joogy06/agent-foundry/business-expenses-and-assets

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

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.

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

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

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.