The Short Answer
Capex, short for capital expenditure, is money spent on something the business will use for more than a year. A van, a machine, a building extension, a new till system. It goes on the balance sheet as a fixed asset and is charged to profit gradually through depreciation.
Opex, short for operating expenditure, is money spent running the business day to day. Rent, wages, electricity, software subscriptions, insurance, repairs. It goes straight through the profit and loss account in the period it relates to.
The quickest test we use with clients: will this still be helping the business earn money in a year's time? If yes, it is probably capex. If it is used up, consumed or simply keeps things as they were, it is probably opex.
UK accountants and HMRC often say capital expenditure and revenue expenditure instead. Revenue expenditure is just the British term for opex. Same idea, older name, and the one you will see in HMRC manuals and accounting exam papers.
Capex vs Opex at a Glance
| Capex | Opex | |
|---|---|---|
| What it buys | An asset with a life beyond the current year | Goods and services used up in running the business |
| Examples | Machinery, vehicles, computers, buildings, extensions, fitting out premises | Rent, wages, utilities, subscriptions, insurance, marketing, repairs |
| Where it goes first | Balance sheet, as a fixed asset | Profit and loss account, as an expense |
| How it hits profit | Spread over the asset's life through depreciation | All in the period it relates to |
| Effect on EBITDA | None, because depreciation sits below EBITDA | Reduces EBITDA in full |
| Cash flow statement | Investing activities | Operating activities |
| Tax relief | Capital allowances, not depreciation | Deducted as a normal business expense |
That EBITDA row matters more than it looks. We come back to it below.
What Counts as Capex
Under FRS 102, the accounting standard most UK companies use, an item of property, plant and equipment is recognised as an asset when it is probable the business will get future benefit from it and its cost can be measured reliably. In plain terms, capex covers:
- Buying a new asset. Equipment, vehicles, furniture, IT hardware, land and buildings.
- Improving an existing asset so it does more, lasts longer or is better than it was. Adding a storey, upgrading a production line to double its output.
- The costs of getting the asset working. Delivery, installation, professional fees and site preparation are part of the asset's cost, not separate expenses.
- Intangible assets that you buy or, in some cases, develop. Purchased software licences, patents, goodwill on buying a business. These are written off through amortisation rather than depreciation.
What Counts as Opex
Opex is everything you spend to keep the business ticking over:
- Staff costs, including employer's National Insurance and pension contributions
- Rent, business rates, utilities and insurance
- Software subscriptions and cloud services
- Marketing, travel, phone and broadband
- Accountancy and legal fees for routine work
- Repairs and maintenance that restore an asset to its previous condition
- Small items below your capitalisation threshold
Cost of sales and overheads are both opex in this sense. The capex vs opex split is about time horizon. The cost of sales vs overheads split is about whether a cost moves with sales.
A Worked Example
Oakmere Dental Care Ltd runs a two-surgery practice in Barnet with a 31 March year end. In the year to 31 March 2026 it spent £98,900 on the following. To keep the numbers simple, assume everything was bought and in use from the first day of the year.
| Spend | Amount | Capex or opex? | Why |
|---|---|---|---|
| New dental chair, including delivery and installation | £18,500 | Capex | New equipment with a life of around 10 years |
| Single-storey extension for a third surgery | £68,000 | Capex | Adds space the practice did not have before |
| Two laptops for reception | £2,200 | Capex | Above the practice's £500 capitalisation threshold |
| Replacing worn vinyl flooring in both surgeries, like for like | £4,200 | Opex | Restores the rooms to their previous condition |
| Practice management software subscription | £3,600 | Opex | A service paid for year by year, not an asset the practice owns |
| Repainting reception | £2,400 | Opex | Routine maintenance |
So £88,700 is capex and £10,200 is opex.
How it hits the accounts
The £10,200 of opex is charged to profit in full this year.
The £88,700 of capex goes onto the balance sheet. The P&L only sees this year's depreciation. Using the practice's policies:
| Asset | Cost | Life | Depreciation this year |
|---|---|---|---|
| Dental chair | £18,500 | 10 years | £1,850 |
| Laptops | £2,200 | 3 years | £733 |
| Extension, building structure | £59,000 | 50 years | £1,180 |
| Extension, electrics and heating | £9,000 | 15 years | £600 |
| Total | £88,700 | £4,363 |
The total charge to profit is £14,563 (£10,200 + £4,363), even though £98,900 left the bank. That gap is why a profitable business can still run short of cash in a year of heavy investment, and why the cash flow statement shows capex separately under investing activities.
How it hits the tax return
For tax, depreciation is ignored completely. It is added back to profit and replaced by capital allowances, which follow their own rules:
- The chair, laptops and the £9,000 of electrics and heating qualify for the £1 million Annual Investment Allowance. The electrics and heating count as integral features, which is why it pays to split them out of a building contract. That is £29,700 deducted in full this year.
- The £59,000 building structure gets no AIA at all. It qualifies for the Structures and Buildings Allowance at 3% a year, straight line, so £1,770 this year and the same every year for 33 and a third years.
- The £10,200 of opex is deducted in full as an ordinary expense.
Total tax deductions this year: £41,670, against an accounts charge of £14,563. In this example tax relief runs well ahead of the accounts, except on the building, where it runs well behind.
Why the Line Matters
1. For tax, less than most people think, except on property
Since the AIA settled at £1 million, most small businesses get 100% relief in year one on equipment whether it is capex or opex. Oakmere's chair is capex, but the tax result is the same as if it were an expense.
The distinction still has real teeth in four places:
- Buildings and structures. No AIA. Relief through the SBA at 3% a year, or not at all for land and residential property.
- Cars. No AIA. They go into the main or special rate pool depending on emissions.
- Residential landlords. Capital allowances are largely unavailable for furnished or unfurnished lets. An improvement to a rental property gets no income tax relief at all. It only reduces the capital gains tax when you sell. A repair is deducted from rental profit straight away. We cover this in tax on rental income.
- Spend above £1 million in a year, where the choice between full expensing, the 40% first year allowance and the 14% main pool comes into play.
If you are a sole trader on the cash basis, which is now the default, most equipment is simply an expense when you pay for it. The capex question mainly survives for cars, land and buildings.
2. For reported profit and EBITDA, a great deal
Depreciation sits below EBITDA. So every pound treated as capex instead of opex adds a pound to EBITDA in the year it is spent.
If Oakmere had capitalised the flooring and the repainting, EBITDA would rise by £6,600. Dental practices often sell for a multiple of adjusted EBITDA. At five times, that is £33,000 on the asking price, from a bookkeeping choice.
Our view: do not do it. Every buyer's due diligence team we have dealt with looks for exactly this, and they will reverse it, usually with less goodwill towards the seller than before. Lenders do the same with covenant calculations. Classifying spend honestly from the start is cheaper than defending an aggressive policy at the moment you most need the numbers to be trusted.
3. For ratios and budgets
Capex grows the balance sheet, which changes return on capital employed, return on equity and the gearing ratio if the spend is financed. It also needs its own budget. We ask clients to keep a separate capex plan alongside the cash flow forecast, because capex is lumpy and easy to forget until the invoice lands.
The Grey Area: Repairs vs Improvements
This is where most disputes with HMRC, and most arguments at the year end, happen.
A repair restores something to its previous condition. It is opex, and deductible. Replacing broken roof tiles, fixing a boiler, relaying worn flooring with similar flooring.
An improvement makes something better than it was, or replaces the whole asset. It is capex. Adding a loft room, replacing a working boiler with a much larger system, or renewing an entire asset rather than part of it.
Four tests we apply in practice:
- What is the asset? Replacing one machine in a factory is replacing an asset (capex). Replacing a worn part inside the machine is a repair (opex). With buildings, HMRC generally treats the building as the asset, so replacing a roof or a window is usually a repair to the building.
- Is it better than before only because technology moved on? Replacing single glazing with double glazing is normally still a repair, because like for like is no longer realistic. HMRC accepts this in its own guidance.
- Was the asset usable when you bought it? This is the trap we see most often. If you buy a run-down property or a second-hand machine that cannot be used until it is put right, the cost of putting it right is capital, even if the work looks like repairs. The case law goes back a century, to Law Shipping in 1923. If the asset was usable and simply tired, as in the Odeon cinemas case, the repairs stay deductible.
- Is there an improvement element mixed in? If you replace a small kitchen and enlarge it at the same time, only the part that restores what was there is a repair. Get the contractor to split the invoice.
Capitalisation Thresholds
No business capitalises a £6 stapler, even though it lasts for years. Most set a capitalisation threshold, usually somewhere between £200 and £1,000, below which anything is expensed. FRS 102 does not set a figure, so it is a policy choice. What matters is picking a sensible level and applying it every year. We explain how to choose one in our guide to fixed assets.
Leases, Subscriptions and the 2026 Twist
For a decade, businesses have been turning capex into opex. Servers became cloud subscriptions. Bought vans became contract hire. Equipment became "as a service". Partly this is about cash, and partly it is about keeping assets and debt off the balance sheet.
From accounting periods beginning on or after 1 January 2026, the amended FRS 102 moved a lot of that back. Almost every lease a business takes on is now shown as a right-of-use asset with a matching lease liability. The rent that used to be opex is replaced by depreciation and interest. EBITDA goes up, debt goes up, and the business has not changed at all. We explain the detail in finance lease vs operating lease. Micro-entities using FRS 105 are not affected.
Pure service contracts, such as most software subscriptions, are still opex. The test is whether you control an identified asset. Paying for access to a cloud platform shared with thousands of other customers is a service, not a lease.
Common Mistakes
- Expensing the installation and fees. Delivery, installation and professional fees for getting an asset working are part of its cost.
- Treating a building contract as one lump. Splitting out integral features and plant can move a large share into the AIA.
- Capitalising repairs to flatter profit. It rarely survives a sale, a bank review or an HMRC enquiry.
- Deducting the cost of doing up a newly bought, unusable asset. That is capital.
- Depreciating for tax. Depreciation is always added back. Relief comes through capital allowances.
- Forgetting disposals. Assets that have been sold or scrapped need taking off the fixed asset register, or depreciation keeps running on things you no longer own.
How IAK Can Help
We act for limited companies, small businesses, landlords and construction companies across North London and Hertfordshire. Capex vs opex questions usually come up at the year end, when a large invoice needs a home, or before a sale, when someone asks why EBITDA looks the way it does.
Our advice is to decide before you spend. If you are planning an extension, a refit or a big equipment purchase, a short conversation first can split the contract the right way, time the spend against your year end, and make sure the relief lands where it is worth most. See our tax planning and accounting services, or get in touch.
Sources
- FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, Financial Reporting Council, Section 17 on property, plant and equipment and the amended Section 20 on leases.
- Business Income Manual BIM35000, capital and revenue expenditure, HMRC, for HMRC's approach to the capital vs revenue divide.
- Business Income Manual BIM46900, repairs and renewals, HMRC, for the repairs vs improvements tests, the entirety of the asset, and the Law Shipping and Odeon cases.
- Claim capital allowances: Annual investment allowance, GOV.UK, for the £1 million AIA.
- Claiming capital allowances for structures and buildings, GOV.UK, for the 3% Structures and Buildings Allowance.