The concept of capital and revenue expenditure is important to consider when budgeting expense for your business. This distinction is important when determining how an expense is tax treated, and this can greatly influence a company’s profit margin. In this article we shall be looking at the distinction between capital and revenue expenditure and the effects of each regarding corporate tax in the United Arab Emirates (UAE).
Capital Expenditure vs. Revenue Expenditure
Capital expenditures can be defined as those expenditures that result in the recognition of a value that has appreciable durability in generating future benefits for the business. These business capital costs are not allowable for corporate tax purposes, but the depreciation of all costs of capital assets is an allowable expense. Some of the examples of capital expenditure are:
- Acquisition of fixed assets like equipment land and buildings
- Renovating, rebuilding, or otherwise modifying existing assets to potentially use the assets for a longer period.
- Increasing the scale of a business’s operations by purchasing more fixed assets or acquiring new technology.
On the other hand, revenue expenditure pays for the many day-to-day activities that a business gets involved in. These expenses are allowable expenses for corporate tax purposes. Some of the expenses considered as revenue expenditure are:
- Maintenance/repair of existing assets or assets that already have been used and incorporated into the operation.
- Remunerations in the form of salary and wages to the employees
- Rent and utilities
- Marketing and advertising expenses
Tax Implications of Capital and Revenue Expenditure
The other difference between the two is with regard to the tax implications of capital and revenue expenditure, which is as follows:
- Capital costs are non-deductible for the corporate tax purpose but depreciation on the cost of capital assets is allowable in the UAE. This means that a business can write off a part of an asset that was acquired for capital investment, and used to carry out a business activity, over the useful life of such an asset as opposed to writing off the whole cost within the first year of acquisition.
- Revenue expenditure, however, has been accorded full deductibility for computing corporate tax liability. This implies that a business is allowed to offset the revenue expenses by the total amount in the year the expenses were made.
Examples of Capital and Revenue Expenditure
Here are some examples to help to distinguish between capital and revenue expenditure:
Example 1: A manufacturing company buys a new machine to use for manufacturing their products.
- This machine is expected to have a useful life of 10 years or more.
- The amount of money used to purchase the machine is classified as a capital cost hence has the capability of yielding a lasting advantage to the business.
- It allows the company to write off the depreciation of the machine over its useful life on its taxes.
Example 2: A retail store is involved in renting a premises for its business.
- This type of expenditure cannot be categorized as capital expenditure because rent is a recurring expense that is incurred to support the existence of the business day-to-day.
- Such payments are fully deductible from corporate tax for the year in which the expense is incurred.
FAQs
What is the difference between capital and revenue expenditure?
Capital expenditure results in the creation of fixed assets, which help a business in the long run and are non-deductible for corporate tax. Revenue expenditure can be described as expenditure that is incurred for the day-to-day running of the business and is 100% tax-deductible for the companies.
How do capital expenditures affect taxes?
The capital expenditure incurred on the depreciation of the costs of capital assets are allowable deductions under the corporate tax laws applicable in the UAE.
Are revenue expenditures deductible for corporate tax?
Yes, revenue expenditure in the UAE is fully deductible for corporate tax purpose.
What are examples of capital expenditures?
Capital expenditure includes activities such as, when a business acquires fixed assets, get in a longer-term manner, improve the fixed assets acquired earlier, or when they extend a business’s operations by acquiring or procuring new assets or technology.
How are capital and revenue expenditures treated differently for tax purposes?
Capital expenditure produces a permanent benefit and is not allowable for deductions under corporate tax while revenue expenditure gives benefits in the day to day activities of an organization and is fully tax deductible.
Capital vs. Revenue Expenditure
| Criteria | Capital Expenditure | Revenue Expenditure |
|---|---|---|
| Nature | Creates an enduring benefit | Supports day-to-day operations |
| Tax treatment | Not deductible, but depreciation is deductible | Fully deductible |
| Examples | Purchasing long-term assets | Routine maintenance and repairs |
| Upgrading or improving existing assets | Salaries and wages | |
| Expanding business operations | Rent and utilities | |
| Marketing and advertising expenses |
Conclusion:
it is important for businesses operating in the UAE to have proper comprehension of capital and revenue expenditure. Accurate classification between capital vs revenue expenditure can be very beneficial since it will impact the amount of tax pay that has to be made. Business owners are, therefore, advised to seek professional advice from Tax Consultant Dubai to avoid misclassification and non-compliance with the provisions of the corporate tax policy regarding tax treatment of expenses.