IT costs
Provides checks to make and what risks and mitigations to consider, including explanations and examples for IT costs.
Risk
Where a lump sum payment is made for the acquisition of a software licence, it will be accepted for tax purposes that the expenditure is revenue where the useful life of the software is expected to be less than two years. Where the expected useful life of the software is longer the correct tax treatment will depend on the circumstances, as set out in the explanation below.
Mitigation
Identify all payments for the acquisition of new software licences and distinguish between regular periodical payments and lump sum payments. For any lump sum payments establish what the useful life of the software is expected to be for the business. For proprietors and partnerships where the expenditure is capitalised and the expected useful life is more than two years, any amortisation is not allowable as a revenue deduction, and a claim should be made for capital allowances. For companies the appropriate tax treatment will depend on the exact nature of the software involved.
Explanation
Most off the shelf computer software is now acquired under licence. If the licence is paid for by regular periodical payments then these should be treated as revenue expenditure and normally spread over the useful life of the software.
If a lump sum payment is made for the software licence and it is evident that the useful life of the software is greater than two years, consideration should be given to treating the payment as capital expenditure.
For proprietors and partnerships any amortisation of capital expenditure in these circumstances should be disallowed and a claim should be made for capital allowances. The same treatment will apply to companies if the software acquired is in the nature of an operating system, or similar system designed to bring a computer system into its intended use within the business, which may be regarded as a tangible asset.
Further information
- Business Income Manual — BIM35801 provides further guidance on the availability of capital allowances for computer software
- Capital Allowances Manual — CA11110 provides further guidance on how capital allowances are made
- Capital Allowances Manual — CA23400 provides the capital allowances treatment of software
- Capital Allowances Manual — CA23081 details Annual Investment Allowance (AIA) qualifying expenditure
- Capital Allowances Manual — CA23174A provides the conditions for full expensing
However, where expenditure may be regarded as an intangible asset, then for companies such expenditure may fall within the corporate intangible assets regime. In these circumstances any amortisation of the capitalised expenditure may be allowed for tax purposes, or alternatively the company may elect to exclude the expenditure from the intangible assets regime and claim capital allowances instead.
Further information
- Corporate Intangibles Research and Development Manual — CIRD25140 provides further guidance on intangible assets excluded from CTA09/PART8
- Corporate Intangibles Research and Development Manual — CIRD25180 provides further guidance on approach and procedure for an election in respect of capital expenditure on computer software
- Corporate Intangibles Research and Development Manual — CIRD25190 provides further guidance on the computational consequences for an election in respect of capital expenditure on computer software
Risk
The appropriate treatment of expenditure on developing a website is dependent on the nature of the expenditure and the function the website performs for the business. If the costs incurred create an enduring asset, consideration should be given to treating the expenditure as capital. If such costs are not identified, there is a risk that these may be incorrectly claimed as revenue expenditure.
Mitigation
Review all payments relating to the business website(s), bearing in mind that these may be posted to marketing, advertising or IT costs. Where these include any expenditure on website development, consider whether this creates an enduring asset and should be treated as capital expenditure.
Explanation
Even though expenditure on website development may be shown in the accounts as advertising, marketing or IT costs, this does not necessarily mean that it is allowable as revenue expenditure. In order to identify the correct tax treatment the exact nature of the website costs should be examined.
Application and infrastructure costs, including domain name, hardware and operating software that relates to the functionality of the website should normally be treated as capital expenditure. Design and content development costs should normally be treated as capital expenditure to the extent that an enduring asset is created. One such indication may be an expectation that future revenues less attributable costs to be generated by the website will be no less than the amounts capitalised.
A website that will directly generate sales, subscriptions, advertising or other income will normally be regarded as creating an enduring asset and consideration should be given to treating the costs of developing, designing and publishing the website as capital expenditure.
Whilst a revenue deduction would not therefore be allowable, this capital expenditure will generally qualify as expenditure on plant and machinery for capital allowances purposes. Expenditure on initial research and planning, prior to deciding to proceed with development, is normally allowable as revenue expenditure.
The cost of maintaining or updating a website (in relation to price changes, for example) should be treated as revenue expenditure.
Further information
- Business Income Manual — BIM35800 explains the treatment of expenditure on computer software in the context of the capital/revenue divide
- Business Income Manual — BIM35300 details the general themes of the capital/revenue divide
- Corporate Intangibles Research and Development Manual — CIRD25145 provides further guidance on websites in respect of which capital allowances have been claimed