Website costs can be significant and are often capitalized on a company's accounts. Traditionally, HMRC has considered these capital costs as non-tax-deductible, on the basis that they are similar to a “business window” and, as such, do not qualify for capital relief (because a window does not have a business function). Capital deductions are similar to a tax-deductible expense and are available with respect to eligible capital expenditures incurred in the provision of certain assets in use for commercial or rental business purposes. In fact, they allow the taxpayer to pay off the cost of an asset over a period of time.
Ken Hardy and Damien Flanagan from our capital allocations team explain. This content is available to ACA students. If you want to start ACA qualification, there are several routes you can take Get access to world-leading local information, guidance, and networking resources. To qualify for capital allocations, the asset resulting from the expense will have to function as a plant, broadly speaking, be a capital asset used to carry out the business, and not shares in the trade or part of the facilities.
However, if the costs incurred are to update the website to add new features, such as adding pages to the website, adding sales capacity, or adding ability to pay, these costs will be capitalized. Because a screen is not a feature, this means that no tax deduction for website costs may have been previously allowed. Depending on the allowances for a particular year, this could give a full deduction for your website development costs. If the costs are for the development, creation and design of the website, the costs are treated as software costs and are amortized over a period of 3 years starting from the month in which the website is put into service for use.
For these purposes, the HMRC Capital Allocations Manual states in CA23410 that “You must treat computer programs of any kind and data of any kind as computer software. Before you can begin to determine the tax treatment for your website development costs, you need to determine what you use your website for. However, it is also necessary to confirm that the website will have the normally expected useful life of a capital asset (as noted above, anything less than two years old is likely to be accepted as a revenue expense). Your friend thinks that these expenses can be classified as capital, so you won't be able to apply for an immediate tax deduction for a website.
This also demonstrates that HMRC's tax treatment for website development costs follows accounting treatment. Capital allocations vary from year to year depending on the Chancellor's budget; therefore, the amount of your website creation costs that are deducted from your taxable profits depends on the year. These are all clearly functions, so HMRC now agrees that certain website costs will qualify for capital allocations such as “plant and machinery”. So what costs are associated with websites? Typical costs incurred for websites include the costs of developing, creating, designing and programming the website, whether you do it yourself or pay someone else for the services.
Costs incurred by designing a website that are not related to software-type costs are deductible over the lifetime of the expense, i. Other costs associated with websites are the costs to obtain a domain name and maintain, update or add to the website.