HMRC enquiry and software Licence fees

HMRC enquiry and software Licence fees

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Having started up in practice as a newcomer and filed first set of practice accounts as a loss, HMRC have picked on a couple of disallowables related to the business. In particular, they are treating the software cost of Digita's suite part disallowed "first user licence fee" just over £1,015 and the software membership fee as allowed. He states that the licence fee merely puts you in a position to trade with new qualifications and are not incurred whilst trading.

Any comments will be appreciated.

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By DBlood
02nd Jul 2011 13:42

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Pre trading expenses are allowable, and software licences for essential software are clearly a business expense.  Tell him to refer it to someone more senior (preferably an inspector with at least 2 working brain cells).

 

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Locutus of Borg
By Locutus
02nd Jul 2011 13:56

My thoughts

HMRC often regards training for a new, unrelated skill not to be an allowable expense in the subsequent trade / profession that is created.

There are few barriers to entry, if any, for being a tax agent.  No formal qualifications are required.  Neither is any software required.  Indeed, many start-up tax practitioners simply use HMRC's free software.

I don't know what your background was before you started trading.  If you had some experience of accounting / tax / bookkeeping (either through employment, self employment or doing favours for friends and family) and then decided that you wanted to become self employed and do this on a commercial basis, then I can't really follow the Inspector's line of argument.

You chose to take the commercial risk of investing over £1,000 in a software suite that you think / hope will ultimately make the process of preparing tax returns more efficient in the future.

The only argument that I think the Inspector might possibly have is if you were originally doing something completely different and then, quite some time before you started trading, speculatively bought Digita in the hope that fiddling around with it you would ulitmately learn how to prepare tax returns.

If you bought the software whilst you were trading, or shortly before you started trading, then I personally would say it is an allowable expense.

Since no formal qualifications are required to be a tax agent, in my opinion, it does not matter whether you buy the software before or after you qualify.

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By ShirleyM
02nd Jul 2011 16:40

S.K.

 I would argue it out with HMRC. Software licences are just a licence to use their software. They are not training costs, which is what the Inspector seems to be saying. Software makes your job easier but it doesn't teach you how to do your job.

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By DMGbus
02nd Jul 2011 17:55

Toolof the trade - claim 100% AIA

If the initial upfront costs are "capital" (ie. in software terms having a useful life of more than 12 months) then they are a tool of the trade that should qualify for AIA.

So, still fully deductible against one year's profits - but as AIA rather than a trade expense.

They are NOT training costs - so can NOT be denied tax relief on these grounds.

They are NOT a franchise fee (or goodwill) - so can NOT be denied tax relief on these grounds.

The costs are, I agree with HMRC, potentially capital, but as said above software is normally deductible against profits, either in full if having a useful life of less than 12 months or alternatively qualify for capital allowances if having a useful life of more than 12 months.

 EDIT / CORRECTION:  Where I say "12 months", HMRC actually agree that if the useful life is less than 24 months the cost is a revenue exepense.    However I would have thought as a separate issue having a useful life of 24 months as an accounting matter, would be capitalised but depreciated at 50% flat rate pa. 

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Image is of a pin up style woman in a red dress with some of her skirt caught in the filing cabinet. She looks surprised.
By Monsoon
02nd Jul 2011 19:03

Rubbish!
A software licence fee does not put you in a position to trade. Arguably HMRC free online software puts you in a position to trade. Buying something that is more expensive and does more stuff is your choice as a tool to run a more efficient practice. It is most definitely a legitimate business cost allowable for tax.

Agree with previous responses, the one off Digita fee should be capitalised and AIA claimed. Same net result for tax though.

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By User deleted
02nd Jul 2011 19:06

Almost correct

HMRC will accept revenue treatment if the useful economic life of the licence is less than 2 years

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Image is of a pin up style woman in a red dress with some of her skirt caught in the filing cabinet. She looks surprised.
By Monsoon
02nd Jul 2011 23:06

Slight tangent
I wrote mine off as revenue as we ditched Digita within months. Ordinarily though I'd expect the licence fee to last more than 2 years :)

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Image is of a pin up style woman in a red dress with some of her skirt caught in the filing cabinet. She looks surprised.
By Monsoon
02nd Jul 2011 23:07

Slight tangent
I wrote mine off as revenue as we ditched Digita within months. Ordinarily though I'd expect the licence fee to last more than 2 years :)

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