HMRC’s annually published ‘Capital v Revenue Expenditure Toolkit’ and their manuals provide useful sources of information on the tax treatment of website creation costs.
The tax treatment of expenditure on developing a website is dependent on the nature of the expenditure.
Website costs may be capital in nature (in which case it will normally be eligible for capital allowances as plant and machinery) or may be a revenue expense. The fact that it may be treated as revenue expenditure for accounting purposes, as advertising, marketing or IT costs, does not necessarily determine the tax treatment.
Capital expenditure
HMRC guidance indicates that application and infrastructure costs, including domain name, hardware and operating software that relates to the functionality of the website should normally be treated as capital.
As regards other costs the toolkit says:
“Design and content development costs should normally be treated as capital expenditure to the extent that an enduring asset is created. One such indication may be an expectation that future revenues less attributable costs to be generated by the website will be no less than the amounts capitalised.”
A website that will generate sales, subscriptions, advertising and other income will normally be regarded as creating an enduring asset and the costs of developing, designing and publishing the website are to be treated as capital expenditure. Whilst a revenue deduction would not be allowed for tax purposes, the capital expenditure would be qualifying expenditure for the purposes of claiming capital allowances.
Expenditure treated as capital would generally attract capital allowances at 18% on the reducing balance of expenditure. The annual investment allowance (AIA) may be utilised to accelerate the relief for capital allowances, granting a 100% allowance on qualifying expenditure up to a fixed annual limit. Where the AIA is available to use, full tax relief will be given for this amount which has the same effect as if the expense had been deductible as revenue.
Revenue costs
Costs of maintaining or updating the website (for example, in relation to price changes) are seen as revenue expenditure, as (normally) are costs of initial research and planning prior to a decision to proceed with development of the website.
In the HMRC manuals, an analogy is made with the costs incurred to create a website to that of a shop window, where the cost of constructing the window would be capital and the cost of changing the display from time to time would be a revenue expense.
Conclusion
As costs incurred on the initial planning and research are also usually allowable as revenue expenditure, it is important that clear records are kept detailing each of the expenses to ensure the correct tax treatment is applied.
For more information on the tax treatment of website costs in specific cases, please contact your usual Moore Stephens adviser.
Source: https://www.moorestephens.co.uk/news-views/october-2014/the-tax-treatment-of-website-costs
The tax treatment of expenditure on developing a website is dependent on the nature of the expenditure.
Website costs may be capital in nature (in which case it will normally be eligible for capital allowances as plant and machinery) or may be a revenue expense. The fact that it may be treated as revenue expenditure for accounting purposes, as advertising, marketing or IT costs, does not necessarily determine the tax treatment.
Capital expenditure
HMRC guidance indicates that application and infrastructure costs, including domain name, hardware and operating software that relates to the functionality of the website should normally be treated as capital.
As regards other costs the toolkit says:
“Design and content development costs should normally be treated as capital expenditure to the extent that an enduring asset is created. One such indication may be an expectation that future revenues less attributable costs to be generated by the website will be no less than the amounts capitalised.”
A website that will generate sales, subscriptions, advertising and other income will normally be regarded as creating an enduring asset and the costs of developing, designing and publishing the website are to be treated as capital expenditure. Whilst a revenue deduction would not be allowed for tax purposes, the capital expenditure would be qualifying expenditure for the purposes of claiming capital allowances.
Expenditure treated as capital would generally attract capital allowances at 18% on the reducing balance of expenditure. The annual investment allowance (AIA) may be utilised to accelerate the relief for capital allowances, granting a 100% allowance on qualifying expenditure up to a fixed annual limit. Where the AIA is available to use, full tax relief will be given for this amount which has the same effect as if the expense had been deductible as revenue.
Revenue costs
Costs of maintaining or updating the website (for example, in relation to price changes) are seen as revenue expenditure, as (normally) are costs of initial research and planning prior to a decision to proceed with development of the website.
In the HMRC manuals, an analogy is made with the costs incurred to create a website to that of a shop window, where the cost of constructing the window would be capital and the cost of changing the display from time to time would be a revenue expense.
Conclusion
As costs incurred on the initial planning and research are also usually allowable as revenue expenditure, it is important that clear records are kept detailing each of the expenses to ensure the correct tax treatment is applied.
For more information on the tax treatment of website costs in specific cases, please contact your usual Moore Stephens adviser.
Source: https://www.moorestephens.co.uk/news-views/october-2014/the-tax-treatment-of-website-costs
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