More and more businesses are going digital. It’s common to see expenses incurred in connection with software licenses needed to work, and with costs on developing websites.
Computer software is increasingly sold on a renewable annual contract. As this gives rights to use the software for a limited period – usually twelve months – it is a revenue expenditure and deductible against business income, so long as it is wholly and exclusively for the business. If you occasionally use the software privately, it may be possible to apportion the costs for an identifiable part that is wholly for business.
But what happens if the rights to the use of the software aren’t for a limited period? Say for example in-house creation of a bespoke booking system. This is likely to be a capital expense. For unincorporated businesses, this is treated like a plant for a capital allowance claim.
For companies, computer software is likely to be an intangible asset, falling within the intangible asset regime. Capital allowances would not be available here, but expenditure would normally be written off for tax purposes following the accounting treatment.
Another way of viewing this might be the following:
If a license for your software is paid by regular payments (every month, every week, every year, etc.) like a rental, HMRC will usually accept that those payments are revenue in nature.
If you instead make a single payment for a license, you must consider if the license will endure sufficiently to be classified as a capital asset. You need to consider both the function of the software and how long the software will last.
The general rule of thumb for HMRC to accept that payment is revenue in nature is if the useful life of the software will be less than 2 years. They will not, however, accept that software has a limited life just because there are updates to that software.
A short note, in exceptional circumstances, some computer software may qualify for research and development tax reliefs. You should speak to your accountant about this if you feel it is the case.
If you are paying for software and your accountant isn’t currently helping you through this, please talk to them or get in touch with us here.