Capitalising software development costs in the UK

This is the question finance directors ask second, right after the price, and almost no software supplier can answer it. What follows is the general position so you know which questions to put to your accountant. It is not tax advice, the right answer depends on your accounts and your circumstances, and the decision below is irreversible, so take it with somebody who has seen your numbers.

The default: an intangible asset, relieved slowly

Spend money having software built and, unless you do something about it, the expenditure falls into the corporate intangible fixed assets regime in Part 8 of CTA 2009. Tax relief then follows the accounting treatment. You capitalise the asset, amortise it over its useful life, and the amortisation is deductible as it goes.

For a 40,000 pound build written off over four years, that is roughly 10,000 pounds of deduction a year. Perfectly reasonable, and considerably slower than the alternative.

The election most companies never make

Section 815 of CTA 2009 lets a company elect to take software out of the intangibles regime and claim capital allowances on it instead. Software counts as plant and machinery for capital allowance purposes, which opens the door to the Annual Investment Allowance.

The Annual Investment Allowance is 1,000,000 pounds for 2026/27 and gives 100 per cent relief in the year of spend, on new and second-hand assets alike. Almost every bespoke software project sits comfortably inside that limit, so in practice the election converts four years of relief into one.

There is also full expensing, which gives companies a 100 per cent first-year allowance on qualifying plant and machinery, though only on assets that are new and unused. For most bespoke builds the Annual Investment Allowance is the simpler route and reaches the same place.

One change worth putting in front of your accountant now: from 1 April 2026 the main pool writing-down allowance drops from 18 per cent to 14 per cent. That makes anything falling outside a first-year allowance slower to relieve than it used to be, which slightly strengthens the case for claiming in year one where you can.

Not all of it is capital

Some software spending is revenue expenditure and deductible straight away, with no election needed. HMRC draws the line on whether you have acquired an enduring asset. Monthly licence fees, hosting, and ongoing support are ordinarily revenue. A one-off build that the business will use for years is ordinarily capital.

This matters for how you structure the engagement. A build plus a support retainer is two different things in tax terms, and it is worth having them invoiced and described separately rather than as one number on one invoice.

The R&D claim you probably cannot make

Somebody will tell you the build qualifies for R&D tax relief. Usually it does not, and this is the single most common misunderstanding in this area.

R&D relief requires a project seeking an advance in science or technology, with technological uncertainty that a competent professional in the field could not readily resolve. Bespoke means new to you. It does not mean technologically uncertain.

• Building a system nobody has built for your business before, using established techniques, is not an advance. It is ordinary competent work.
• Configuring or customising an off-the-shelf product or a content management system does not qualify.
• Assembling known components in a known pattern does not qualify, however new the result is to your company.
• Work does qualify where the team genuinely did not know whether something was achievable, and had to resolve that uncertainty rather than look it up.

HMRC has tightened enforcement in this area considerably, and a claim that does not meet the test is an expensive thing to have made. If a supplier offers to build your system and mentions an R&D claim in the same breath as a way of reducing the effective price, treat that as information about the supplier.

Four questions for your accountant

1. 1Given our profit position this year and next, are we better off electing under s815 and claiming the Annual Investment Allowance, or letting the relief spread through amortisation?
2. 2What is the exact deadline for the election on this spend, and who diarises it?
3. 3Which parts of this engagement are revenue rather than capital, and is the invoicing structured so that is clear?
4. 4Does any part of this genuinely meet the R&D test, and are you comfortable defending it if HMRC asks?

The first two are worth ten minutes of their time and can be worth several thousand pounds of cash flow. The fourth is worth asking specifically so that the answer is on record.