---
title: "How to Record Capital Expenditure: UK Bookkeeping Guide"
description: "**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…"
url: "https://www.accountingfirms.co.uk/knowledge-bank/how-do-i-record-capital-expenditure-in-my-bookkeeping/"
updated: "2026-08-12"
category: Bookkeeping
---

# How to Record Capital Expenditure: UK Bookkeeping Guide

**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:

1. record proceeds and any output VAT;
2. remove original cost;
3. remove accumulated depreciation;
4. calculate the accounting gain or loss; and
5. 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.

### Does capital expenditure reduce profit immediately?

Not normally in accrual accounts. Depreciation is charged over time, while tax relief may arise under capital allowances.

### Can VAT be reclaimed?

A VAT-registered business may reclaim qualifying VAT subject to business use, evidence, partial exemption and specific restrictions.

## Related guidance

See [double-entry bookkeeping](https://www.accountingfirms.co.uk/knowledge-bank/what-is-double-entry-bookkeeping/) and [bookkeeping for tax planning](https://www.accountingfirms.co.uk/knowledge-bank/how-can-bookkeeping-help-with-tax-planning-for-my-business/).

## Official source

Check [GOV.UK capital allowances](https://www.gov.uk/capital-allowances) before claiming, as rates and qualifying conditions can change.