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Capital versus Revenue expenditure toolkit

From:
HM Revenue & Customs
Published
1 July 2026
Updated:
1 July 2026 - See all updates

Financial costs

Provides checks to make and what risks and mitigations to consider, including explanations and examples for financial costs.

Check if any financial payment includes a capital element has it been treated correctly

Risk

Payments made in respect of finance costs, for example a mortgage, hire purchase (HP) agreement or leasing of assets used in the business may include both capital and revenue elements. Following the generally accepted accounting practice for any particular financial obligation will normally ensure that only the revenue element is allowed under income tax Self Assessment.

Mitigation

Review any expenditure charged to the profit and loss account in respect of finance payments, such as for mortgage, HP or leasing costs. Identify the exact nature of any such finance payments and the generally accepted accounting practice that is appropriate in respect of each of them. Following the generally accepted accounting practice will normally produce the correct allocation of expenditure to capital or revenue for tax purposes.

If any interest has been capitalised as part of the initial asset costs, relief may be available for tax purposes by means of an adjustment in the tax computation.

Further information

Transactions relating to corporate lending and borrowing are subject to specific rules on the taxation of loan relationships, under which relief is typically allowed for both revenue and capital elements.

Further information

Check if all payments made by a proprietor or partnership to acquire a franchise has been treated correctly

Risk

An initial payment made by a sole trader or partnership for the acquisition of a franchise is usually capital expenditure, as are any related legal fees. This is the case whether the payment is made in one sum or in instalments over a period of years.

Deductions should not be made on the basis that elements of the initial payment relate to allowable revenue expenditure for specific services, unless they are clearly supported by both the franchise agreement and the facts.

Mitigation

Ensure that all payments relating to an initial fee are treated as capital expenditure, and that any deductions made in the accounts for amortisation are added back. Review legal and professional fees and disallow any costs associated with the acquisition of the franchise.

Consider the franchise agreement and the facts before seeking any alternative deduction on the basis that an element of the initial payment is deductible in respect of actual services provided.

Explanation

Generally, the annual fees payable in respect of a franchise agreement will be an allowable revenue expense. The initial payment however, together with any related legal fees, is usually capital expenditure for tax purposes and not allowable as a revenue deduction. An initial fee for the acquisition of a franchise will still be capital expenditure even if it is paid by instalments over a number of years.

In some cases, a deduction may be possible for an element of the initial payment on the basis that it relates to the provision of services by the franchisor, but only if both of the following conditions are met:

  • specific services are actually provided by the franchisor in accordance with the franchise agreement
  • the agreement stipulates that these services are paid for by reference to the initial payment and not the annual fees

And then only to the extent that the amount allocated to revenue expenditure is commensurate with the services provided.

For companies, initial payments for franchises may be covered by the corporate intangible assets regime, and accordingly their amortisation over the lifetime of the franchise agreement is normally allowable.

Further information

Check if the arrangement fees for any long-term security correctly spread over the lifetime of the security in accordance with GAAP

Risk

Fees paid for the arrangement of long-term loans or securities will generally be spread over the lifetime of the loan in accordance with generally accepted accounting practice.

For companies, generally accepted accounting practice for arrangement fees should be followed for tax purposes. For sole traders or partnerships, relief may be claimed for incidental costs of loan finance under S58 and S59 Income Tax (Trading and Other Income) Act 2005 (ITTOIA).

Mitigation

Review long term loans or securities to identify any arrangement or rearrangement fees. Where any such fees are incurred by a company, ensure that generally accepted accounting practice is followed for tax purposes. For sole traders or partnerships ensure that, if appropriate, relief is claimed for such fees as incidental costs of loan finance.

Explanation

For companies, long term securities and expenses incurred in respect of them (such as bank arrangement fees) are governed by specific rules on the taxation of loan relationships. These rules specify that generally accepted accounting practice should be followed for tax purposes.

The Corporate Finance Manual — CFM30170 provides further guidance on what is taxable under the loan relationships rules with CFM33060 detailing expenses allowed as debits under the computational rules of loan relationships.

The Corporate Finance Manual — CFM35000 provides further guidance on the special rules relating to loan relationships between connected parties.

Proprietors and partnerships (except partnerships including companies) are not covered by these loan relationship rules. S58 ITTOIA and S59 ITTOIA however gives relief for certain incidental costs of obtaining loan finance where these would otherwise be disallowed as incidental costs of the capital transaction of obtaining finance.

Further information