HMRC use the Analogy of a shop window….
The cost of a web site is analogous to that of a shop window. The cost of constructing the window is capital; the cost of changing the display from time to time is revenue. (BIM35870)
UITF Abstract 29
Set out 4 key areas of cost:
- Planning – P&L
- Application and infrastructure development – Tangible Fixed Asset
- Design costs – P&L
- Content costs – P&L
HMRC also have some useful information on software in CA23410
Computer software qualifies for PMAs if it is not already plant.
Computer software is not defined in the capital allowance legislation. You should treat computer programs of any type and data of any kind as computer software. Computer programs range from operating systems like Windows to games like Solitaire. There may be no physical asset because software is sometimes transferred by electronic means, for example it may be downloaded over the Internet. Software acquired that way is also plant.
A person may acquire a right to use or otherwise deal with computer software. If so, the right and the software to which it relates are plant. Treat the person as owning the plant while the person is entitled to the right.
Capital Allowances and the Annual Investment Allowance can be claimed against Plant including software.
Lets start with a typical scenario:
- Mr Smith has been running a small garage for a few years
- he decides to incorporate his business and sets up Smiths Garage Limited with himself as the sole director and shareholder
- he transfers the goodwill of the business and its other assets and liabilities to Smiths Garage Limited but does not claim incorporation tax relief under Taxation of Chargeable Gains Act (TCGA) 1992, s162, nor does he claim hold-over relief under TCGA s162
- at the time of incorporation, the goodwill of the business is valued at £100,000
- Mr Smith makes a chargeable gain on the transfer of the goodwill, which is deemed to be at market value, of £100,000 which, after deducting the annual CGT exemption (£10,900 2013-14), will be taxable at 10% due to the availability of entrepreneur’s relief (note rules changed 3rd December 2014 and ER is no longer available normal rates of CGT now apply)
- the company will pay Mr Smith £100,000 for the acquisition of goodwill and this is done by way of a credit to Mr Smiths director’s loan account. Mr Smith is able to draw down on this account without any further tax charges.
In addition Mr Smith started his Sole Trader business after the 1st April 2002 so he can claim a corporation tax deduction for amortisation of the goodwill in the company accounts. Small Companies pay Corporation Tax at 20%, so being able to deduct Goodwill on £100,000 will save £20,000 in Corporation Tax. (note rules changed 3rd December 2014 and Section 849C CTA2009 prevents this on related party goodwill)
However, please bear the following in mind:
- If the business started before 1st April 2002, Corporation Tax Act 2009 s895 prevents the company from claiming a deduction against corporation tax, also refer to HMRC Spotlight 1: Goodwill – companies acquiring businesses carried on prior to 1 April 2002 by a related party
- Where a trader transfers his business to a limited company of which he is a ‘substantial shareholder’, the parties are treated as ‘related parties’ and the transfer must be at market value, but you can ask HMRC to carryout a post transaction valuation check by submitting form CG34
- Goodwill relating to personal services is not normally considered to have a market value as it can not be transferred
- In general it is expected that intangibles will have a useful life of no more than 20 years (note new rules – FRS102 states
“If an entity is unable to make a reliable estimate of the useful life of goodwill, the life shall not exceed five years.”)
- Get professional advice to help you to prepare the valuation, disclose the capital gain and claim the tax relief