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business-expenses-and-assets

business-expenses-and-assets

Use when deciding how to treat a business purchase — whether a laptop, phone, tool or piece of equipment is a capital asset or a revenue expense, how to depreciate it and over what life, how depreciation interacts with capital allowances for tax, how to apportion mixed business and private use, and how to handle consumables, subscriptions, low-value items a…

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name: business-expenses-and-assets description: Use when deciding how to treat a business purchase — whether a laptop, phone, tool or piece of equipment is a capital asset or a revenue expense, how to depreciate it and over what life, how depreciation interacts with capital allowances for tax, how to apportion mixed business and private use, and how to handle consumables, subscriptions, low-value items and a capitalisation policy. Covers the categories a small company actually spends on and the ones that are commonly mis-posted. disambiguation: The DECISION about how to treat a purchase — capital vs revenue, depreciation, private-use apportionment. Posting the resulting entries is bookkeeping-double-entry; claiming the tax relief on a CT600 is uk-corporation-tax; reclaiming the VAT is uk-vat; benefits-in-kind on assets made available to a director is uk-payroll.

Business expenses and assets

The decision that gets made hundreds of times a year and is wrong often enough to matter: is this a cost, or is it a thing the company now owns?

1. Capital or revenue — the question that decides everything else

CapitalRevenue
TestLasting benefit beyond this periodConsumed in the running of the business
ExamplesLaptop, phone, drill, van, machinery, office fit-outPaper, ink, fuel, rent, software subscription, repairs
In the accountsBalance sheet, then depreciatedP&L immediately
For taxCapital allowancesDeducted in the year

The practical test is durability, not price. A £900 laptop lasting three years is capital. A £900 stock of paper consumed this year is revenue. A £900 repair restoring something to working order is revenue; a £900 upgrade making it materially better is capital.

Repairs vs improvements is the pair that catches people: replacing a broken part is a repair (revenue); replacing the whole thing with something better is an improvement (capital).

Set a capitalisation policy and write it down

Below a stated threshold, treat purchases as revenue regardless of durability. £200–£500 is typical for a small company. A drill at £80 is not worth an asset register entry and a decade of depreciation lines.

A policy only works if it is consistent and recorded — applied the same way every year, and written down so the treatment can be explained later. Ad-hoc capitalisation of whatever happens to feel large is what makes a fixed-asset register untrustworthy.

2. Depreciation — the accounting view

Depreciation spreads a capital asset's cost across the periods that benefit. It is an accounting estimate, and it is NOT the tax deduction — see §3.

MethodHowUse for
Straight lineCost ÷ useful life, same each yearMost small-company assets — simple and defensible
Reducing balanceFixed % of the written-down valueAssets losing value fastest early — vehicles

Typical useful lives (a judgement, applied consistently, not a rule):

AssetLife
Laptop, phone, tablet2–3 years
Office furniture5–10 years
Tools and small equipment3–5 years
Vehicles4–5 years
Fit-out / leasehold improvementsOver the lease term

Residual value is what it will be worth at the end. For a laptop, usually nil. Do not invent a residual value to reduce the charge.

Entries: Dr Depreciation (P&L) / Cr Accumulated depreciation (balance sheet). Never credit the asset account directly — cost and accumulated depreciation are shown separately, and netting them loses the asset's history.

On disposal: remove cost and accumulated depreciation, and put the difference against proceeds as a profit or loss on disposal. An asset scrapped but left on the register overstates the balance sheet indefinitely.

3. Depreciation is not the tax deduction — the point people miss

Depreciation is added back in the corporation tax computation, every year, without exception. Tax relief comes instead through capital allowances (uk-corporation-tax §2–§3).

So for a laptop:

  • Accounts: capitalise, depreciate over ~3 years, and add the depreciation back for tax.
  • Tax: claim capital allowances — often 100% in year one under the Annual Investment Allowance, or full expensing for qualifying new plant.

The two run on completely different timetables and that is normal. The consequence worth understanding: the tax relief is usually faster than the depreciation. A company can have a laptop still depreciating in year three whose full cost was relieved in year one.

Rates and limits are not repeated here — accounting-uk-ltd/references/rates-2026-27.md.

4. Mixed business and private use

A phone used for both, a laptop used at home, a car. Apportion honestly and record the basis.

  • Claim only the business proportion, in the accounts, for VAT, and for capital allowances.
  • Record how the split was reached — a call log, a mileage log, a stated percentage with a reason. "50%" with nothing behind it is the number an inspector asks about first.
  • VAT: input VAT is recoverable only on the business proportion. Cars are effectively blocked entirely; commercial vehicles differ (uk-vat §4).
  • Assets made available to a director for private use can create a benefit in kind — a P11D matter, not just an apportionment (uk-payroll §6).

A rule cannot make this judgement, which is why mixed-use purchases must never be auto-added by a bank rule (quickbooks-bookkeeping §3).

5. The categories a small company actually spends on

CategoryTreatmentWatch
Consumables — paper, ink, cleaningRevenueBulk buys spanning periods are a prepayment if material
Software subscriptionsRevenueAnnual licence paid up front spans periods — prepay it
Perpetual software licenceOften capitalDepends on term and substance
Tools and small equipmentPolicy threshold decidesBe consistent
RepairsRevenueImprovement ≠ repair
Professional feesRevenue — unless capital-relatedFees on buying an asset are capital
Entertaining clientsRevenue but disallowed for tax, VAT blockedStaff entertaining differs
Staff costsRevenueEmployer's NI and pension are company costs, not deductions
MotorDepends on vehicle and useCars are treated very differently from vans
Home officeApportionedUse a defensible basis
StockNeither — it is an asset until soldNot an expense on purchase

Stock is the one that is neither. Buying stock is not a cost; it becomes cost of sales when sold. Treating purchases as an expense with no stock adjustment misstates profit in both directions.

6. Keep a fixed-asset register

For every capital item: description, date acquired, cost, supplier, invoice reference, useful life, method, depreciation to date, net book value, and disposal details when it goes.

Without it, depreciation becomes a guess, disposals never get removed, and the balance sheet slowly fills with assets that no longer exist. It is also what a capital-allowances claim is built from — financial-document-ingestion §6 stores the invoice; the register links it to the asset.

7. Anti-patterns

  • Expensing a capital item — overstates costs now, loses the allowance claim, and is an add-back waiting to be found.
  • Capitalising consumables to flatter profit.
  • Forgetting to add back depreciation in the tax computation.
  • Assuming depreciation is the tax deduction. It never is.
  • Claiming 100% on a mixed-use asset without a basis.
  • Capitalising ad hoc, with no written policy or threshold.
  • Leaving disposed assets on the register.
  • Treating stock purchases as an expense.
  • Netting depreciation against cost, losing the asset's history.
  • Auto-categorising a mixed-use purchase by bank rule.
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