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HMRC internal manual

Business Income Manual

Capital/revenue divide: computer software: in-house software development costs: general approach

Don’t press analogies too far

Clearly analogies can be drawn between a computer software system and a more traditional tangible asset, such as a piece of machinery or plant. To a degree that approach is helpful and indeed is adopted in this guidance. A major computer program may represent a huge investment of intellectual effort and business resources. And it may play a vital and important role in the conduct of the entire business. But the Commissioners and the courts are unlikely to be impressed by attempts to press such analogies too far. Software is unlikely to be viewed in the same light as ordinary tangible fixed assets. The classification of computer software is therefore more problematical. See for example Lord Reid’s comments in Strick v Regent Oil Co Ltd [1965] 43TC1 on pages 30 and 31 (see BIM35560). Nowadays many large businesses incur significant expenditure not only on developing new computer systems but also on piecemeal adaptation or improvement of existing systems. It follows that a good deal of expenditure incurred on computer programming etc will be of a revenue nature.