What is capital expenditure?

Published Thursday 23 July 2026

Table of contents

• What is capital expenditure?
• Types of capital expenditure
• Examples of capital expenditure
• Capex vs opex: what's the difference?
• How to calculate capital expenditure
• Where to find capital expenditure in financial statements
• Is capital expenditure tax deductible?
• Track capital expenditure with Xero
• FAQs on capital expenditure

Key takeaways

• Capital expenditure (capex) is money you spend on long-term assets such as property, equipment or software that benefit your business for more than 1 year. It's recorded on the balance sheet, not the income statement.
• Capex splits into 2 types: maintenance capex keeps your current operations running, while growth capex funds expansion into new capacity or markets.
• You can't deduct the full cost of capex in the year you spend it, but HMRC capital allowances let you claim tax relief over time, and the Annual Investment Allowance covers up to £1 million per year.
• Understanding the difference between capex and operating expenditure (opex) helps you plan cash flow, report your finances accurately and make smarter spending decisions.

What is capital expenditure?

Capital expenditure is a foundational concept in business accounting. Knowing how it works helps you plan spending, manage cash flow and report your finances correctly.

Capital expenditure (capex) is money you spend to buy, build or upgrade long-term assets that benefit your business for more than 1 year. Common examples include property, equipment, vehicles and software.

You record capex on your balance sheet under assets, typically as property, plant and equipment (PP&E). Unlike day-to-day running costs, capex isn't fully expensed in the period you spend it. Instead, the cost is spread over the asset's useful life through depreciation.

This means capex affects your profit gradually rather than all at once. It's the opposite of operating expenditure (opex), which covers the everyday costs of running your business and is expensed immediately.

Fixed assets are items your business owns and uses over a long period rather than selling them. When you make a capital expenditure, you're adding to your fixed assets. These assets sit on your balance sheet and lose value over time through depreciation, which flows into your income statement as an expense.

Types of capital expenditure

Not all capex serves the same purpose. Understanding the 2 main types helps you prioritise spending and plan your budget.

Capex falls into 2 categories: maintenance capex and growth capex.

Maintenance capex

Maintenance capex is what you spend to replace or repair existing assets so your business can keep operating at its current level. It's a necessary cost if you want to maintain your revenue and profitability.

For example, replacing a worn-out delivery van or upgrading an ageing computer system counts as maintenance capex. You're not expanding your capacity; you're preserving it.

Growth capex

Growth capex is money you spend to increase your revenue and expand your business. This includes buying new assets that boost productivity, add capacity or open up new markets.

For example, purchasing 3 additional vehicles to serve a new region or fitting out a second premises is growth capex. Growth capex is a discretionary expense; you choose to invest because you expect it to generate returns.

In practice, small businesses often scale back growth capex during periods of economic uncertainty. Xero Small Business Insights data from 440,000 UK small businesses showed that in early 2026, owners were delaying premises and equipment upgrades as margins tightened; a pattern that illustrates how discretionary capex decisions respond to trading conditions.

Examples of capital expenditure

Capital expenditure covers a broad range of assets. Here are some common examples relevant to UK small businesses.

• Property, land and buildings: buying office space, a warehouse or retail premises for your business to operate from
• Equipment, vehicles and work tools: purchasing machinery, delivery vans, computers or specialist tools you'll use for more than 1 year
• Software and technology: investing in business software, IT infrastructure or cloud systems that support your operations long term
• Research and development (R&D): spending on developing new products, services or processes that give your business a competitive edge
• Intellectual property: acquiring patents, copyrights, trademarks or licences that have lasting value
• Business acquisitions: buying another business or its assets to expand your operations or enter new markets

Capex vs opex: what's the difference?

Knowing the difference between capex and opex affects how you record costs, calculate profit and plan your tax position. Getting it right matters for accurate financial reporting.

Capital expenditure (capex) is money you spend on assets that last more than 1 year. You record it on your balance sheet and spread the cost over time through depreciation. Opex, or operating expenditure, is what you spend to run your business day to day. It's fully expensed in the period you incur it and appears on your income statement.

Here's a practical way to think about it: if you buy a new laptop for your business, that's capex. The electricity to power it, your broadband bill and your office rent are all opex.

Other common examples of opex include payroll, insurance, marketing, utilities and materials you use up during production. These costs don't create a long-term asset on your balance sheet.

For small businesses, the distinction matters because capex and opex are treated differently for tax purposes. Capex qualifies for capital allowances rather than being deducted as a straightforward business expense.

How to calculate capital expenditure

If you need to work out how much your business spent on capex during a period, there's a simple formula you can use.

The capital expenditure formula is:

Capital expenditure = ending PP&E - beginning PP&E + depreciation

PP&E stands for property, plant and equipment, which you'll find on your balance sheet. Depreciation is the amount your assets lost in value during the period, shown on your income statement or in the notes to your accounts.

Here's a worked example. Say your balance sheet shows PP&E of £50,000 at the start of the year and £65,000 at the end. Your depreciation expense for the year was £10,000.

Capex = £65,000 - £50,000 + £10,000 = £25,000

This tells you the business spent £25,000 on new or upgraded assets during the year.

Where to find capital expenditure in financial statements

Capital expenditure doesn't appear as a single line item. It shows up across several financial statements, each giving you a different perspective.

Balance sheet

Your balance sheet shows the total value of your long-term assets under property, plant and equipment (PP&E). When you make a capital expenditure, the value of PP&E increases. Over time, depreciation reduces it.

Cash flow statement

Your cash flow statement is often the easiest place to spot capex. Look under "investing activities" for purchases of property, equipment or other long-term assets. This section shows the actual cash spent on capex during the period.

Income statement

Capex doesn't appear directly on your income statement. Instead, the cost of your assets flows through as depreciation expense over their useful life. This is how capex gradually reduces your reported profit.

Is capital expenditure tax deductible?

You can't deduct the full cost of a capital asset as a business expense in the year you buy it. But HMRC offers several ways to claim tax relief on capex through capital allowances.

Capital allowances

Capital allowances let you deduct the cost of qualifying assets from your taxable profits. Most plant and machinery, vehicles, equipment and some fixtures qualify. The relief is typically spread over several years using writing down allowances.

Annual Investment Allowance (AIA)

The Annual Investment Allowance (AIA) lets you deduct the full cost of qualifying plant and machinery up to £1 million per year. For most small businesses, this means you can claim 100% tax relief on eligible capex in the year you spend it.

Full expensing

Since April 2023, limited companies can claim 100% first-year relief on qualifying new plant and machinery through full expensing. This applies to main rate assets and covers items such as computers, office furniture and commercial vehicles. It's a permanent measure with no upper limit. Sole traders and partnerships can't use full expensing but may be able to claim through the Annual Investment Allowance instead.

Tax rules can change and your specific circumstances matter, so it's worth speaking to your accountant or checking the latest HMRC guidance on capital allowances for up-to-date details.

Track capital expenditure with Xero

Keeping accurate records of your capital expenditure helps you stay on top of asset values, depreciation schedules and tax claims. Accounting software makes this simpler by tracking your fixed assets in one place, calculating depreciation automatically and keeping your balance sheet up to date. Get one month free.

FAQs on capital expenditure

Here are some frequently asked questions about capital expenditure.

Can capital expenditure be negative?

Capital expenditure is typically a positive number because it represents money spent on assets. However, if you sell more assets than you buy in a period, the net figure could appear negative on your cash flow statement.

Does capital expenditure affect profit?

Capex doesn't reduce your profit in the year you spend it. Instead, the cost is spread over the asset's useful life through depreciation, which appears as an expense on your income statement each year.

What is the difference between capital expenditure and revenue expenditure?

Capital expenditure buys assets that benefit your business for more than 1 year and is recorded on the balance sheet. Revenue expenditure covers day-to-day running costs that are fully expensed in the current accounting period.

How does depreciation relate to capital expenditure?

When you make a capital expenditure, you record the asset on your balance sheet. Depreciation then spreads that cost across the asset's useful life, reducing its value on the balance sheet and creating an expense on your income statement each year.

Can you claim VAT on capital expenditure?

If you're VAT-registered, you can usually reclaim the VAT on capital purchases used for your business. The standard rules for input tax recovery apply, so check that the asset is used for taxable supplies.