Accounting treatment under FRS FRS does not address the classification of software and website costs and therefore each entity should develop and apply a suitable accounting policy to classify such costs as tangible fixed assets or as intangible assets. Software and website development costs not research costs may be recognised as internally generated intangibles only if the entity can demonstrate: a the technical feasibility of completing the intangible asset so that it will be available for use or sale; b its intention to complete the intangible asset and use or sell it; c its ability to use or sell the intangible asset; d how the intangible asset will generate probable future economic benefits; e the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; f its ability to measure reliably the expenditure attributable to the intangible asset during its development.
Reporting and commercial impact of the changes In view of the lack of direction in FRS it is conceivable that some entities will classify software and website development costs as intangible assets while under current UK GAAP they would have been classified as tangible assets.
Transition Whether software and website development costs are treated as intangible or tangible assets, the deemed cost can be either the fair value on transition date, or a previous GAAP revaluation at the revaluation date. Taxation impact of the changes We have already seen what FRS 10 has to say about software. Contact us Send us a message. The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice.
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Pre-FRS accounting requirements Companies incurring expenditure on website development costs have historically accounted for them depending on the perceived long term net benefit to the business. It should however be noted that computer software specifically qualifies for capital allowances under s71 CAA This means that the tax treatment of digital expenses can be more complicated for companies than unincorporated businesses which do not have an equivalent to the intangible assets regime.
For companies there are broadly three possible scenarios depending on whether expenditure is revenue or capital for tax purposes and, if capital, how it is treated for accounts purposes:.
Licences and rights over software, website development costs and domain names will often be accounted for as intangible assets, and will therefore fall within the intangible assets regime provided they are created or acquired from an unrelated party on or after 1 April Where this is the case, the tax relief will follow the accounting treatment with amortisation or impairment of the asset usually deductible for tax purposes as and when recognised in the accounts.
It should also be noted that software is excluded from the intangible assets regime 2 if:. Where any of the above applies to exclude an asset from the intangible assets regime, it may qualify for capital allowances instead. It may be beneficial to make an election under s CTA if claiming capital allowances would give relief faster than deducting the amortisation or impairment costs recognised in the accounts for example, because the Annual Investment Allowance AIA will cover the expenditure in full or the intangible asset will be amortised over a long period.
The following HMRC guidance may be useful in determining the correct tax treatment of digital expenditure:. Note that an LLP is a body corporate, but treated as transparent for tax purposes. For an LLP, the relevant question will be whether the member is an unincorporated entity or company.
Skip to main content. Tax treatment of software and website costs. Broadly the tax treatment of such expenses will depend upon: whether they are capital or revenue in nature for tax purposes; whether they are incurred by an unincorporated business e. The potential consequences of these issues can be summarised as follows: This article takes a brief look at the above questions and sets out some practical points to consider when determining the tax treatment of software and website costs.
Such an asset is identifiable when:. When the website development costs relate to activities other than advertising or promotion, such as e-commerce and order processing systems, it may be possible to capitalise the expenditure if the other conditions are met.
When an entity has made an accounting policy choice to expense development expenditure, the expenditure should be expensed as that policy must be applied consistently in accordance with FRS paragraph When an entity has elected to adopt an accounting policy of capitalising development expenditure, it may be possible to capitalise the expenditure if the other conditions are met. A project is in the development phase if and only if it meets all the criteria contained within FRS paragraph The entity must be able to demonstrate; the technical feasibility of completing the intangible asset, an intention to complete the intangible asset and use or sell it, an ability to use or sell the intangible asset, how the intangible asset will generate probable future economic benefits, the availability of adequate technical, financial and other resources to complete the development and use or sell the intangible asset and an ability to reliably measure the expenditure attributable to the intangible asset during its development.
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This helpsheet is designed to alert members to an important issue of general application.
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