Revenue Expense (tax-deductible) and Capital Costs expenditure

Which expenditure on your website is revenue expense (tax-deductible) and which are capital costs?

What business these days does not own a website, but having spent out on the redesign and upgrade of your website in the current tax year, you may have assumed the expense was tax deductable because a website is essential for running your business.

Think again, because HMRC’s most recent guidance no longer pays attention to the function of the website as much as how much income the website is expected to generate in the future.

The new guidelines focus on the purposes of the website: is it mainly for visibility and inquiry purposes ‒ in effect the window display of your business ‒ and a revenue expense (like letterhead or marketing costs)? Or is it used to generate income ‒ in which case it is more akin to having the shop window re-fitted with a new frame and glass ‒ which is a fixed, capital cost (like new computer hardware or other plant and machinery).

Guidance from HMRC The new HMRC guidelines Capital v Revenue Expenditure Toolkit aims to clarify the position on the treatment of website costs.

Past Guidance took the website’s function as determining whether the costs were treated as capital cost or revenue expense. If the website was primarily for promotional and advertising purposes it was seen as revenue expenditure, but if the website allowed electronic transactions and generated sales, or other income, then the costs of developing, designing and publishing the website were treated as capital expenditure.

New Guidance indicates that application and infrastructure costs (e.g. domain name, hardware, and operating software), which relate to the functionality of the website, should normally be treated revenue expense, but costs like design and content development should normally be treated as capital expenditure, because an “enduring asset” is likely to be created.

The new guidance is focused on the revenue likely to be generated by the website. Therefore, if the cost of building the website is more than the amount likely to be earned from the website then it is revenue expenditure. If the amount earned from the website is likely to be greater then the development of the website then it is a capital cost. The guide states:

“A website that will directly generate sales, subscriptions, advertising or other income will normally be regarded as creating an enduring asset and consideration should be given to treating the costs of developing, designing and publishing the website as capital expenditure.”

The guidance seems quite clear, therefore, that the decision whether it will be a revenue or capital cost relates to the expected economic outcome rather than the technical functions of the website.

Design and build If the website will directly generate sales, subscriptions, or advertising it will normally be regarded as creating an enduring asset and costs of developing, designing and publishing the website should probably be seen as capital expenditure.

However, if your website is redesigned and largely rewritten every year, it is difficult to see it as an “enduring asset”, so then the development costs could be written off against profit.

It is as well, then, to remember the importance of careful record keeping so that should you be asked to verify that the cost of redesigning your website was greater than any revenue earned from it in the same period, you would be able to prove that.

The cost of maintaining and updating your website (to change stock, prices, text) should be treated as revenue expenditure. Expenditure on initial research and planning, prior to deciding to proceed with development, is normally allowable as revenue expenditure too, but is dependent on the purposes of the website according to the rule about costs for designing and the likely revenue earned.

Of course, there are always exceptions to the rule, but for a guide:

• Website planning costs should be put through profit and loss accounts at the time they are incurred;
• Application and infrastructure development costs may be capital costs dependent on the relationship between the expenditure and the future economic benefits;
• The maintenance or operating costs of the website after its development should be charged to the profit and loss account at the time they are incurred.

Conclusion The newest thing in the revised HMRC guide is the point about the purposes of the website, whether it is likely to generate more income than the costs associated with building it. This is where I’d say the most attention should be paid.

Another thing to consider are capital allowances, which may mean you receive the full relief against the expenditure in the year the money was spent whether it is revenue or capital cost, but in any case just be sure to keep careful records and ask if uncertain.

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