For tax, software and website spending is revenue if it buys a short lived benefit or is paid as a regular licence or subscription, and capital if it creates a business tool that lasts, such as a bespoke system or a lump sum licence used for years. Unincorporated businesses get relief for capital software through capital allowances, because section 71 of the Capital Allowances Act 2001 treats software as plant. Companies fall under the intangible fixed assets rules instead, unless the software is accounted for as part of the hardware or they elect under section 815 of the Corporation Tax Act 2009 to use capital allowances.

How does HMRC decide whether software spending is capital or revenue?

HMRC’s Business Income Manual deals with software at BIM35800 onwards. The starting point is the role the software plays in the business, not the fact that it is intangible. BIM35810 says that for most businesses software works as a tool of the trade in the same way as the computer it runs on, and that a lump sum for a licence is comparable to a premium for a lease of a physical asset, which is capital. That follows the general capital and revenue test of whether the payment brings into existence an asset of enduring benefit.

Two practical rules come out of the manual:

  • Regular licence payments are revenue. Unless they are really instalments of a capital sum, periodical payments are deductible, with the timing following the accounts: the cost is charged over the shorter of the software’s useful life and the licence term.
  • Software with a short life is revenue. HMRC officers are told not to argue that software with an expected useful life of less than two years is capital. But frequent updates alone do not shorten the life. The question is whether the business actually moves to new versions often enough for each version to have only a passing value to it.

Most monthly or annual subscriptions to cloud software are periodical payments, so they are revenue. An annual fee paid in advance is deducted as the accounts charge it, so the part relating to the next year is carried forward as a prepayment.

How is bespoke or in house development treated?

Software built for the business, whether by employees or a contractor, follows the same principles as licensed software. BIM35810 confirms that the cost can be capital even when it takes the form of programmers’ salaries, relying on McVeigh v Arthur Sanderson and Sons Ltd. BIM35850 then breaks a project into stages:

  1. Feasibility and preliminary planning. Working out user needs and drawing up specifications is usually too remote from the finished software to be capital.
  2. Decision to develop, testing and trials, and building the working system. These costs are normally capital, even if the project is later abandoned.
  3. Implementation. Training staff to use the new system is revenue.
  4. Upgrading, updating and fixing errors. These are normally piecemeal improvements and revenue.

BIM35840 lists pointers for deciding whether a project is capital at all: how long the system is expected to last, its absolute cost, and its cost as a share of the business’s outlays. HMRC gives the example that a project taking 20% of a year’s administrative costs is likely to be significant whatever the sum. A system can be extended and adapted over the years and still count as the same asset. Where development involves resolving genuine technological uncertainty, the research and development reliefs may also be relevant.

How are website costs treated?

BIM35815 compares a website to a shop window: building the window is capital, changing the display is revenue. The original cost of creating a site that will last is capital and regular updates are revenue. Calling the cost advertising does not settle it; HMRC quotes Lord Morris in Strick v Regent Oil Co Ltd, who called marketing costs a neutral description covering both kinds of spending.

HMRC’s capital versus revenue toolkit on IT costs adds that design and content costs are capital to the extent they create an enduring asset, that a website which generates revenue is usually treated as creating one, and that initial research and planning, and ongoing maintenance, are revenue. A brochure site rebuilt every year or so is more likely to be revenue than a trading platform designed to run for several years. The accounting side, including when FRS 102 allows website costs to be capitalised, is covered on our page on accounting for website and software development costs.

How do sole traders and partnerships get relief for capital software?

Section 71 of the Capital Allowances Act 2001 treats computer software as plant, whether or not it would otherwise count as plant, and treats a capital payment for a right to use software as expenditure on plant owned for as long as the right lasts. HMRC’s Capital Allowances Manual at CA23410 confirms that software downloaded with no physical medium is still plant. Any amortisation in the accounts is added back and capital allowances are claimed instead.

In practice most small businesses cover capital software with the annual investment allowance, which is £1 million. Where one price covers both a computer and its software, BIM35805 says the cost should be apportioned, although this is unnecessary if both go into the main pool. A short life asset election may also be available.

How do companies get relief for capital software?

For companies, the intangible fixed assets regime in Part 8 of the Corporation Tax Act 2009 takes precedence over capital allowances. Relief then follows the accounts: section 729 gives a tax debit for amortisation and impairment charged on the capitalised cost. Alternatively, section 730 lets the company elect, in writing within two years after the end of the accounting period in which the asset is created or acquired, to write the asset down at a fixed 4% a year.

Capital allowances can still apply in three situations, listed at CA23410:

  • the accounts treat the software as part of the cost of the related hardware, which takes it outside Part 8 under section 813;
  • the software is now an intangible for accounting purposes but was previously a tangible asset on which plant and machinery allowances were given;
  • the company elects under section 815 to exclude the capital expenditure from Part 8.

Section 816 sets the rules for that election: it must specify the expenditure, be made in writing to HMRC no more than two years after the end of the accounting period in which the expenditure was incurred, and it cannot be revoked. With the election, new software can qualify for full expensing, which needs the expenditure to be incurred on or after 1 April 2023 by a company on unused plant. HMRC’s toolkit confirms that capitalised software and website costs may qualify for the annual investment allowance and full expensing. CIRD25180 notes that sale proceeds not brought in as capital allowance disposal values are still taxed under Part 8.

What does this look like for a company?

Illustration only. A company with a 31 December year end pays a developer £60,000 in 2026 to build a bespoke booking system it expects to use for six years, plus £4,000 to train staff and £1,200 a year for hosting. The accounts capitalise £60,000 and amortise it over six years.

Treatment Year one tax relief on the £60,000
Intangibles regime, following the accounts £10,000 (one sixth amortisation)
Intangibles regime, 4% fixed rate election £2,400
Section 815 election and full expensing £60,000

The training and hosting are revenue under either route. Full expensing brings the relief forward but has a cost later: if the system is sold, the proceeds create a balancing charge or a Part 8 credit, so a company expecting to sell the software should model both routes before the two year election deadline passes.

What mistakes come up in HMRC enquiries?

  • Writing off a bespoke system as an expense because it is paid through invoices for development days. The label does not decide it; the enduring asset does.
  • Capitalising the planning and training. Feasibility work and staff training are revenue even inside a capital project.
  • Treating a website as marketing. The build of a site intended to last is capital, however the invoice describes it.
  • Claiming capital allowances on company software without a section 815 election, or making the election late. The two year limit is strict and the election cannot be undone.
  • Adding back nothing. Unincorporated businesses must add back amortisation of capital software and claim capital allowances instead.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.