One confusing area around claiming expenses for you business is the difference between a capital expense and an operating expense. It is important to understand the difference between them because they are treated very differently in terms of the way your business is reimbursed against your self assessment/tax bill.
What is the difference?!
An operating expense (OPEX) is an expense required for the day-to-day functioning of a business. This kind of expense is one that you will often claim fairly regularly while undertaking business activities. In contrast, a capital expense (CAPEX) is an expense that a business incurs to create a benefit in the future and is often a large or expensive purchase for the business. OPEX and CAPEX are treated quite differently for accounting and tax purposes.
What is included in operating expenses?
An expense incurred in carrying out an organization’s day-to-day activities, but not directly associated with production. Operating expenses include such things as:
- payroll,
- sales commissions,
- employee benefits and pension contributions,
- transportation and travel,
- amortization and depreciation,
- rent,
- repairs,
- and taxes.
You generally offset all of your operating expenses against your income at the end of the year and the total of those expenses are recorded in your self assessment return.
What is considered a capital expense?
Capital expenditure, or CapEx, are funds used by a company to acquire or upgrade physical assets such as:
- property,
- industrial buildings or equipment.
It is often used to undertake new projects or investments by the firm. Examples of other capital expenses are:
- extracting minerals,
- research and development,
- intellectual property and patents
You generally offset a percentage of your capital expenses against your income at the end of the year and that percentage is recorded in your self assessment returns over a period of years (normally over 3 or more and relates to the ‘useful life’ or ‘depreciation’ of the asset).