Hmrc software costs

Expenditure at the second and third stages will normally be capital even though the expenditure may prove abortive if the decision is subsequently taken not to implement. At this stage the software can be viewed as a business tool which has been successfully created. An exception would be recurring royalties for a licence to use any bought-in software as the base for the in-house project even though the rights obtained under the licence are of a capital nature.

Compare the treatment of rents payable for the occupation of premises that are a capital asset of a business. To the extent that the fourth stage, that of implementation, consists of teaching staff how to use the software the costs should be regarded as revenue just as the costs of teaching staff to use bought-in software or any item of new capital equipment would normally be regarded as revenue.

Costs incurred at the fifth stage would normally be regarded as no more than piecemeal improvement and should be allowed see BIM In developing a perspective on the treatment of computer software expenditure it may be helpful to bear in mind the likely treatment of the HMRC computer systems were it necessary to apply tax law to them.

Expenditure on creating the small pieces of software which exist to support various minor technical computations required under current tax law would be revenue. To help us improve GOV. It will take only 2 minutes to fill in. Cookies on GOV. UK We use some essential cookies to make this website work.

Accept additional cookies Reject additional cookies View cookies. Hide this message. Home Business and industry. Broken down into five stages Having established whether, and if so which, computer software projects are of a capital nature it remains necessary to identify the relevant capital expenditure. Nature of trade test The trading test is not one of purpose. Stages in system development In deciding what expenditure is integral to development of the new system it may be useful to identify the stages in the development and implementation of a project: Initial research expenditure and preliminary planning.

UK is being rebuilt — find out what beta means. The basic approach to determining whether expenditure on computer software is capital is set out in BIM To recap the key points:. There is no presumption that because expenditure on software is incurred in-house it is more likely to be revenue than it would be if the same software were developed for a concern by an independent software house. For the role of the commercial accounting treatment of the expenditure in question see the general comments in BIM onwards.

That treatment, though not decisive, will remain relevant to the tax position. The fact that expenditure on in-house software costs has been taken to the balance sheet does not mean that it is necessarily capital for tax purposes but it is a factor in support of capital treatment. If such expenditure turns out to be revenue for tax purposes then it does not follow that a deduction is due in the year it is incurred. Licences and rights over software that was created or acquired from an unrelated party by a company, on or after 1 April , usually fall within the Corporation Tax intangible fixed assets regime.

Conversely, the fact that expenditure on in-house software costs has been written off immediately to the profit and loss account does not mean that it is necessarily revenue for tax purposes. Indeed, where the payment is clearly capital by reference to the other relevant factors ECC Quarries Ltd v Watkis [] 51TC - see BIM is authority for capital treatment even if an immediate write off is the only available accountancy treatment. Nevertheless, in marginal cases it will be relevant and helpful to seek accountancy advice on whether immediate write-off is the only commercially acceptable accounting treatment.

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