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Are website development costs capital goods for VAT FRS?

Are website development costs capital goods for...

We have a bit of a dispute with HMRC on the flat rate scheme and reclaiming input VAT outside of the scheme on capital items.

We are trying to reclaim the VAT on website development costs. The costs was well over the £2k minimum, and within all the other requirements as far as I can see.

HMRC have come back and disallowed it, sending me to looking at Chapter 15 of Public Notice 733, as well as Regulations 55E of VAT Regulations 1995.

From looking at these, I can see no example of why our capital item would be excluded - it falls within none of the 'exclusions' that these notices go through.

Neither of these publications though are clear on what is meant by the 'services' exclusion - does anyone have experience of this??

Secondly, if the VAT say it is not a capital item, can I then expense the item through the P&L (rather than in fixed assets where it is now) and reclaim corporation tax? Or can the VAT treatment and the accounting treatment be different?

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29th Nov 2011 11:27

UITF 29...

... is your new best friend.

UITF 29 will tell you whether or not you were right to capitalise your website.  It may even offer you an argument (although possibly a tenuous on) that your website is goods.  UITF 29 says that websites are like software (a service, a little part of your computer that you never will actually own), but your website may differ from software, in that it might be a little part of a computer that you do actually own (but possibly runs on a computer that you don't own).

The reason services are excluded is because regulation 55E permits separate input VAT recovery on "capital expenditure goods" where the expenditure concerned exceeds £2,000. Regulation 55A defines "capital expenditure goods" as goods that are capital in nature.

Tax case law and accounting practice is relevant to determine if an item's capital in nature, if you can successfully argue it's goods.

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lexi
29th Nov 2011 14:24

Thanks for this Steve.

UITF29 was my understanding of the accounting treatment, and that is how we have shown it in the accounts, i.e. as a fixed asset.

It seems that the difference between 'capital vs expenditure' is not the same as 'goods vs services' which is the confusing bit..!

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29th Nov 2011 12:01

Services

The FRS allows the recovery of VAT on the purchase of capital goods, not of services.  I believe that there is no definition of goods in the VAT legislatin but there is an EC Council directive that  states that a supply of goods means ‘the transfer of the right to dispose of tangible property as
owner’

By any definition design of a website cannot, for me, be construed as supply goods and the input tax cannot be reclaimed

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By DMGbus
29th Nov 2011 14:45

Service not goods because...

A few years ago I recall seeing HMRC's definition of services vs goods when it comes to SOFTWARE.

 

I think that writing a website is SOFTWARE.

 

This is what HMRC's guidance said some years ago:

 

Purpose made / tailor made written software = services.

 

Mass-produced software bought on CD format = goods.

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29th Nov 2011 15:42

I think you may have a case here

Refer to Public Notice 733 paragraph 12.13

This refers to the purchase of a capital asset. It does not say the assets need to be goods.

If you go down the services or goods route you will lose.

If you can show that the software is indeed a capital asset, then as per notice 733, you should be able to claim the input VAT.

You should consider taking this one to a tribunal.

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29th Nov 2011 16:49

Capital Asset

Refer to HMRC website on the Flat Rate Scheme

These are the rules for claiming back VAT when you buy capital assets:

Bullet point 2: It must be a purchase of capital goods, not services.

 

 

The HMRC website doesn't have force of law, and can be wrong, but the FRS is operated under regulations laid down by HMRC so you'd have to demonstrate where that point is at variance with the law.

 

Edit this link to notice 733 contains the rules in para 15.2 and is the version dated August 2011

 

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30th Nov 2011 11:18

Further thoughts

Reflecting on this yesterday, my UITF 29 "goods" argument moved from tenuous to unrealistic.  VAT is a tax on supplies, and what is being supplied are the services of the web developer, as others have observed.

As noted in my original post, the effect of regs 55A/55E is that input VAT can only be recovered in respect of supplies of capital goods, not on services.  That is also consistent with the majority of other responses.

I'm forced, therefore, to agree with HMRC on this one.  I disagree with tonykelly though; I don't think you should take this to tribunal.

If you're happy with your accounting treatment under UITF 29, then you do seem to have a differing VAT/direct tax treatment.

Just to clarify Cloudcounter's definition of "supply of goods", what he says is stated in the EC 6th Directive at article 14(1) of the recast directive.

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