position on a refurbishment klike this are neither Capital nor Revenue?

Thanks (0)
21st Oct 2009 14:03

Its all in the planning on large projects
Steve - this is a very useful article - thanks!
The distinction between capital and revenue and its subsequent accounting treatment can have a massive impact on a company with a high capital expenditure budget and the distinction needs to be made as early in the project planning process as possible.
I spent a few years administering the fixed asset balance sheet & p&l activity in a large corporate that, at the time I joined, were going through an accelerated phase of property acquisition and refurbishment. The planned project costs were all expected to hit the balance sheet.
It was only on detailed analysis of the bill of quantities (after the event) and applying the guidance in FRS15 that a large amount of revenue expenditure was indentified and subsequently written off to the profit and loss account.
It is always worth having a detailed look at any large capital project to avoid any nasty p&l surprises.

Thanks (0)
21st Oct 2009 18:05

For me it had the makings of an interesting article ...

... except that as the first responder mentions it addresses only the accounting disclosure requirements while wholly ignoring the separation between tax rules and accounting disclosure rules.  For many of us the tax rules are the more significant.  The FRS rules are not entirely irrelevant, even for the smaller company, as they affect the distributable reserves, but even so ...

Jobtel, I think that the exenditure will always fall onto one side or the other of the capital/revenue divide.  The only problem is that neither treatment guarantees that tax relief will be available.  Normally you would be looking for a trading deduction for the revenue expense, and either capital allowances or a CGT base cost for the capital expense.  As you have noted, however, you do occasionally come across a "nothing" for tax purposes (whatever the accounts say).

You may want to have a browse of

and then after that trawl though the CGT and CA manuals.  If you have the time, that is.

With kind regards

Clint Westwood

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By jdavies
21st Oct 2009 18:33

I think this article addresses many issues which us accountants often disagree on.

During my days as a practice accountant I have had many a disagreement with HMRC regarding accounting treatments and they have always been known to fall back on what the accounting standards say.

I was always led to believe accountancy and tax treatment of things like capital are always different but HMRC want accounts prepared to UK GAAP so I don't thin Clint Westwood is entirely right in sayng FRSs only affect reserves.

Good article though once again!

Thanks (0)
21st Oct 2009 19:06

Tax Treatment


Thanks once again for your feedback.  It's much appreciated.

I did not cover the tax issues within the article because I knew Gina Dyer would post the article in the Financial Reporting zone so I thought it best to keep it "on topic" and discuss the accounting issues rather than digressing into the tax issues. 

However, we all, of course, know that since the introduction of the Annual Investment Allowance, a typical SME client could buy an item of plant (or enhance an item of plant as in the example) as a fixed asset and (presuming it qualifies in nature and within the £50,000 (or pro-rata'd AIA)) could write the cost of this plant in full by virtue of AIA which could result in a tax written down value of nil but have a net book value in the balance sheet.  The accounting treatment would still be that the company should still recognise the item of plant in its balance sheet and depreciate the asset in accordance with the accounting policies even though it may have a nil or negligible value for tax purposes.  Writing asset values off in full for corporation tax purposes will also result in deferred tax balances increasing or being recognised, where material.




Thanks (0)
By jdavies
22nd Oct 2009 23:18

Deferred tax
Steve thanks for adding your thoughts on the tax aspects and I am sure we can all see why you didn't include a tax aspect to your article. I mean if we can't deal with the tax aspects of fixed assets without the likes of your good self and Rebecca Benneyworth to hold our hands then why would we be doing the job we do.

One thing that intrigued me about your answer was about your reference to deferred tax. I have always thought of this concept of somewhat a waste of time and would be very interested to read your thoughts on the subject. Do you think deferred tax is a meaningful exercise?

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