Capital Items: What They Are and How They’re Treated for Tax

“Capital items.” It sounds like something you’d hear in a boardroom meeting, but in reality it’s just the technical term for the bigger, longer-term things your business buys. Whether you’re a sole trader or running a limited company, understanding what counts as capital and how to claim for it makes a big difference when it comes to your tax return.

Let’s take a look at what capital items are, how they differ from everyday expenses, and how they’re handled in your accounts and tax returns.

What are capital items?

In the simplest terms, capital items are the things your business buys that are expected to last longer than a year and help generate income over the long term. Think of them as business investments rather than everyday running costs.

Examples include:

• A new laptop or desktop computer

• A van for deliveries

• Office furniture like desks or chairs

• Tools and machinery for your trade

• Shop fittings

On the other hand, day-to-day costs like printer paper, petrol, or staff wages don’t count as capital items. Those are revenue expenses – the everyday costs of keeping your business ticking over.

Revenue vs capital: repairs and improvements

This is where things can get a little confusing. Let’s say you fix a broken window at your shop. That’s a repair – a revenue expense. But if you knock down the wall and put in a shiny new glass frontage to make your café more appealing, that’s an improvement – and it’s capital.

In short:

• Repairs = restoring something to its original condition → revenue expense

• Improvements = upgrading or extending life of an asset → capital item

Getting this distinction right is important, because HMRC sees them very differently when it comes to tax.

How are capital items accounted for?

Unlike revenue expenses, you don’t just deduct the full cost of a capital item from your income in the year you buy it. Instead, tax rules give you relief through something called capital allowances.

• Annual Investment Allowance (AIA)

For most small businesses, this is the main way to claim. AIA allows you to deduct the full cost of most capital items (up to £1 million per year) from your profits in the year of purchase. So if you buy a £10,000 machine, you can usually knock £10,000 off your taxable profit straight away.

• Writing Down Allowances (WDAs)

If the item doesn’t qualify for AIA, or you’ve gone over the limit, you may claim relief gradually over several years through WDAs. Different assets have different rates – for example, cars usually go into special pools with set percentages.

• First-Year Allowances

Available for certain energy-efficient or environmentally friendly equipment.

Sole traders vs companies

Both sole traders and limited companies can claim capital allowances, but they do so on different tax returns.

• Sole traders claim them on their Self Assessment tax return, reducing the taxable profit they report to HMRC.

• Limited companies claim them through the Corporation Tax return (CT600).

The principles are the same – but the forms are different.

Everyday examples

To make this more tangible, here are a few scenarios:

• The laptop test: You buy a £1,200 laptop for your freelance design business. That’s a capital item. Under AIA, you can claim the full £1,200 against your income this year.

• The van purchase: You’re a sole trader builder and buy a £20,000 van. Again, it qualifies for AIA, so the full cost reduces your taxable profit.

• Office chair vs printer paper: A £250 chair for your office is capital (it’ll last years). A £10 pack of paper is a revenue expense (gone in weeks).

• Fixing vs improving: You repair your leaking roof (£500) – revenue expense. You replace it with a brand-new, higher-quality roof (£5,000) – capital item.

Why it matters

Claiming correctly is crucial. Treat a capital item as an expense, and HMRC could challenge your accounts. Fail to claim for capital allowances, and you could miss out on legitimate tax relief.

Handled properly, capital allowances make sure your accounts reflect the true cost of running and growing your business, without paying more tax than you should.

Final thoughts

Capital items aren’t as intimidating as they sound. They’re simply the “big purchases” that help your business keep moving – from vans to laptops, chairs to machines. The key is knowing the difference between revenue expenses (everyday running costs) and capital (long-term investments), and then claiming the right relief through AIA or other allowances. Get it right, and you’ll not only stay compliant with HMRC but also make sure you’re getting the tax relief you’re entitled to.