Every business should have the best possible website that it can afford, since it is your ‘window to the world’. However, the tax treatment of the various expenses incurred is often a source of confusion and so we have prepared a brief guide.
Capital or Revenue expenditure?
There is a clear distinction of capital from revenue expenditure for both income tax and corporation tax purposes. Expenditure that is capital is generally not allowable as a revenue deduction in computing taxable profits. Depending on the nature of the capital expenditure it may be possible to claim capital allowances.
There is no single, simple test that can be applied to decide which items are capital expenditure and which are revenue. This can only be determined by reference to the relevant facts that applied at the time the expenditure was incurred. In addition, the classification of items as capital or revenue expenditure is intrinsically linked to the particular circumstances and the exact nature of the trade.
Whether website expenditure is capital or revenue in nature will depend upon:
- the nature of the expenditure, and
- the function which the website performs in the business.
Design and content development costs should normally be treated as capital expenditure to the extent that an enduring asset is created.
Where a website directly generates sales, subscriptions, advertising or other income this will normally be considered to be an enduring asset. It is, however, also necessary to confirm that the website will have the lifetime normally expected of a capital asset (as noted above, anything under two years is likely to be accepted as revenue expenditure).
HMRC’s position is that the following should normally be treated as capital expenditure:
- Application and infrastructure costs.
- Domain names.
- Operating software that relates to the functionality of a website.
However, not all website related costs will be capital in nature. In particular, HMRC will normally accept that the following are revenue costs:
- Initial research and planning costs prior to deciding to proceed with development.
- Costs associated with maintaining or updating a website (for these purposes the website can be thought of as analogous to a shop window – the cost of constructing the window is capital, but the costs of changing the display from time to time is revenue).
All expenses relating to business websites therefore need to be analysed against the above criteria.
Election in respect of software owned by companies
Corporation tax legislation includes specific rules regarding the tax treatment of intangible assets, referred to as the ‘intangible assets regime’, which can be found in Part 8 of CTA 2009. This means that the tax treatment of digital expenses can be more complicated for companies than unincorporated businesses (which do not have an equivalent to the intangible assets regime).
Licences and rights over software, website development costs and domain names will often be accounted for as intangible assets and will therefore fall within the intangible asset’s regime provided, they are created or acquired from an unrelated party. They can be depreciated over their anticipated life.
However, these costs may be excluded from the intangible asset’s regime, if the company makes an irrevocable written election under s815 CTA 2009 to exclude them from the rules. The expenditure will then be treated as a capital asset and may qualify for capital allowances.
It may be beneficial to make this election because under the capital allowances rules, the Annual Investment Allowance (AIA) will cover the expenditure in full in the year of acquisition as against writing the cost off over time by amortisation.
Beware of pirates
Under the Copyright, Designs and Patents Act 1988 there is an offence of using pirated software in the course of business, which can be punished with up to six months in prison and a fine of up to £5,000 for the directors/partners/owner. HMRC would also disallow all expenditure on pirated software as a matter of policy even if it was purchased in good faith.
SRC-Time are one of the South East’s leading accountancy firms in advising the self-employed and partnerships in all aspects of their tax affairs and we are able to assist in any issue raised above.
Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at firstname.lastname@example.org or speak with an account manager to get any process started.