Creating, upgrading and maintaining a website can be costly. Not all these expenses are tax deductible in the same way. What steps can you take to maximise relief?
HMRC’s old view
HMRC’s view of websites is that they can be similar to a shop window: both put your business on display to customers. It also used to take the view that like the cost of a shop window, 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). To do that, whatever you’ve spent money on must have a function in the business. Because a display is not a function it follows that no tax deduction is due.
HMRC’s current view
HMRC’s view was out of touch. 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. On that basis 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.
Tip. Because the plant and machinery rules apply it means that the CAs can be claimed as part of the annual investment allowance. Subject to a £200,000 (£1 million for expenditure between 1 January 2019 and 31 December 2020) maximum, this gives you a tax deduction for the entire expense for the financial year in which you incur it.
Not always capital
HMRC also has a view on other website costs which don’t qualify for CAs. It says expenses for maintaining and updating your website, e.g. changing product prices, can be deducted from profits like other day-to-day business costs (usually referred to as revenue expenditure).
Note. 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.
Revenue or capital – part one
Some expenditure is more difficult to categorise. For example, that relating to initial research and planning prior to a decision to proceed with development or redevelopment of your website. The good news is that HMRC accepts that these can be treated as tax deductible revenue costs.
Revenue or capital – part two
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.
Tip. Because bookkeeping/accounting and tax treatment of expenditure relating to websites can differ it’s important 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.