Revenue vs Capital Costs in UK RDEC Claims

R&D Tax Relief and Capital Costs — What You Need to Know

Can capital expenditure qualify for R&D tax relief? The short answer: R&D tax relief is designed for revenue costs, but certain capitalised expenses—like software development—can still qualify. Meanwhile, Research and Development Allowances (RDAs) apply to tangible capital assets, such as equipment. Understanding the difference between revenue and capital expenditure is key to maximising your claim. Take a look at our short video and article to more fully understand how some capitalised costs can be claimed under RDEC, while most are ineligible.

Summary of Revenue vs Capital Expenditure in R&D Claims

UK R&D tax relief is aimed at revenue expenditure (day-to-day running costs).
However if you capitalise development costs as an intangible asset (e.g., software), the underlying revenue-type costs can still qualify for R&D tax relief.
Tangible capital spend (e.g. equipment or labs) isn’t claimable under R&D tax relief schemes. Instead, you can often claim Research & Development Allowances (RDAs) at 100% tax relief on these capital costs in the year you incur the expenditure.
The key is to track and split your costs correctly to avoid missing valuable tax reliefs.

1) Revenue vs capital — why the difference matters

Revenue expenditure
These are the everyday running costs of your R&D project. Typical examples include:

Staff costs – salaries, employer National Insurance contributions, and pensions for employees involved in the R&D work
Consumables – materials or cloud usage that are “used up” in the R&D process
Utilities – a proportion of heat, light, and power used during R&D
Externally Provided Workers (EPWs) – agency workers supplied by a staffing company who work on your R&D
Subcontractors – other companies or individuals you pay to carry out qualifying R&D work (rules vary between schemes)

Capital expenditure
This is money spent on assets that have a longer-term use, such as buildings, machinery, or internally developed software that you capitalise as an intangible asset. These costs sit on your balance sheet and are written down over time.

The key point: R&D tax relief is for revenue costs. However, if you capitalise revenue-type costs (e.g. developers’ salaries) into an intangible asset like software, these can still be eligible for R&D tax relief.

2) Capitalised software and other intangible assets

Tech businesses often capitalise software development costs as intangible assets. Here’s how this works with R&D claims:

Identify qualifying R&D work – What parts of the project involve overcoming technical or scientific challenges?
Break down the capitalised costs – Many of these will be revenue in nature (e.g., staff, cloud usage).
Include those revenue-type costs in your R&D claim – The fact they are capitalised for accounting does not exclude them.
Do not claim the finished asset itself – Once complete, the software asset is amortised for accounts and dealt with under the Intangible Fixed Assets regime or capital allowances, not R&D tax relief.

Did you miss claiming for Capitalised Costs in a previous year?

If you didn’t include these costs in a previous accounting period, check whether they can still be added to your latest R&D claim. In some cases, this is possible depending on whether the costs have already been amortised or not.

3) Where RDAs come in – tangible R&D kit

If you purchase or build tangible assets to use in R&D (such as an R&D laboratory or lab equipment or test rigs), these costs do not go into your R&D claim. Instead, you can usually claim Research & Development Allowances (RDAs), which give 100% tax relief in the year the costs were incurred. RDAs are more expanisve than standard Capital Allowances, taking in a wider range of items, so it's always worth checking what RDAs you can claim.

Remember:

RDAs are for tangible capital costs.
R&D tax relief & credits (RDEC) is for revenue costs (including revenue costs that have been capitalised as intangibles).

4) Example – AI software project

Scenario: A company builds a new AI platform and capitalises development costs as software.

R&D tax relief can cover:

Salaries, employer NIC, and pensions of engineers and data scientists working on the R&D
Fees for subcontractors or agency staff working on qualifying tasks
Cloud computing usage and software tools used during the development phase.

Other reliefs:

A specialist server bought just for R&D would qualify for RDAs (100% deduction in year one)
The finished AI platform (capitalised as an intangible asset) is not part of the R&D claim but is treated under separate intangible asset rules.

5) Common mistakes in R&D claims

Thinking capitalisation blocks an R&D claim – It doesn’t.
Not breaking down capitalised costs – You need to identify the underlying revenue elements.
Ignoring RDAs – Missing relief on tangible assets used for R&D.

6) Quick rule of thumb for revenue vs capital in R&D claims

Tangible assets for R&D? → Claim RDAs.
People, consumables, utilities, cloud services or subcontractors? → Claim R&D tax relief, even if capitalised as part of an intangible.
Finished capitalised asset? → Treated under separate capital allowance or intangible asset rules.

7) Good Records are essential in all R&D claims

To support your claim, keep:

A clear project breakdown showing which activities are R&D
A reconciliation of general ledger entries to your R&D claim, especially for capitalised projects
Notes on how you split costs between revenue and capital
Evidence that RDAs have been considered for tangible items

Key takeaways for Revenue vs. Capital in R&D Claims

R&D tax relief is focused on revenue costs — and capitalisation of those costs (e.g., for software) doesn’t change that.
RDAs are there for tangible assets used in R&D.
Good cost tracking means you can claim both reliefs correctly.
Specialist advice pays off when navigating these rules.