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Any answers answered: What a tangled web! By Simon Sweetman

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13th Aug 2007
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Simon Sweetman tries to find the definitive answer to the vexed question of website expenditure...

There was a recent query about the tax position of money spent putting your website together. My answer (capital, but plant) was based on past rulings which I suspect have been withdrawn. I thought I would try to sort this out and see if anyone else can be more definitive (perhaps even someone from HMRC may be moved to contribute!)

Let’s start with the accounting treatment. The Accounting Standards Board issued UITF 29 on Website development costs in February 2001. This says

    Website planning costs are revenue expenditure
  • Other website development costs (i.e. the costs of sorting the software and getting it in place) should be capitalised as tangible fixed assets
  • Design and content costs are capitalised if they lead to the creation of an enduring asset – the ASB takes the view that this is usually only relevant if there are direct sales through the site

It also says that a website is a tangible fixed asset: the UITF considered whether capitalised website development costs should be regarded as tangible or as intangible fixed assets. It noted that websites fitted neither classification perfectly.

It then refers to FRS10 and suggests that software development costs that are directly attributable to bringing a computer system or other computer-operated machinery into working condition for its intended use within the business are treated as part of the cost of the related hardware rather than as a separate intangible asset. That does not seem to me to make a lot of sense. There is surely no piece of hardware enhanced by a website, which is a thing in itself capable of being bought and sold or moved easily from one server to another (I can change my web host).

Also, are the distinctions between the categories of expenditure really clear here? In many cases the trader is going to pay a single fee to someone to sort all of this out.

So what is now HMRC’s view?

The first port of call is BIM 35870

The cost of a web site is analogous to that of a shop window. The cost of constructing the window is capital; the cost of changing the display from time to time is revenue.

Presumably it is analogous in the sense that the customers can go to the website and see what is on offer. This is possibly misleading because of course HMRC has always insisted that a shop window is not plant and machinery, because it is part of the setting. You cannot say that about a website. Now there was a time in the past when – memory says – HMRC said specifically that website costs were software – though, more correctly, some of the costs will be for software.

BIM 35810
Where the licensed software functions as a capital asset of the licensee’s trade capital allowances on plant and machinery will be due under Section 71 CAA 2001. This will be the case whether or not the software comes in a corporeal medium (such as on ‘floppy discs’) separate from the licensee’s computer hardware. A short life asset election may be made where appropriate. Computer software is not defined for capital allowances purposes and therefore has its normal meaning which is wide and covers both programs and data (for example books stored in digital form).

It then goes on at some length to discuss the tax treatment of software created in house, and suggests that on the whole it is treated in the same way. To confirm that we can refer to CA 23410

Computer software qualifies for PMAs if it is not already plant. Computer software is not defined in the capital allowance legislation. You should treat computer programs of any type and data of any kind as computer software. Computer programs range from operating systems like Windows to games like Solitaire. There may be no physical asset because software is sometimes transferred by electronic means, for example it may be downloaded over the Internet. Software acquired that way is also plant.

Can anyone offer a definitive solution here?

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Replies (3)

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By Ray051
17th Aug 2007 09:20

Come on Chancellor
This is a great example of how tax legislation causes business unnecessary expense and uncertainty, Why can HMRC not simply accept the accounting treatment used. Over a few years it is not going to make any difference to the tax take.

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By puzzel
16th Aug 2007 12:55

Capital Improvements and Revenue Expenditure
One way to go forward is consider the website being built as would a piece of machinery. All associated costs at the start are capitalised. Improvements during the life of the asset is also capitalised.

Maintenance would be a revenue expenditure. Simon mentioned paying a monthly fee. If he stops paying, they pull the plug. This would be revenue expenditure. I.E. if you have a car ,a photo copier or even a water dispenser unit that you pay a monthly fee for its use. If you stop paying the fee they take the equipment (asset) away, you don't own them!!

The cost of "re-designing" the website, another choice of words may help. Simon, as mentioned at the start of your e-mail " No up front fees or purchase of the actual website". I would class this charge as a consultation fee as at the end of the meeting you will still not own the website.

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By AnonymousUser
13th Aug 2007 14:11

Monthly fees?
So what is the situation where I pay a third party a monthly fee to maintain my web site and send out weekly e-mails on my behalf? There were no upfront fees for the design and initial set up.

If I stop paying them the fee they will withdraw my web site and I will have nothing - the content is all theirs.

Surely a revenue treatment will be allowed.

However as long as I go on paying them I have an enduring asset which adds value to my practice - this could make it capital. Do I capitalise the monthly payments and then claim capital allowances?

From next year I will not really care as my capital expenditure will be well below £50k and I will be able to claim it all as an annual allowance but I think I should know how to treat it in my accounts. I have about 8 years of expenditure which may need to be changed from revenue to capital!!

What about the meeting I am going to have next month to redesign the site. Do I treat the fees for the redesign as a repair cost (maintenance of an existing asset) or capital.

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