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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Capital/revenue divide: computer software: in-house software development costs: practical approach - size matters

Which projects did the business managers see as of particular importance?

As a practical matter, a starting point in identifying the major new projects (see BIM35830) which may be of a capital nature is to ascertain which ones the management of a business itself singled out as of most importance, as evidenced by the way the projects were in fact handled at the time rather than as perceived after the event. In the absence of contemporary documentary evidence (or to supplement it), discussions with the managers of the information technology department within a concern may be helpful.

A project not identified in this way is less likely in practice to be capital for example, when it will operate, and can be approved, at a local branch or divisional level. Typically, the fact that a project is regarded as especially important will be evidenced by a requirement that budgetary approval and authority to proceed has to be obtained at a higher level of management than that for other projects. The degree of detail (for example by way of a formal project plan) required in support of an application to commit funds is also likely to be greater (though you may occasionally come across a substantial project which is so essential to a concern’s future that management see no point in too rigorous control of its costs).

There is likely to be evidence in the form of internal memos, Board project forecasts and selective extracts from Board papers etc which, for example, discuss the case for the project, review its progress and possible changes in it, including the expected cost-benefit results. These could themselves be helpful in identifying capital expenditure even if the financial accounts do not separately analyse the salaries of staff and other costs between capital and revenue.

The total amount of expenditure required to develop and implement the new system is clearly likely to be relevant here. As a general matter it is not possible to set out any minimum figure below which a project will be revenue. The nature and size of the business in question has to be taken into account. But in the context of a particular business you should consider whether it might be convenient to agree monetary guidelines for this purpose, based on the overall business plans and expenditure forecasts for particular projects (rather than on annual budgets), subject to periodical review. Projected expenditure on the salaries etc. of those involved in developing the new software for the project will often be a convenient more reliable measure of its likely significance than, for example, the costs of the hardware.