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I would be grateful for readers' guidance on the tax treatment of website costs. Although this is a common type of expenditure for all businesses, there appears to be very little guidance in HMRC's manuals.
I appreciate that ongoing updates to websites are revenue deductions, but how should I treat the initial design costs?
I would be grateful for readers' guidance on the tax treatment of website costs. Although this is a common type of expenditure for all businesses, there appears to be very little guidance in HMRC's manuals.
I appreciate that ongoing updates to websites are revenue deductions, but how should I treat the initial design costs?
Presumably the treatment is different if the website is expected to have a useful life of more than two years? And does CAA 2001, s 71 apply to these costs? Also, how does the treatment differ between companies and unincorporated entities with the intangibles régime not applying to the latter?
Readers' assistance and advice on this matter would be most welcome.
Query T16,685 — Charlie.
Reply by Web Browser
Although Charlie states that there is little guidance contained within HMRC manuals, the one page contained in the Business Income Manual at BIM35870 ('Capital/Revenue divide: Computer software: Costs of setting up a website') does offer some very good guidance. This manual describes and likens a website for a business to that of a shop window and explains that some businesses may describe the costs of creating a website as advertising and treat this as revenue in the year of expenditure. However, the costs of bringing into existence an asset or advantage of enduring benefit to the trade are capital. If the website has the lifetime normally expected of a capital asset, the regular update costs of the site are likely to be revenue expenses and the original cost of creation, capital.
The manual goes on to state that 'the cost of a website 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'. This follows basic principles: the cost of setting up the website is capital and the costs of updating and running it is a revenue deduction. However, if there is an improvement done to the website, this again will be capital expenditure.
Whether the website has a useful life of less than two years may be a question of fact, but the reality is likely to be that a business sets up its original website and will do regular updates, but as technology moves on and depending on the nature of the business, it may, after a few years, have to do a complete rewrite. At the time that the business incurs the initial expenditure it will not know exactly when the website will be rewritten, just like any other business where it purchases an asset; it is likely not to know when it will be replaced because the old one has exceeded its useful life.
One should not lose site of this basic principle; the only difference is that the old website is likely to have a residual value of nil.
The Capital Allowances Manual at CA21100 explains that an asset that has an expected life of two years or more (the two-year test) is sufficiently durable to be plant and the manual (at CA22280) explains that computer software should be treated as plant whether or not it would normally be treated as plant.
Computer software is not defined in the legislation and HMRC at CA22280 explain that expenditure incurred on acquiring software qualifies for plant and machinery allowances even if there is no physical asset.
The development costs of a website will therefore qualify for plant and machinery allowances and in reality this is no different from computer software.
The tax treatment of a website should also follow the generally accepted accounting principles in relation to website development costs and this is covered by UITF Abstract 29: Website development costs (Issued 22 February 2001).
The UITF follows the general principles mentioned above and states that:
'there is often substantial uncertainty regarding the viability, useful economic life and value of a website … costs would be capitalised only to the extent that they created an enduring asset and there were reasonable grounds for supposing that future economic benefits in excess of the amounts capitalised would be generated by the website'.
In the UITF's opinion, this would be the case only if the website was capable of generating revenues directly, for example by enabling orders to be placed.
The UITF also considers whether capitalised website development costs should be regarded as tangible or as intangible fixed assets. It noted that websites fitted neither classification perfectly.
The UITF reached a consensus that:
- website development costs should be capitalised as tangible fixed assets, in accordance with the requirements of FRS 15, 'Tangible Fixed Assets';
- expenditure to maintain or operate a website once it has been developed should be charged to the profit and loss account as incurred, in accordance with the requirements of FRS 15; and
- design and content development costs should be capitalised only to the extent that they lead to the creation of an enduring asset delivering benefits at least as great as the amount capitalised.
Although the UITF is not applicable to smaller entities, the general spirit of it is useful guidance and HMRC are likely to follow this guidance if it is applied to a small business.
