Quick Answer
Operating expenditure (OpEx) is day-to-day spending that is fully expensed in the P&L in the period incurred — salaries, rent, software subscriptions, utilities. Capital expenditure (CapEx) is investment in long-term assets that is capitalised on the balance sheet and depreciated over the asset useful life — equipment, office fit-out, development costs. The classification affects P&L profit, tax treatment, and cash flow presentation.
P&L impact. £100k of OpEx reduces profit by £100k in the current year. £100k of CapEx with a 5-year life reduces profit by only £20k per year (through depreciation). This affects EBITDA, operating profit, and net profit.
Tax treatment. In the UK, capital allowances (not depreciation) determine the tax deduction. The Annual Investment Allowance (AIA) currently allows 100% first-year deduction on qualifying plant and machinery up to £1m. The full expensing regime allows 100% deduction on qualifying new plant and machinery with no upper limit. Research and development expenditure qualifies for enhanced tax relief under the HMRC R&D schemes.
Cash flow. Both OpEx and CapEx require cash outflow, but they appear in different sections of the cash flow statement. OpEx flows through operating activities; CapEx flows through investing activities. This distinction matters for understanding cash generation from operations.
Financial ratios. EBITDA excludes depreciation and amortisation, so capitalising expenditure improves EBITDA. Lenders, investors, and analysts scrutinise whether capitalisation policies are appropriate.
OpEx: Salaries and wages, rent, insurance, software subscriptions (SaaS), marketing spend, travel, professional fees, utilities.
CapEx: Computer equipment, office furniture and fit-out, servers and hardware, capitalised software development costs, leasehold improvements.
Software development. Under FRS 102 Section 18, development costs must be capitalised if specific criteria are met (technical feasibility, intention to complete, ability to use or sell, probable future economic benefit, and adequate resources). This is a common area of debate in technology companies.
Cloud computing. SaaS subscription fees are typically OpEx. However, implementation and customisation costs may qualify for capitalisation under certain circumstances — consult your auditor.
Maintenance vs improvement. Routine maintenance of existing assets is OpEx. Improvements that extend useful life or enhance capability are CapEx.
Budget separately. Create distinct budget lines for OpEx and CapEx. This ensures the P&L, balance sheet, and cash flow are all correctly planned.
Model depreciation. Maintain a fixed asset register showing existing assets and planned additions with their depreciation schedules. This feeds into the P&L (depreciation expense) and balance sheet (net book value).
Cash flow planning. CapEx is often lumpy (large one-off purchases) while OpEx is more predictable. Ensure your cash flow forecast captures the timing of major CapEx items.
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FAQ
No. Capitalisation policy should follow accounting standards (FRS 102 or IFRS), not be driven by a desire to manage the P&L. Auditors and investors scrutinise capitalisation policies, and aggressive capitalisation erodes credibility. Apply the standards consistently and let the numbers reflect economic reality.
The AIA allows UK businesses to deduct 100% of qualifying plant and machinery expenditure against taxable profit in the year of purchase, up to the current threshold of £1m per year. This means the tax benefit is accelerated compared to accounting depreciation, which is spread over the asset useful life.
Most SaaS subscriptions are OpEx (they are a service, not an asset). Budget them as recurring operating costs with annual renewal assumptions. If you are building proprietary software, the development costs may be CapEx under FRS 102 Section 18 — work with your accountant to determine the correct treatment.
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