Capital vs Revenue Expenditure — What Trades Can Expense Now vs Claim as Capital Allowances (2026)

The Core Distinction

Revenue expenditure is the ongoing cost of running the business — the things you spend money on to earn this year's income. It is fully deductible against your profit in the year it is incurred. Typical revenue costs for a trade include materials and consumables, fuel, tool hire, repairs, insurance, subcontractor payments, wages, accountancy fees, phone and software subscriptions, and small hand tools.

Capital expenditure is money spent acquiring, creating or improving a lasting asset that the business will use over a number of years — a van, plant and machinery, a new compressor, computers, or a workshop fit-out. Capital spending is not deducted as a business expense in your profit and loss account. Instead it may qualify for capital allowances, which give you tax relief on the cost in a different way.

The important point that catches a lot of people out: capital does not mean "no relief". You still get tax relief on most qualifying capital items — just through the capital allowances system rather than as a straight expense. In many cases, thanks to the Annual Investment Allowance or full expensing, you get 100% of that relief immediately anyway. The mechanism differs; the eventual relief often does not.

Why It Matters

Putting a cost in the wrong box distorts your taxable profit. Treat a genuine capital item — say a £6,000 replacement van — as a revenue expense, and you understate your profit by £6,000 in one year, underpay tax, and leave yourself exposed if HMRC reviews the return. Treat a genuine revenue repair as capital and you overstate profit, overpay tax, and tie up relief you were entitled to take immediately.

HMRC pays particular attention to large "repairs" in the accounts that are really improvements. A £500 repair to a workshop roof rarely raises an eyebrow; a £40,000 "repair" that turns out to be a complete new roof or an extension is exactly the kind of entry that gets questioned. The cost has to be correctly classified, and you need to be able to explain why.

The Classic Grey Area: Repairs vs Improvements

For trades, the single most common judgement call is whether work done on an existing asset is a repair (revenue, deduct now) or an improvement (capital, capital allowances). The basic principle is straightforward even if the application is not:

• Repairing or restoring an asset to its original condition is revenue. Replacing some slipped roof tiles, fixing a van engine, replacing a broken window with an equivalent one, repointing a section of brickwork — these put the asset back to where it was. Fully deductible this year.
• Improving, upgrading or replacing the whole asset is capital. Building an extension on the workshop, replacing an entire roof, upgrading a machine to a higher-spec model, fitting a better engine than the one that failed — these create something better or new. Capital.

Two tests help you decide.

The "Entirety" Test

Ask: is the work repairing part of a larger asset, or replacing the asset in its entirety? Replacing a few tiles repairs the roof (which is part of the larger asset, the building) — revenue. Replacing the whole roof can be treated as replacing the entirety of that part and is more likely to be capital, especially if the new roof is a genuine improvement. The smaller the part relative to the whole, the more likely it is a deductible repair.

The "Like-for-Like vs Betterment" Test

Ask: does the work simply restore the asset, or does it make it materially better than before? A like-for-like replacement using modern equivalent materials is generally still a repair — you are allowed to use today's standard materials even if the originals are no longer made. But if the replacement is a clear upgrade — single-glazed to double-glazed as a deliberate improvement, a standard machine swapped for a faster, higher-capacity one — that betterment element points to capital.

Capital Allowances: How the Capital Side Gets Relief

Once a cost is correctly identified as capital, you look at whether it qualifies for capital allowances. Most plant and machinery a trade buys does. The main routes in 2026 are:

• Annual Investment Allowance (AIA): gives 100% relief on most qualifying plant and machinery in the year you buy it, up to the AIA limit (£1 million). For the vast majority of trade businesses, this means a new compressor, generator, power tools, or a commercial van gets full relief in year one — the same effect as expensing it, just claimed through the capital allowances pages.
• Full expensing: available to companies (not sole traders or partnerships) on new and unused qualifying plant and machinery, giving 100% first-year relief with no upper limit. Limited company trades buying new equipment can use this for unlimited qualifying spend.
• Writing-down allowances (WDAs): for capital spending that falls outside AIA or full expensing, you claim a percentage of the cost each year on a reducing-balance basis — 18% a year for the main pool, 6% for the special rate pool. Relief is spread over several years rather than taken all at once.
• Cars: have their own rules and do not qualify for AIA. The allowances available depend on the car's CO2 emissions — lower-emission and electric cars attract more generous first-year or main-pool treatment, higher-emission cars go into the special rate pool at 6%. Vans are treated as plant and machinery, so they generally do qualify for AIA — the distinction between a van and a car matters here.

So even though capital items are not expensed, you are usually not worse off in cash terms over the life of the asset. With AIA or full expensing you often get exactly the same year-one relief you would have had by expensing it. The difference is that you must claim it correctly as a capital allowance, and the relief on items outside those schemes is spread over time.

Worked Examples for a Trade Business

The theory is easier to see with concrete numbers. Here is how the split plays out on costs a typical trade actually meets.

• A £40 hand drill vs a £5,000 bench machine. A low-cost hand tool is usually treated as a revenue cost — small tools are written off as an expense in the year you buy them. A £5,000 bench machine is plant and machinery: capital, but typically covered 100% by AIA, so you still get full relief in year one — just claimed as a capital allowance.
• Servicing a van vs replacing a van. A service, new tyres, a clutch or an engine repair keep the van running — revenue, deduct now. Buying a replacement van is capital expenditure on plant and machinery — claim it through capital allowances, generally within AIA.
• Repointing some brickwork vs building an extension. Repointing a section of failing mortar restores the wall to its original condition — a revenue repair. Building an extension on the workshop creates a new, larger asset — capital expenditure (and note that the building structure itself may fall under different rules to the plant inside it).

A Note on the Cash Basis vs Accruals Basis

For many smaller sole traders and partnerships, this whole question is simpler than it looks, because of the cash basis. Under the cash basis you record income and expenses when money actually changes hands, and most plant and machinery is simply treated as an allowable expense when you pay for it — there is no separate capital allowances calculation for it (cars are the main exception and still follow capital allowance rules).

That means a cash-basis trader buying a new compressor or set of power tools generally just claims the cost as an expense in the period paid, sidestepping the capital allowances machinery entirely. Under the traditional accruals basis, you account for income and costs when they are earned or incurred, and capital items go through capital allowances as described above. Which basis suits you depends on your turnover, structure and circumstances — worth a conversation with your accountant.

Quick Reference: Revenue vs Capital for Trades

Getting It Right on Your Return

The practical workflow is simple: when a cost lands, ask whether it keeps the business running this year (revenue, expense it) or buys or improves a lasting asset (capital, claim allowances). For the grey-area jobs, run the entirety and betterment tests and keep a note of your reasoning and the invoices. If a job mixes the two — a repair carried out at the same time as an improvement — split the cost between revenue and capital rather than lumping it all into one box.

This is general information, not tax advice, and the rules and allowance limits can change. Before you finalise how a significant cost is treated — especially a large repair-or-improvement decision, or anything affecting your capital allowances claim — speak to a qualified accountant who can look at your specific circumstances.