How to Record Capital Expenditure: UK Bookkeeping Guide

4 min read

Table of Contents

Capital expenditure versus operating expense
Examples of capital expenditure
Repairs versus improvements
Initial bookkeeping entry
What costs form part of the asset?
Fixed-asset register
Depreciation
Capital allowances for 2026/27
Cash-basis businesses
Hire purchase, leases and finance
Asset disposal
Common mistakes
Frequently asked questions
Related guidance
Official source

Capital expenditure buys or improves an asset expected to benefit the business beyond the current accounting period. It is normally recorded on the balance sheet rather than charged immediately as a day-to-day expense.

The business then recognises depreciation in its accounts and considers separate capital allowances for tax.

Capital expenditure versus operating expense

Capital expenditure	Operating expense
Creates or improves a lasting asset	Supports day-to-day operations
Recorded as a fixed or intangible asset	Charged to profit and loss
Depreciated or amortised over useful life	Recognised in the relevant period
Tax relief considered under capital rules	Tax deduction considered under expense rules

Examples of capital expenditure

machinery and production equipment;
computers and office equipment;
vans and business vehicles;
furniture and fixtures;
property acquisitions and qualifying improvements;
software licences or development meeting recognition criteria; and
major improvements that increase capacity or useful life.

Stock bought for resale is not a fixed asset, even if it remains unsold at year end.

Repairs versus improvements

A repair that restores an asset to its previous condition is commonly a revenue expense. Work that creates a new asset, changes its character or significantly improves it may be capital.

Replacing a small component may be repair expenditure; replacing an entire asset or adding new capability can be capital. The invoice description alone does not determine treatment.

Initial bookkeeping entry

For a £12,000 equipment purchase plus £2,400 recoverable VAT on supplier credit:

debit equipment £12,000;
debit input VAT £2,400; and
credit trade creditors £14,400.

When paid, debit the creditor and credit bank. If VAT is not recoverable, the irrecoverable amount generally forms part of asset cost.

What costs form part of the asset?

Capitalised cost can include expenditure directly attributable to bringing the asset to the location and condition needed for use, such as:

purchase price after discounts;
delivery and handling;
installation and testing;
professional fees directly related to acquisition; and
irrecoverable taxes.

Training, general administration and avoidable operating losses are not automatically part of asset cost.

Fixed-asset register

Maintain:

asset description and unique reference;
supplier and invoice;
purchase and in-service date;
location and responsible person;
cost and recoverable VAT;
useful life and depreciation method;
business/private use;
capital-allowance category;
serial number;
disposal date and proceeds; and
supporting evidence.

Depreciation

Depreciation allocates the depreciable amount over the estimated useful life. Common methods are:

straight line: equal annual charge; and
reducing balance: a percentage of the remaining carrying value.

The policy should reflect consumption of economic benefit. Review useful lives, residual values and impairment indicators regularly.

Capital allowances for 2026/27

Accounting depreciation is normally not the tax deduction. HMRC capital allowances provide tax relief for qualifying assets.

Current GOV.UK guidance lists:

Annual Investment Allowance of up to £1 million for qualifying plant and machinery;
100% first-year allowances for certain qualifying assets;
full expensing and a 50% first-year allowance for qualifying company expenditure from 1 April 2023;
a 40% first-year allowance for qualifying plant and machinery bought after 1 January 2026; and
writing-down allowances where another allowance is unavailable or value remains.

Eligibility differs by taxpayer, asset, ownership, use, timing and whether the item is new. Cars have separate rules.

Cash-basis businesses

HMRC states that a sole trader or partnership using cash basis generally deals with qualifying equipment through the cash-basis expense rules and claims capital allowances only on business cars. Do not duplicate relief.

Hire purchase, leases and finance

Separate:

asset cost;
deposit;
capital liability;
interest and fees;
VAT; and
each repayment’s principal and finance element.

The accounting and tax treatment depends on the contract and reporting framework. Do not post every payment as equipment expense.

Asset disposal

When an asset is sold or scrapped:

record proceeds and any output VAT;
remove original cost;
remove accumulated depreciation;
calculate the accounting gain or loss; and
update the capital-allowance pool or disposal calculation.

Keep sale invoices, trade-in documents and evidence of scrapping.

Common mistakes

posting equipment to repairs;
capitalising ordinary maintenance;
claiming both depreciation and capital allowances as tax deductions;
omitting installation or irrecoverable VAT from cost;
failing to split loan principal and interest;
leaving disposed assets on the register;
claiming an allowance without checking eligibility; and
buying unnecessary assets only for tax relief.

Frequently asked questions

Is a laptop capital expenditure?

It is normally equipment, although accounting policies may expense low-value items where that treatment is appropriate and consistent. Tax rules are considered separately.