Fixed Assets: What can you capitalise?

Let’s think of this scenario. You started your business last year, running a small operation from the loft in your own home. Working every day late into the evening to promote your business and products. Fast forward 18 months…You wonder where the time went. Your business has gone past just merely breaking even and you are now taking orders everyday and fulfilling them as fast as you can. Your loft is full of stock and you need to hire a few helping hands to cater for the growing demand for your goods. You realise that the business has outgrown the space you have allocated it when you first start up and will benefit from having its own space; perhaps a shop.

Fast forward another 12 months, and you have secured a premises to open a shop and have a retail presence. Exciting times! You have spent the best part of £500k to build out a business. But how would you account for this build out? Would you consider these costs as expenses? Or do you consider them as capital?

FRS 102 Section 17: Plant Property and Equipment

FRS 102 Section 17 provides guidance on which costs can be considered as a capital item; that is, you can treat them like an asset on your balance sheet. The reason for this is that your premises will be used to generate income. The official line is:

You can recognise the cost of an item as plant, property and equipment if and only if:

1) It is probably the economic benefits associated with the item will flow into the entity, and

2) The cost can be measured reliably.

There are various types of cost associated with purchasing an asset. For example, the purchase of a racket stringing machine, will incur delivery costs. FRS 102 provides guidance on which costs can be capitalised and which need to be expensed. Whilst you need to consider the circumstances of each scenario, the general guidance is as follows:

Costs you can capitalise are: the purchase price, delivery and carriage costs, legal fees, brokerage fees, import duties and taxes, site preparation, installation and assembly, testing of functionality.

Costs you should expense are: costs of opening a new facility, training, marketing and advertising, general overheads.

It is important to apply the rules of FRS 102 to each cost associated with a build-out as this will govern whether they ultimately live on your balance sheet or income statement. This should also mean that your profit and loss is more stable, as if you considered a build-out completely as expense, then that’s a huge loss you will need to claw the business out of! You can also claim capital allowances for fixed assets that you have capitalised onto your balance sheet, which will help with reducing your corporation tax bill at the end of the year. So, it is definitely worth getting right!