Even though expenditure on website development may be shown in your accounts as advertising, marketing or IT costs, this does not necessarily mean that it is allowable by the taxman as revenue expenditure and therefore tax deductible. To identify the correct tax treatment, the exact nature of the website costs needs to be examined.
HM Revenue & Customs (HMRC) has recently altered its guidance on this topic so that it no longer focuses on the function of the website.
Instead, HMRC is interested in whether the website is expected to generate future income and how much that is likely to be.
Under the new HMRC guidance, 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 expenditure.
When considering the design and content development costs, the guidance states these should normally be treated as capital expenditure to the extent that an ‘enduring asset’ is created.
In other words, if future net income generated by the website is expected to be more than the design costs then it is likely that the website costs should again be capitalised.
Hence, 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. On the other hand, where a website is redesigned every year or so, then that is unlikely to be an enduring asset and the development costs can be written off against profit. Likewise, the cost of maintaining or updating a website (in relation to price changes, for example) 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.
Under current tax legislation, to some extent the difference in tax treatment is a red herring.
Where a revenue deduction would not be allowable, tax rules currently permit capital expenditure to generally qualify as expenditure on plant and machinery for capital allowances purposes and therefore to receive full tax relief against profit in the year the costs are incurred. But it is useful to know HMRC’s thinking and tax relief for capital expenditure may not be so generous in future years.