Computer software and capital allowances

Computer software and capital allowances

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Hello there

We have a client who are medium sized (£20m + turnover) who sell industrial materials and have a large stockholding for most of the year.

They have spent roughly £125k on the development of some bespoke warehousing software which will link into their accounts software to enable better processing of orders and maintainence of stock.

The software is expected to live in the next couple of months, however until then they have not been capitalising the costs, rather putting them all into a prepayment account until it is ready to be used and, obviously, as a consequence of this, none of the capital expenditure has been included as an asset.

With regards to these costs I am aware that some of them will be revenue and some will be capital items which is not an issue.

The issue is as to when the capital expenses can be claimed under capital allowances. My understanding is that the common procedure is for claiming is when the obligation to pay arises, and in the case of many of the capital items that have been incurred have been paid or the obligation to do so is there.

Can the client put off the capital allowance claim on these items until it is active or does it have to really have been when they were incurred? And yes, the expenditure on the development of the software runs over more than one corporation tax year.

Thanks in advance!

Phelan

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By merlyn
12th Nov 2013 20:31

R&D

Can't help you on the capital allowances question, but has the client considered making a claim for R&D tax relief with regards to their software development ?

 

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By raychidell
13th Nov 2013 16:38

Capital allowances

As you say, the first issue is to distinguish between revenue and capital expenditure. You are on top of this issue but, for any other readers, there is some (old but useful) guidance on this at BIM 35801. The opportunity to claim plant and machinery allowances for computer software in the first place comes from CAA 2001, s. 71 (and see CA 23410 and CA 22280 for guidance).

To focus on the capital expenditure, you are right in saying that the unconditional obligation to pay is what generally determines when the expenditure is incurred (CAA 2001, s. 5). Various exceptions can apply.

There is nothing to stop the client from deferring the claim, however; any business is always free to disclaim annual investment allowances (s. 51A(7)) or to claim less than the maximum writing-down allowance (s. 56(5)). So the client can still add the expenditure to the main capital allowances pool but then simply claim no allowances, so that the full value is carried forward.

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