Document Type



Taxation-Transnational | Tax Law


This article is a part of European Taxation’s continuing study of fiscal depreciation in the European economic community and focuses on the United Kingdom. It incorporates changes made by the Finance Act of 1972.

There are eight categories of capital expenditure for which depreciation, or capital allowances, are allowed and taken into account for income tax purposes. These categories include industrial buildings; plants and machinery; mines, oil wells, and other natural mineral deposits of a wasting nature; dredging; agricultural and forestry buildings; scientific research; patents; and know-how.

While there is considerable variation in the rules that apply to each category, the general effect is the same: the capital expenditure incurred for the acquisition of an asset, minus any amount received from its disposition, must be deducted from income over a period of time which varies for each category.

While there is no statutory definition for a capital expenditure, the frequently cited test for distinguishing a capital expenditure from a non-capital expenditure is “when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade . . . there is very good reason . . . for treating such expenditure as . . . [a capital expenditure].” Other cases illustrate that even this rule cannot be taken too literally and whether or not something is a capital expenditure is a fact-specific inquiry to be decided in light of the particular circumstances.

This article describes the terms basic to depreciation such as: annual depreciation deduction; initial allowance; first year allowance; unallowed expenditure; balancing allowance; and balancing charge. The body of the article then examines the eight categories of capital expenditures mentioned above, and goes into detail about what qualifies for each category and rules specific to each of the categories, with examples.