Treatment of website development - The Book-keepers Forum (UK)

FoxAccountancyServices · Expert

Treatment of website development

Shamus · Forum Moderator & Expert

Hi Michelle,

excellent question.

the guidance on this is in abstract 29 (www.frc.org.uk/getattachment/3588c0bf-4037-4312-b9f6-f693c71b4dcd/UITF-Abstract-29-Website-development-costs.aspx)

Which is at odds with international treatment of website development costs which regard such expenditure as an intangible per IAS38 (or more correctly the SIC-32 interpretation).

I do appreciate where your coming from though with the site being non commercial giving grief as such obviously fails the intangible test in relation to where future economic benefits fall.

In my case I've not yet encountered a website material enough to be worth capitalising and have expensed them (couple of hundred initial outlay then ongoing costs).... lol, Rob will be so proud of me giving a there or there about answer.

kjmcculloch83 · Expert

Hi Michelle,

My understanding is that AIA is only for plant and machinery. Websites won't fall into this category.

FoxAccountancyServices · Expert

Hi Shaun, thanks for taking the time to reply. Appreciated as always :)

It was the guidelines in this extract that led me to believe that the accounting treatment for a website that did not take orders should be shown as a P&L item. Its the then tax treatment that concerns me.

Although, I do note that this document states

Application to smaller entities
10 Reporting entities applying the Financial Reporting Standard for Smaller Entities currently applicable are exempt from this Abstract.

So the confusion continues.. ultimately, CAs are 100% as would charging it to P&L but I would like to feel like I have a solid answer in my head.

I am dealing with a small company who have invested £10k into a second website which "is a social forecasting tool invites people to make predictions about upcoming sales"

Hello also to Chris, thanks for your reply :)

This is the HMRC guidance that I was directed to, which suggests the website (which, I believed, was classed as the purchase of software, held on the public domain) is allowable as P&M

http://www.hmrc.gov.uk/manuals/camanual/CA23410.htm

But happy to discuss why this might not be so? How you would you expect to deal with such items?

Shamus · Forum Moderator & Expert

But thats part of the debate Kris as to whether a website is a tangible (per UK GAAP, see abstract 29 above) or intangible (per IFRS, specifically IAS38 and SIC-32).

If its a tangible asset as would seem to be indicated then its no different to any other plant and machinery and AIA would be available.

The complication as identified here by Michelle is that future economic benefits are unlikely to be generated either from use or sale of the site in which case it would not meet the definition of an asset and would be expensed.

As I say, interesting debate which isn't as clear cut as it sounds.

FoxAccountancyServices · Expert

Here is the website I found where it all started...

howladerandco.com/how-to-account-for-website-development-costs

FoxAccountancyServices · Expert

This sort of backs-up what I believed was the correct treatment in the accounts... to capitalise the relevant elements of an order taking website, and to show non order taking websites in the P&L.. but I wasn't aware that HMRC would want it shown differently - disallow expense, then capitalise a tax asset... much like Shaun, I have only every had small website costs before!

Shamus · Forum Moderator & Expert

Pondering the scenario Michelle that the site generates no income to my mind puts it as an expense rather than an asset.

Definition of an asset

A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. (That might not be word perfect). This website will not result in any economic benefits either from use or sale.

Therefore, to my mind (although happy to be convinced otherwise) does not meet that criterion so is not an asset and even though material to the financial statements (I assume at £10k for a small company) I believe that it would need to be expensed.

... where's Bill (Wella) when you need him!

FoxAccountancyServices · Expert

I agree that the abstract suggests its a P&L expense.. but what then of the tax treatment? The HMRC guidelines suggest that much like a window display, the set up cost should be capitalised and the maintenance treated as revenue.. this suggests that you have to add back the expense which you included in the accounts to adhere to accounts legislation, and then treat it as an asset addition on the tax comp? Presumably as plant, but waiting on Kris's response to consider that further....

RobH · Expert

I'm bursting with pride Shaun!!

However, a fly in the ointment, www.hmrc.gov.uk/manuals/bimmanual/bim35870.htm and the last sentence therein is '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' I read this as the website doesn't need to be a 'selling site' per se as a shop window is just advertising the goods. That said in my usual and now Shaun's ultra pragmatic approach, I would probably not capitalise anything under a grand.

Shamus · Forum Moderator & Expert

Think that we're in agreement over the financial reporting treatment Michelle.

On the HMRC front I think that you are getting dodgy info from them as they are probably considering the standard sort of website rather than your specific scenario.

Just had a quick glance at this guidance : www.google.co.uk/url%3A%2F%2Fwww.hmrc.gov.uk%2Fagents%2Ftoolkits%2Fcapital-v-revenue.pdf&ei=5-SVUr6jJo2y7AavuoHoDg&usg=AFQjCNEYqWO3xCJhzEUJvh8VsnWxxkIkGw&bvm=bv.57155469,d.ZGU&cad=rja

And it shows that there are holes in HMRC's arguement that you can drive a bus through as evidenced by the use of such words as "usually".

The website does not meet the criterion of being an asset for financial reporting and I can see no justification in this instance for HMRC treating it as if it is one.... In fact, take a look at the section called explanation on page 16 and I think that clearly shows that in the case of your client no enduring asset has been created as the site will generate revenue neither through use or sale.

Basically, to my mind in this instance the website is a rather expensive expense that should rightly be recognised through the P&L and accepted as such by HMRC... I would definitely keep a copy of the above document though before they change the evidence.

FoxAccountancyServices · Expert

Hi Rob

The HMRC guidance leads me to believe that in order to comply with accounting and tax regs, you should add back the expense and then show an asset on tax comp.. however, I am wondering if, seeing as the FRSSE is being applied in my case, that I can capitalise the expenditure regardless, as the FRSSE application makes the company exempt from the rule.

Soooo then I think, that would keep things nice and tidy, BS assets match tax comp... but then Kris mentions its not plant, which I thought it was? If I purchase wordpress and my developer make site with it, surely I have really bought software? Its just the software is not on my desktop, but out there.... in cyberspace.... ((makes twilight zone noises))

FoxAccountancyServices · Expert

Passed in the post Shaun.. reviewing the link now, thanks :)

RobH · Expert

Well I always try to go with HMRC first and accounting standards second as it is HMRC we deal with and I can't think they would have any problem with you capitalising rather than putting straight to P & L. I've been looking for an answer regards to whether its plant and the closest I can come up with is software like you have said and to be honest I think that's where I would go with this if I didn't put through as revenue. I need those Christmas drinks now!

FoxAccountancyServices · Expert

OK, having read that, it appears the whole thing can be revenue for both accounts and tax purposes.. and it states that websites can be treated as P&M, so really, whichever way it is treated, it results in the same tax liability - which lets face it, is all anyone will really care about with a small owner director company!

RobH · Expert

Case closed!

Shamus · Forum Moderator & Expert

Good one Rob, but as you will see from my link (now fixed) there is disagreement over the treatment even within HMRC's own documentation and the key seems to be whether an asset in the true definition of the word (shown above) actually exists.

Of course such does pose another problem in that of indirect revenue. Is the site to be considered advertising?

There are two income streams from advertising, direct such as pay per view and indirect. The HMRC links are unclear as to what sort of advertising they are refering to. That which generates income directly or all advertising being of financial benefit so creating an asset of the website being a platform for advertising delivery?

The latter would not make sense as advertising is specifically mentioned as an intangible that must not be capitalised which would be at odds with such treatment of a website where such was pure advertising with no associated revenue stream.

FoxAccountancyServices · Expert

Another point.. would treating it as an asset work better if they sold the website on at some point? Or would that just be covered by goodwill?

Shamus · Forum Moderator & Expert

You can't close the case while I was still writing Rob. lol.

Actually, I think that you've arrived at the right conclusion Michelle so I'll agree with Rob or rob can agree with me in that I think that there is sufficient information out there to justify either treatment dependant upon how the question is approached.

Just one point to Rob mainly in that much as HMRC would love to think that they can make up whatever rules that they like accounting standards take precedence over HMRC rules as accounting standards are given power by the companies act.

If this was a game of top trumps it would be a Companies Act (and by association accounting standards) trumps Finance Bill.

And HMRC can sulk about that as much as they like. lol

FoxAccountancyServices · Expert

Actually I've always thought that you have to adhere to accounting rules in the accounts, and then present the tax comp to adhere the HMRC rules.. so you follow both in the end?

Shamus · Forum Moderator & Expert

Hi Michelle,

If the intention is to sell the site then it should have been treated as an asset as future economic benefits associated with the development will flow to the company.

sorry about that one just being a quick response but got to fly.

toodle pip.

FoxAccountancyServices · Expert

I don't believe that is the intention at this point.. but who knows what might happen when retirement rolls round.. I will revenue the lot and have done with it! :)

Thanks to all :)

RobH · Expert

Out of interest Michelle, how much money are we talking?

Shamus · Forum Moderator & Expert

Noooo, just about to leave the keyboard and you pull me back in.

HMRC have to adhere to accounting standards such as the fundamental definition of an asset and liability (which is the root source of the debate here). As you know, there are many things that they can treat differently resulting in recognition timing differences in relation to tax but they cannot simply run roughshod over fundamental concepts.

really have got to go now but looking forwards to reading more later.

Shaun.

FoxAccountancyServices · Expert

£10k Rob.. total cost £14k, the rest of which was update and amendments to the existing site.

RobH · Expert

Oh quite significant costs. I would probably capitalise afterall, claim AIA but charge depreciation at 25% reducing balance in P&L so it doesn't adversely affect the profit figure...

FoxAccountancyServices · Expert

Hi Rob.. see my confusion! Its a tough call!! LOL

I have actually gone back to the client and re-asked about the new site making income.. he may have thought i was only asking about the subscription income, which his main website sells. I just want to be sure he wont sell advertising space etc.

FoxAccountancyServices · Expert

The client has returned with an answer! The website will be used to generate income in about 12 months time, so off to the BS it goes!

The client registered for VAT from May.. and had already paid 2 installments towards this website being built, in January and April... would that constitute claimable pre-reg VAT?

RobH · Expert

I would think so Michelle, especially now that it is an asset!

FoxAccountancyServices · Expert

Woop!