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HMRC internal manual

Business Income Manual

Capital/revenue divide: computer software: in-house software development costs: practical approach - other pointers

Consider all the relevant pointers

It does not follow, however, that projects regarded by the management of a business itself as of particular importance are necessarily capital. It remains necessary to have regard to all the relevant pointers and to consider what light they shed on the key factual issue, namely how important an economic or functional role the software plays in the business in question. Possible pointers include:


Even an important computer system may have a relatively limited useful life; for example where it has been designed to meet a business need which, though pressing, is of limited duration. Inspectors should always accept that expenditure on software with an expected life of less than two years is revenue (BIM35810). That apart, the shorter the expected life the stronger the other capital features will need to be before the project can reasonably be characterised as capital. The project documentation may indicate over how many years the new system is likely to increase business earnings or reduce running costs.

You should however resist the view that some longer period should be substituted for the two years mentioned above. In particular, you should resist the adoption of a period derived from case law concerned with a different type of asset or advantage, such as the agreement for the exclusive supply of petrol to filling stations in Bolam v Regent Oil Co Ltd [1956] 37TC56 (see BIM35555) and Strick v Regent Oil Co Ltd [1965] 43TC1 (see BIM35560). See the comments of Lord Templeman in Beauchamp v Woolworth plc [1989] 61TC542 (at page 581) rejecting the attempt to apply to consideration of whether a loan liability was a capital matter a minimum expected life test (of five years or more) derived from the petrol tie cases. Software is in essence a business tool (often central to a trader’s ability to run the business) and far removed from the marketing agreements for trading stock at issue in those petrol tie cases.

Functions may be added on to an existing system or it may be adapted in response to competition to provide a more sophisticated customer service or to meet new trade regulations. Nevertheless, it is expected to remain recognisably the same system. So long as it does so its useful life continues. Major systems are difficult and expensive to develop and core computer code may last a long time.


As noted in the final paragraph of BIM35835 it is not possible to set out general guidelines concerning costs. But the more expensive a project the more it is likely to be a central tool of the business and the more enduring is likely to be its effect.

In this context it is necessary to have regard to both the absolute cost (to take an extreme example £10m is, without doubt, a significant sum of money to any business) and the cost as a proportion of total business outlays. Again, a project taking up 20% of business administrative costs in a single year is likely to be significant whatever the sum is in absolute terms. See the final part of BIM35835 for a practical approach. You should also refer to BIM31045 onwards for discussion on how tax law applies to what accountants call ‘materiality’.

For management purposes a project will usually be analysed into stages or modules and costs allocated to each. You should critically consider any contention that such smaller units themselves amount to independent and relatively insignificant projects. There may be cases where a series of relatively small undertakings are entered into not because they are perceived as contributing to some larger project but for the benefits they offer in isolation. But equally there will be many others where they represent parts of what in essence is a much larger whole.

Associated capital expenditure

The case for capital treatment will be stronger where new computer equipment (‘hardware’) is provided on which to run the software developed under the project. This is especially the case where the new hardware is not merely desirable but necessary for this purpose.

Degree of associated organisational change

Similarly the degree of change intended in the way operations are carried out as a result of the project; for example, savings in the number, and changes in the location, of staff used to provide services to customers will have a bearing. The more radical the changes, the more likely the expenditure will be capital. These changes are likely to be most radical when operations previously carried on manually are computerised.