Get your website taxes right
Tax and Accounting Treatment for Website Development Costs
Before you can start determining the tax treatment for your website development cost, you need to assess the use of the website. You need to decide if your website is more of a brochure that publicises your brand or if the website’s purpose is to sell goods.
Is the purpose of your website to publicise your brand?
If your website isn’t for the direct purchasing of goods, and more about publishing your business, then the answer is simple. The entire website development goes on your profit and loss statement.
For those of you who are unsure about a profit and loss statement, it’s a document that shows a company’s financial progress over a certain period. To display this progress, you need to add up all the sources of revenue and subtract all the expenses related to that revenue.
If the purpose of your website is for customers to buy things through it and make a profit on those items, then the tax treatment of your website development gets a little bit more complicated. You can no longer stick your website product under profit and loss. Now at least part of it needs to go on the balance sheet.
Is the purpose of your website to sell goods?
According to the International Accounting Standards Board (via IAS 38 and SIC32), there are different stages of the website builder that should have another accounting treatment. The cost of maintaining the initial planning stage is expensive. The building of a website profits as an asset on the balance sheet, any updates made on the website or changes are treated as an expense and subjected to profit and loss statement.
What is a balance sheet, and how does it differ from P&L?
Although the balance sheet and the P&L statement contain some of the same financial information, including revenues, expenses, and profits, they are essential differences. Here’s the main one: The balance sheet reports the assets, liabilities, and shareholder equity at a specific point in time, while a P&L statement summarises a company’s revenues, costs, and expenses during a particular period.
What is the tax treatment of website cost?
The tax treatment mirrors the tax position for website costs. The main feature of the intangible asset’s regime is that the tax treatment follows the accounting treatment. As there may be more assets classes as intangible fixed assets, the tax treatment will be easier to follow from the accounts.
The corporation tax regime includes specific rules regarding the tax treatment of intangible assets, referred to as the ‘intangible assets regime’, which can be found in Part 8 of CTA 2009. 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:
- The expenditure is revenue in nature – generally deductible in full when it is recognised in the accounts.
- The expenditure is capital in nature and accounted for as a tangible asset – capital allowances may be available if the asset functions as a plant or is software (as set out above for unincorporated businesses).
- The expenditure is capital in nature and accounted for as an intangible asset – the intangible assets regime may apply.
Licences and rights over software, website development costs and domain names will often be considered intangible assets. Therefore, they will fall within the intangible assets regime provided they are created or acquired from an unrelated party on or after 1 April 2002. 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.
However, if intangible assets were:
- created or acquired before 1 April 2002, or
- acquired from a connected party (or parties) who created/acquired them before 1 April 2002
then the intangible assets regime will not apply.
It should also be noted that software is excluded from the intangible assets regime2 if:
- it is treated for accounting purposes as part of the related hardware; or
- the company makes an election under s815 CTA 2009 to exclude it from the regime.
An asset that will also be excluded entirely from the intangible asset regime is treated as an intangible asset in the company’s accounts but treated as a tangible asset in a previous accounting period on which capital allowances were claimed (for example, on a change of accounting standards).
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 s815 CTA 2009 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).
What is the intangible assets regime, and how does it work?
The Intangible Fixed Assets regime (IFA regime), introduced on 1 April 2002, fundamentally changed how the UK corporation tax system treats intangible fixed assets (such as copyrights, patents, and trademarks) and goodwill.
Qualifying intangible assets include the following but are not limited to;
– Intellectual property includes patents, trademarks and copyrights.
– Player registrations (sports clubs),
These are defined in an accounting standard, and although the assets are not required to be capitalised in the company’s account, rules still do apply.
Assets that exclude in the legislation include and are not limited to;
– IFAs created or acquired before 1 April 2002
– Financial assets and assets held for non-commercial purposes
– Assets acquired from related parties, such as IFAs created by related parties before 1 April 2002 or goodwill created on the incorporation of a business.
Intangible tax rules contain a wise rollover relief. Although there is no interaction between the two forms of rollover relief, this is like capital gains relief, so the tangible asset’s gain cannot be rolled over into an intangible asset. By acquiring other IFAs directly, a company can only defer gains on realisations.
For intangible assets obtained on or after 1 April 2019, the tax treatment of goodwill and other customer-related intangibles, i.e., customer lists, attract relief of 6.5% of the cost per annum. This is subjected to a cap six the value of any qualifying property.
From 1 July 2020, all intangible assets acquired, whether from an unrelated party or not, come within the scope of the corporate intangible’s regime (other than those acquired from a company is the same capital gains group). This means that any profit or loss on a subsequent disposal of such assets will be dealt with under the corporate intangible’s regime. The tax treatment will depend on whether the assets are restricted assets, such as goodwill and intangible assets.
Rollover relief cannot be claimed on the following.
– Deemed realisations on intangible assets.
– An asset is partly realised, and the related party acquires an interest in that asset or some other asset deriving value from the part-realised asset.