What is CapEx (capital expenditure)?
CapEx, short for capital expenditure, is money a business spends buying or improving long-term assets such as equipment, vehicles, property or computers.
What CapEx means
Capital expenditure buys something that will benefit the business for more than a year. Instead of appearing as a cost in the profit and loss account straight away, it is added to fixed assets on the balance sheet and written off gradually through depreciation.
Typical CapEx for a small business includes laptops and servers, vans and machinery, shop fit-outs, kitchen equipment and building improvements. Repairs that restore something to its original condition are not CapEx; they are day-to-day OpEx.
Example
A physiotherapy clinic buys treatment couches and equipment for £18,000 and expects them to last six years.
- Accounts: £18,000 goes onto the balance sheet. Depreciation of £3,000 a year is charged to profit for six years.
- Tax (company): the Annual Investment Allowance lets the company deduct the full £18,000 from taxable profit in the year of purchase. At a 19% Corporation Tax rate, that saves £3,420 this year.
- Cash: the full £18,000 leaves the bank on day one, or is spread if financed.
Why it matters for your business
CapEx is where profit and cash diverge most. A big purchase barely dents this year's accounting profit, but it can drain the bank. Plan large purchases in a cash flow forecast, and think about financing for assets that will earn their keep over several years.
The tax relief is generous. The Annual Investment Allowance gives 100% relief on up to £1 million a year of qualifying plant and machinery, and companies can also claim full expensing on new main-rate equipment. Cars are the main exception: they get writing down allowances based on emissions instead. Buying before your year end brings the relief forward a year.
CapEx vs OpEx
CapEx buys long-term assets; OpEx pays running costs like rent, wages and software subscriptions, which are charged against profit when incurred. Leasing an asset turns what would have been CapEx into a regular operating cost.
Planning capital spending
Before a large purchase, compare buying outright, hire purchase and leasing. Hire purchase keeps the asset on your balance sheet and still qualifies for capital allowances; most leases do not, but spread the cost as a running expense. A simple payback calculation, cost divided by the extra annual profit or saving the asset brings, helps decide which purchases to prioritise.
Common questions
Not as an expense, but through capital allowances. For most equipment, the Annual Investment Allowance gives full relief in the year of purchase up to £1 million. Cars and buildings are treated differently. Depreciation in the accounts is not deductible.
A laptop normally lasts several years, so it is CapEx and capitalised as a fixed asset. Many small businesses set a capitalisation threshold, such as £500, and expense cheaper items. Either way, the tax relief is usually the same through the AIA.