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Are website costs tax deductible?
You’ve decided to upgrade your website and are laying out thousands of pounds on development and running costs. Your bookkeeper says that some of these are capital and therefore might not qualify for a tax deduction. Can this be right?
HMRC used to see your website as your shop window, and therefore website development was not day-to-day expenditure, but a capital cost. This type of expense is only deductible from profits if it qualifies for capital allowances (CAs). Therefore, whatever you’ve spent money on must have a function in the business. Because a display (shop window or website) is not a function it follows that no tax deduction is due.
HMRC now see that most websites offer customers a means of ordering goods or services, communicating with the business and finding out detailed information about products. These are clearly functions in the business. Therefore, HMRC now says that certain website costs qualify for CAs purposes as ‘plant or machinery’. The types of expenditure falling into this category include that for domain names, hardware and operating software that relates to the functionality of the website.
Because the ‘plant and machinery’ rules apply, CAs can be claimed as part of the annual investment allowance. Subject to a £200,000 maximum, this gives you a tax deduction for the entire expense for the financial year in which you incur it.
HMRC also says that expenses for maintaining and updating your website, for example changing product prices, can be deducted from profits like other day-to-day business costs (usually referred to as revenue expenditure).
Development costs for a replacement website for your business, even one that uses the same domain name, etc., should be treated as capital expenditure to which the CAs rules apply.
Vital to keep a detailed summary of all costs
More difficult to categorise is the initial research and planning prior to a decision to proceed with development or redevelopment of your website. HMRC accepts that these can be treated as tax deductible revenue costs.
Where the purpose of your website is essentially only to advertise your business, HMRC’s approach these days is to accept that all the costs relating to it count as tax deductible revenue expenses.
So, whilst accounting and tax treatment of some types of website cost can differ, a tax deduction from profits is allowed for capital and running expenses. Research and planning costs are deducible as running costs, while development expenses and software qualify for tax deductions under the capital allowances rules.
Given the above, it is clearly vital that a detailed summary of these costs is provided to your accountant when you send them the figures for your annual accounts. They can then allocate them correctly for tax purposes and ensure the proper deductions are claimed.
If you are in any doubt about your position in relation to this issue, please talk to your usual Thomas Croft contact as soon as possible.