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WHAT IS THE DIFFERENCE BETWEEN REVENUE EXPENDITURE AND CAPITAL EXPENDITURE?

For tax purposes the distinction between capital and revenue expenditure is quite important. Expenditure that is capital is generally not allowable as a deduction when computing taxable profits.

For example, improvements made to a property must be differentiated between repairs to existing features of the property (or replacements of existing features with a product of a similar standard) and improvements which add value to the property such as renovations or extensions.

According to HMRC’s own manuals “there is no single, simple test that can be applied to decide which items are capital expenditure and which are revenue expenditure”. Yet adopting the correct treatment is important because whilst revenue expenditure will reduce the profits and therefore the corresponding income tax, capital expenditure will increase the purchase price of the property and thus reduce the capital gains when the property is sold. Hence different tax rates will apply.

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