Most businesses consider that a presence on the internet is essential to the growth of their business. Indeed, in some cases it is their business. The tax treatment of website development can sometimes be a bit tricky, but the good news is that you should generally get a deduction against profits for the full cost provided only that the website has a function within the business. The tricky bit is deciding whether the cost is a capital or a revenue expenditure.
HMRC’s view is that a website is similar to a shop window. The cost of constructing the window is a capital expense. The cost of changing the display in the window is a revenue expense. Some people describe website development as advertising, but HMRC does not consider the description to be conclusive. They say that “What falls to be considered is the nature of that for which payment has been made”.
Taking a simple case first, if the website is designed primarily to advertise your business then the full cost of developing and maintaining that website is tax deductible as a revenue expenditure. This would generally be the case for all small websites.
However, the tax treatment of other websites can be more complex. For instance, many websites offer much more functionality. I would suppose that all readers have ordered goods or services over the internet from sites such as Amazon. No-one can say that those websites are performing a purely advertising function. Similarly, websites frequently offer a means of securely communicating with the business or of the business communicating with its customers. Again, not purely advertising. Or they may provide a source of information for the owners of a product, such as installation manual’s etc. In these cases the website is more like a retail store than an advertising hoarding. HMRC’s view of the tax treatment of these more complex sites is as follows:
- Some of the costs are capital expenditure such as the domain name, any hardware costs incurred, and the development of the operating system of the website
- Other costs are revenue expenditure such as keeping the information on the website, such as pricelists, catalogues, etc up to date
This split treatment of the costs applies not only to a new website but also to the cost of developing a replacement website, even if the same domain name, etc is used.
The good news is that the capital expenditure qualifies for the Annual Investment Allowance. Currently, this allows 100% of the cost of capital additions up to a limit of £200,000 per annum to be fully deducted from profits in the year of acquisition.