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Capitalizing Software

Intangible or Tangible?

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I've recently been appointed to act for a client who develops software.  They undertake contracts to custom build software for various business clients where no option exists on the market.  As part of their standard terms, they retain the IP and rights to all their work and can freely resell it.  It's quite frequently the case that having designed a software solution for a client, they believe that a market exists for their software and so they adapt it for sale to other businesses if they can generate enough interest.

My current thinking is that these should be treated as assets as they meet the asset definition under FRS102 and are likely to be the source of significant future income from licensing fees.  The problem is that the accounting standards seem to provide no guidance as to whether they should follow the tax rules of intangible or tangible fixed assets under the same rules which capture websites.  If tangible they seem to qualify for AIA treatment, if intangible the tax treatment seems to follow accounting treatment where they will receive tax relief as the assets are depreciated.

The ACCA guide to this seems to suggest that the decision is left up to the discretion of the business itself, "FRS 102 does not address the classification of software and website costs and therefore each entity should develop and apply a suitable accounting policy to classify such costs as tangible fixed assets or as intangible assets."

All other things being equal, I would prefer to treat them as tangible fixed assets due to the quicker tax relief and the ACCA summary seems to imply that we can do this without any major issues - I just wanted to check to see if anyone disagrees with this interpretation or whether anyone can point me to further reading as it seems to be a very grey area of tax law.

https://www.accaglobal.com/uk/en/technical-activities/technical-resource...

Replies (14)

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By Tim Vane
09th Apr 2019 11:51

Turn the lights out and walk around. If you bang your shins on it, it’s tangible.

A desire for faster tax relief is not a valid method of classification.

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Replying to Tim Vane:
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By Jdopus
09th Apr 2019 13:21

Not quite as simple as that though given the website rules which allow them to be classified as a tangible asset?

I've yet to bump my shins off Google.

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JCACE
By jcace
09th Apr 2019 13:24

Does CA23410 help in your situation?

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Replying to jcace:
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By Jdopus
09th Apr 2019 14:11

It's very helpful jcace, thank you for the reference. I was looking for something as explicit as this. It does contradict what paul says below (which I've read elsewhere) but unfortunately I frequently keep uncovering contradictions in this area. I'll just have to take a view I suppose.

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By Tax Dragon
09th Apr 2019 14:15

I think you may be confusing tax law and accounting principles.

There'd never be any adjustments in tax comps if these two were aligned.

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By Jdopus
09th Apr 2019 14:24

If I'm following you correctly - you mean it's treated as an intangible asset under accounting standards but can be treated as P&M under the tax rules and qualifies for AIA?

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By Tax Dragon
09th Apr 2019 14:33

For an unincorporated business, yes. See BIM35801.

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By paulwakefield1
09th Apr 2019 13:35

The general view is, quite understandably, that it is an intangible asset unless very closely tied in with associated hardware (e.g. an operating system for a computer).

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By Jdopus
09th Apr 2019 15:15

Further reading following some of the above:

It seems the default is Software follows intangible asset rules unless you make a declaration under S815 of the Corporation Tax Act 2009, according to this HMRC guide which allows you to claim AIA if the software meets the definition of R&D.

https://www.gov.uk/hmrc-internal-manuals/corporate-intangibles-research-...

"Tax relief for the depreciation of computer software may be available more quickly under the capital allowances code (see CA23400 onwards) than it is under CTA09/PART8. To permit companies to preserve the benefit of capital allowances, S815 allows companies to make an election in respect of capital expenditure on computer software. The election makes capital allowance treatment available."

S815 seems to require that you make a written statement to HMRC that you intend to follow this treatment and claim capital allowances on the software expenditure. Has anyone made such a claim before?

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By johnt27
10th Apr 2019 10:48

I think you've missed the point - FRS 102's capitalisation rules for websites/software licences relate (generally) to those purchased not developed in-house.

Anything developed in-house would be R&D expenditure and so, in order to capitalise, you need to qualify whether or not there is a market for the product being developed. If so (subject to FRS 102 recognition criteria), you can capitalise and amortise over UEL, if not, it hits P&L. This treatment assumes that the development work can be saleable to multiple parties, otherwise the business is incurring, essentially, project costs for a particular customer - essentially a direct cost.

FRS 102 Paragraph 18.8A onwards is your guide to all of this. As for the tax treatment I have no idea but this would be an intangible asset.

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By David Gordon FCCA
17th Apr 2019 10:54

In these cases one must carefully choose one's words.
When you say "Resell it" do you mean actual capital sale, or do you mean license it to another user?
Further:
If the main business is writing software for "Renting out"? Then as per the traditional definition of Capital, the cost is the "Tree" i:e:Capital, and the "Rent" (license and or usage fees) is the "fruit i:e: Revenue.
This is not the same as you or I buying or developing a piece of software. for us it is a sunk cost, so generally not recoverable (except indirectly through our working fees).

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By David Gordon FCCA
17th Apr 2019 10:54

In these cases one must carefully choose one's words.
When you say "Resell it" do you mean actual capital sale, or do you mean license it to another user?
Further:
If the main business is writing software for "Renting out"? Then as per the traditional definition of Capital, the cost is the "Tree" i:e:Capital, and the "Rent" (license and or usage fees) is the "fruit i:e: Revenue.
This is not the same as you or I buying or developing a piece of software. for us it is a sunk cost, so generally not recoverable (except indirectly through our working fees).

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By David Gordon FCCA
17th Apr 2019 11:04

Part 2)
This is clearly not a "Tangible" asset.
Consider the case of a Taxi or hire-car. A taxi is for tax allowance purposes falls under the definition of an automobile.
As, however, in the specific case of a taxi/hire car business the tax rules recognise it as allowable plant.
The software in this case is as per the taxi, but is clearly an Intangible Asset. -Intellectual Property- Unfortunately revenue law has not caught up with this.
I would claim AIA and see what happens.
It may also be that you might better claim relief under the R & D rules.

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By David Gordon FCCA
17th Apr 2019 11:04

Part 2)
This is clearly not a "Tangible" asset.
Consider the case of a Taxi or hire-car. A taxi is for tax allowance purposes falls under the definition of an automobile.
As, however, in the specific case of a taxi/hire car business the tax rules recognise it as allowable plant.
The software in this case is as per the taxi, but is clearly an Intangible Asset. -Intellectual Property- Unfortunately revenue law has not caught up with this.
I would claim AIA and see what happens.
It may also be that you might better claim relief under the R & D rules.

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