HMRC has recently revised its guidance on the treatment of website creation costs, in its ‘Capital v Revenue Expenditure Toolkit’.
Expenditure on a website may be capital in nature (in which case it will normally be eligible for capital allowances as plant and machinery) or it may be a revenue expense. The fact that it may be treated as revenue expenditure for accounting purposes, as advertising, marketing or IT costs, does not determine the tax treatment.
Capital expenditure: the previous guidance
Previously HMRC saw the function of the website as the key factor in making the distinction. If the function was solely to advertise or promote the business this was seen as revenue expenditure. If the website included the ability to carry out electronic transactions that would directly generate sales or other income, then HMRC considered that ‘consideration should be given’ to treating the costs of developing, designing and publishing the website as capital expenditure.
Capital expenditure: the new guidance
The new guidance indicates that application and infrastructure costs, including domain name, hardware, and operating software that relates to the functionality of the website should normally be treated as capital.
As regards other costs the toolkit says:
“Design and content development costs should normally be treated as capital expenditure to the extent that an enduring asset is created. One such indication may be an expectation that future revenues less attributable costs to be generated by the website will be no less than the amounts capitalised.
“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 second paragraph does not appear to add a great deal to the first, and the use of terms such as ‘normally’, ‘indication’ and ‘consideration should be given’ lead to a lack of certainty. In broad terms, however, the message is clear. Where expenditure is incurred on an income-generating website it will usually be seen as capital in nature; where the website is simply an advertising medium the expenditure will normally be revenue. Where this differs from the previous guidance is that consideration must now be given to the expected economic outcome rather than simply to what functions the website is technically able to perform.
In both the old and new guidance, costs of maintaining or updating the website (for example, in relation to price changes) are seen as revenue expenditure, as (normally) are costs of initial research and planning prior to a decision to proceed with development of the website.
Technology & media