BIM35845 - Capital/revenue divide: computer software: in-house software development costs: piecemeal developments

An element of upgrading does not automatically make the expenditure capital

Whether expenditure merely represents the piecemeal improvement of an existing computer system or a stage or module within something sufficiently major to constitute capital expenditure will depend on a detailed consideration of all the facts and circumstances. Among the circumstances that have to be borne in mind is the fast-changing nature of the computer software industry and the fact that a computer program does not as such wear out. Against that background it is hard to envisage any repair which does not involve some element of upgrading the system.

The presence of an element of upgrading, therefore, will not necessarily cause the expenditure in question to be capital. Rather, capital treatment will be appropriate in either of two circumstances:

  1. Where the computer system which has been improved is itself a capital asset of the business and that system, viewed as a whole, has been sufficiently improved to make capital treatment appropriate.
  2. Where the work on the system is itself part of a major new project which is capital (see BIM35835 and BIM35840).

In considering whether an entire system has been improved you should have regard not so much to any enhancement of the system’s specification but to the practical effects on the service it provides to the business. You also need to consider what proportion of the system has been affected by the changes. The smaller the proportion the more radical the improvements need to be before the view that the expenditure is capital is likely to commend itself to the Commissioners or the courts.