Tax and accounting treatment for website development costs
Planning on building or updating the website for your company? Not sure how to account or tax the website development costs? Does it go under profit and loss and count as an expense? Or does it go on the balance sheet and count as an asset? Haven’t a clue how to answer those questions? Don’t worry, you’ve come to the right place.
Before you can start determining the tax treatment for your website development costs, you need to determine what you use your website for. You need to decide if your website is more of a brochure that publicises your brand, or if the purpose of your website is to sell goods.
If the purpose of your website is to publicise your brand
If your website isn’t for the direct purchasing of goods, and more about publicising your business, then the answer is pretty simple. The entire website development goes on your profit and loss statement.
For those of you who are unsure about what a profit and loss statement is – it’s a document that shows a company’s financial progress over a certain period. To show this progress you have to add up all the sources of revenue and the subtract all the expenses related to that revenue.
Generally speaking, having your website development as a profit and loss expenditure is good for tax because the smaller your official profits are, the less you’re taxed on.
The example of Adam the greengrocer
To illustrate, Adam owns a greengrocers. His customers don’t buy anything online – they all come to his shop. He made £100,000 profit this year. During that time he also built a website that cost him £10,000.
Because he doesn’t sell anything directly from his site Adam needs to put his website development costs on his profit and loss statement. He will therefore only be taxed on £90,000 (£100,000 profits minus the £10,000 he spent on the website). The taxman is happy and so is Adam.
If Adam had put his website on his balance sheet by mistake, he’d have been taxed on all his £100,000 profits. That’s why it’s important to get the tax treatment for your website development costs right!
If you’re unsure of what a balance sheet is – it’s a statement of the assets, liabilities and capital of a business.
If the purpose of your website is to sell goods
If the purpose of your website is for customers to buy things through it and to make a profit on those items, then the tax treatment of your website development gets a little bit more complicated. You can no longer simply stick your website development under profit and loss. Now at least part of it needs to go on the balance sheet. But which part?
According to the International Accounting Standards Board (via IAS 38 and SIC 32), different stages of the website build should have a different accounting treatment. The initial planning stage is an expense and goes on the profit and loss statement. The building of the website should be capitalised as an asset on the balance sheet. Any subsequent updates you make to the content of the website is treated as an expense.
The HMRC sums this up nicely: “the cost of a website is analogous to that of a shop window. The cost of constructing the window is capital (an asset on the balance sheet); the cost of changing the display from time to time is revenue (an expense on the profit and loss)”.
This also shows that the HMRC’s tax treatment for website development costs follows the accounting treatment.
So what does this do to your tax bill?
The planning and website maintenance costs are considered an expense. This means they can be deducted from your profit and your tax bill.
The building of the website counts as capital and goes on the balance sheet. How this affects your tax bill will depend on whether you are an unincorporated business or a limited company.
If you’re an unincorporated business then the website build costs are eligible for capital allowances. What are capital allowances?
Capital allowances are an amount based on your capital expenditure that you can deduct from your taxable profit, in the same way as expenses.
Capital allowances vary from year to year depending on the Chancellor’s budget – hence the amount of your website build costs that are deducted from your taxable profits depends on the year.
Depending on the allowances for a particular year this might give a full deduction for your website development costs. This would give the same result for tax as if it had all been expensed. Alternatively, it may take a number of years to get a full deduction.
If you’re a company there is a special treatment that is the same as the accounting treatment stated earlier.
In your accounts, the asset on the balance sheet will have to be depreciated over the useful life of the website.
So, for example, if you think the website will last 3 years before you need a replacement, then you should depreciate it in equal instalments over 3 years on your profit and loss statement. The depreciation amount will also be deducted from your taxable profits.
If capital allowances would give you a better result than the special treatment above – in other words, if it will allow you to get the deduction more quickly – then you can choose to use capital allowances instead.
This blog covers a lot of technical details and it would be completely understandable if you feel that you need more assistance or that you need to look into this further. That’s what Howlader are here for and we’d be more than happy to help, so don’t hesitate to get in touch today.
Reprinted with permission.
Originally published on Howlader & co – 9th April 2020.