Capital Allowances and Full Expensing for R&D Companies

Revenue spend and capital spend are treated differently

R&D tax relief covers revenue costs: staff, subcontractors, consumables, software, cloud computing and data. Equipment that lasts, such as lab rigs, test benches, servers and prototype tooling, is capital spend and is excluded from the R&D tax credit.

That capital spend still attracts relief, through capital allowances. For hard tech, AI, biotech and manufacturing companies, getting both right can be worth as much as the R&D claim itself.

Full expensing

Companies can deduct 100% of the cost of qualifying new main rate plant and machinery in the year of purchase. Special rate assets, such as long life assets and integral features, get a 50% first year allowance. Second hand assets and cars are excluded.

For a profitable company paying the main rate, that turns every pound of qualifying equipment into a 25p tax saving in the year of spend.

Annual Investment Allowance

The Annual Investment Allowance gives a 100% deduction on up to £1 million of plant and machinery each year, including second hand assets. It is available to unincorporated businesses as well as companies, and most smaller businesses never exceed it.

Research and Development Allowances

Research and Development Allowances give a 100% deduction for capital spent on R&D facilities and equipment, including buildings used for R&D but excluding land and housing. They can apply where full expensing does not, for example on qualifying buildings or second hand equipment used in R&D.

Putting it together

A typical deep tech company might claim the merged R&D credit on engineers and cloud compute, full expensing or the AIA on new test equipment, and Research and Development Allowances on a lab fit out. Grant funding interacts with each, so the order and the records matter.

Our R&D tax credits hub explains the revenue side, and the merged scheme vs ERIS guide shows which R&D regime applies. Once patented products earn profit, the Patent Box can reduce tax further.

Where to go next

If you are investing in equipment alongside R&D, book a call and we will map which reliefs apply before you spend.