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. Effective from 6 April 2018 17
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.
For further guidance see BIM35801+ and for further guidance on capital allowances see CA11110+ and CA23081.
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.
For further guidance see CA11110+ and CIRD25140, and in relation to capital allowances elections see CIRD25180 and CIRD25190.
Source: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/717616/Capital-toolkit.pdf
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. Effective from 6 April 2018 17
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.
For further guidance see BIM35801+ and for further guidance on capital allowances see CA11110+ and CA23081.
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.
For further guidance see CA11110+ and CIRD25140, and in relation to capital allowances elections see CIRD25180 and CIRD25190.
Source: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/717616/Capital-toolkit.pdf
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