Every business that buys equipment needs a rule for when a purchase becomes a fixed asset on the balance sheet and when it is simply an expense. Without one, a £600 printer is capitalised in March, an £800 laptop is expensed in June, and nobody can explain the difference to the accountant at year end. A capitalisation policy is that rule, written down once and applied every time.
What the policy needs to say
A useful policy fits on one page and answers five questions:
- The threshold. Single items costing less than this amount (net of reclaimable VAT) are expensed.
- What counts as cost. Purchase price plus costs needed to bring the asset into use: delivery, installation, professional fees directly related to the purchase. Not training, not ongoing support.
- Capital versus revenue. Which spending on existing assets is an improvement (capitalised) and which is a repair (expensed).
- Asset classes and useful lives. How long each class is depreciated over, and by which method.
- Grouped purchases. When several low-value items bought together are treated as one asset.
Setting the threshold
There is no statutory threshold in UK accounting. The business chooses one that is material for its size; for many small businesses it sits somewhere between £250 and £1,000. A higher threshold means fewer assets to track; a lower one makes the balance sheet more complete but adds work. Pick one figure, apply it to the cost of a single item, and do not change it from year to year without a reason.
The accounting threshold has nothing to do with tax. For tax, most plant and machinery qualifies for capital allowances, including the Annual Investment Allowance, whether or not you capitalised it in the accounts, and items you expense in the accounts still need to be treated correctly in the tax computation. See capital allowances explained.
Capital or revenue: the hard cases
| Spending | Usual treatment | Reasoning |
|---|---|---|
| Replacing a broken van engine with a like-for-like one | Revenue (repair) | Restores the asset to its previous condition |
| Fitting a refrigerated body to an ordinary van | Capital | Changes what the asset can do |
| Repainting the office | Revenue | Maintenance |
| Building an extension | Capital | Creates something new |
| Upgrading laptop memory to extend its life by two years | Usually capital, if above the threshold | Extends useful life beyond the original estimate |
| Annual software licence | Revenue (often a prepayment) | No asset beyond the year |
| Website build | Capital if it generates future income and is above the threshold; ongoing hosting and edits are revenue | Separate the build from running costs |
The question to ask is whether the spending creates or improves an asset, or merely keeps it working as it was. When a repair and an improvement happen in the same job, split the invoice.
Useful lives
Set lives that reflect how long the business really uses each class, not what a tax table suggests.
| Class | Typical method | Typical life in small businesses |
|---|---|---|
| Computer equipment | Straight line | 3 years |
| Office furniture and fittings | Straight line | 5–10 years |
| Motor vehicles | Straight line or reducing balance | 4–5 years |
| Plant and machinery | Straight line | 5–10 years |
| Leasehold improvements | Straight line | Shorter of the lease term and the improvement’s life |
| Freehold buildings | Straight line | Up to 50 years; land is not depreciated |
How each class is posted in the ledger is covered in fixed assets in the chart of accounts and depreciation accounts.
Items below the threshold
Low-value items are expensed in the month they are bought, usually to office equipment or small tools in the profit and loss account. Two refinements keep this sensible:
- Bulk purchases. Twenty office chairs at £150 each are individually below a £500 threshold, but the purchase is a single fit-out worth £3,000. Many policies say that items bought together for one purpose and used together are capitalised as one asset. Write that rule into the policy so it is applied consistently.
- Portable, attractive kit. Phones, tablets and power tools under the threshold are not assets in the accounts, but they still walk out of the door. Keep a simple equipment list with who holds each item. It is an inventory for control, not part of the fixed asset register.
VAT treatment does not change with the threshold: reclaim input VAT on a low-value item exactly as you would on any other business purchase.
Applying and reviewing the policy
Whoever codes purchase invoices needs the threshold and the capital-versus-revenue table to hand. Anything capitalised goes straight into the fixed asset register with its cost, date, class and life. Review the policy once a year at the year end: if lives look wrong because assets are being scrapped long before or long after they are fully depreciated, change the estimate going forward and note the change for the accounts.