It is important to understand the distinction between Capital and Revenue, both for receipts and for expenses.

There have been numerous tax cases on this issue, and the distinction can be very difficult in the “grey areas” between the two, but as far as the typical property letting business is concerned, the path is quite well-trodden, and there are some clear distinctions to be made.

Capital expenditure involves acquiring an “enduring asset” for your business – the most obvious example being buying a property you intend to keep and use as the HQ of your development business.

A Capital receipt involves receiving a payment for disposing of such an asset – again, the most obvious example would be selling a property you have been using as your HQ.

Revenue expenditure means expenses that do not produce an “enduring asset” – the basic running costs of your business. The obvious example would be travelling expenses.

Revenue receipts mean the income produced from the business – such as the sale of the developed properties.

You deduct revenue expenses from revenue receipts to arrive at your profit for income tax purposes.

You deduct capital expenditure from capital receipts to arrive at the capital gains you make from disposing of assets.

There can sometimes be problems in deciding exactly where the line should be drawn between capital and revenue, particularly where expenditure is concerned. If in doubt, seek advice from a qualified tax adviser.

This entry was posted on Monday, September 22nd, 2008 at 11:27 am and is filed under Property Capital Gains Tax, Property Companies, Property Income Tax. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.