Generally speaking, capital expenditure results in a fixed asset. On this basis, capital expenditure essentially relates to the provision and improvement of significant fixed assets including land, buildings and equipment which will be of use or benefit in providing services for more than one financial year.

However, in practical terms, it is often quite difficult to easily distinguish between capital and revenue expenditure and as such there are a number of ways that we should consider expenditure in order to identify what is capital and what is revenue.

Revenue expenditure is expenditure incurred for the purpose of the organisations daily activity, services or to maintain fixed assets. For example: employees pay, travel expenses and IT consumables are all deemed to be revenue expenditure.

The common definition of capital expenditure is “Capital expenditure is expenditure that results in the acquisition or construction of a fixed asset (land, building, vehicle, equipment) or enhancement of an existing fixed asset.”

Determining the acquisition or construction of a new asset is relatively straight forward and as such the greatest difficulty is often associated with identifying expenditure that can be said to enhance an existing asset.

To be an enhancement, the work undertaken must either :

• Lengthen substantially the useful life of the asset – beyond the current assessment of the useful life of the asset. For example, the replacement of a flat roof with a pitched roof will be more effective at protecting the building from degradation by the elements and should result in a more optimistic assessment of the prospective useful life.

• Increase substantially the market value of the asset – if the asset were valued after the works substantially higher than prior to the works.

• Increase substantially the extent to which the asset can or will be used for the purpose of or in conjunction with the functions of the authority – for example extending a building to provide a wider service or making a building fit for a purpose that it would not otherwise be fit for.

For reasons of materiality and consistency with other capital controls, de minimis levels are applied, below which expenditure is treated as revenue. These de minimis levels are set at £2,000.