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Capital v Revenue
Expenditure Toolkit
2017-18 Self-Assessment and Company Tax Returns
Effective from 6 April 2018
2
Index
Introduction .................................................................................................................................. 3
Areas of risk within Capital v Revenue expenditure ..................................................................... 3
Using links within this document .................................................................................................. 4
Checklist
Capital v Revenue expenditure
..................................................................................... 6
Explanation and mitigation of risks ............................................................................................... 9
Effective from 6 April 2018
3
Introduction
Tax agents and advisers play an important role in helping their clients to get their tax returns
correct. This toolkit is aimed at helping and supporting tax agents and advisers by providing
guidance on the errors which we find commonly occur in relation to Capital v Revenue
expenditure. It may also be helpful to anyone who is completing an Income Tax Self-
Assessment tax return or Company Tax return.
This toolkit should be used for financial years commencing 1 April 2017 for Company Tax
returns and 6 April 2017 for Income Tax Self-Assessment tax returns. Its use is entirely
voluntary.
The content of this toolkit is based on our view of how tax law should be applied. Its application
to specific cases will depend on the law at the relevant time and on the precise facts.
This version of the Toolkit was published in July 2018. The risks in this toolkit have been
reviewed and updated where necessary for 2017-18.
For further information on using this toolkit and reasonable care under our penalty system see
Tax agent’s toolkits.
For guidance on matters not dealt with in this toolkit you should refer to our Business Income
Manual (BIM).
Areas of risk within Capital v Revenue expenditure
‘Capital v Revenue expenditure’ is a term used throughout this toolkit. It refers to the distinction
of capital from revenue expenditure for tax purposes. Expenditure that is capital is generally not
allowable as a revenue deduction in computing taxable profits. Depending on the nature of the
capital expenditure it may be possible to claim capital allowances.
There is no single, simple test that can be applied to decide which items are capital expenditure
and which are revenue. This can only be determined by reference to the relevant facts that
applied at the time the expenditure was incurred. In addition the classification of items as capital
or revenue expenditure is intrinsically linked to the particular circumstances and the exact
nature of the trade. The same item may correctly be categorised as capital in one trade, and as
trading stock in another.
This toolkit does not reflect:
The cash basis which is available from 2013-14 for the simplest small businesses. For further
information see BIM70000+.
Areas of risk within Capital v Revenue expenditure fall broadly into the following categories:
Record keeping
Good record keeping is essential as poorly kept records can contribute to difficulties in
identifying whether a transaction is capital or revenue and treated correctly for tax purposes. It
is therefore desirable to plan a system of record keeping that reflects the nature of expenditure
clearly.
The distinction between capital or revenue expenditure for tax purposes can be complex and it
is therefore important to consider the records kept and the business circumstances, for example
whether the business has expanded, relocated or restructured during the accounting period or
even merely attempted to do so.
For further guidance on record keeping see Records for Corporation Tax.
Effective from 6 April 2018
4
Acquisition, improvement and alteration of assets
Risks relating to the allocation of expenditure to revenue rather than capital will often arise from
work done in the course of the purchase, refurbishment or repair of an asset. For example
business premises may be acquired or altered, or other fixed assets may be purchased or
improved.
It can be difficult to identify that apparently similar items of expenditure should be treated
differently, particularly where there are many invoices to be considered, or the exact nature of
the work carried out is not immediately apparent.
Legal and professional fees
Legal and professional fees can be incurred for a wide variety of reasons, for example on the
acquisition of property or other assets, or on changing the way the ownership of the business is
structured. In some cases the fees will be related to capital transactions and so will not be
allowable as revenue expenditure.
Finance costs
It is important to be aware of what is included in finance charges, and then to consider which
factors may be relevant in deciding whether they are capital or revenue, and to what extent.
Transactions relating to corporate lending and borrowing are the subject of specific rules
however, the aim of which is broadly to follow generally accepted accountancy practice
('GAAP') in recognising receipts and expenses relating to corporate debt.
IT costs
It can be difficult to distinguish the function that computer hardware, software and information
technology perform in the business, what kind of asset they represent, or how the costs
associated with them should be handled in the accounts and tax computations. There are a
number of complexities to consider for expenditure in this area.
Corporate intangible assets
The corporate intangible assets regime represents a significant departure from the previous
rules governing the capital or revenue treatment of intangible assets. The regime affects assets
created or acquired by companies on or after 1 April 2002. In general, the tax rules relating to
these assets follow the accounting treatment. So for example, if expenditure on qualifying
assets is written off, normally by way of amortisation, the deduction for tax purposes will
generally follow the same approach. Similarly, disposal proceeds on qualifying intangible assets
would, subject to any statutory provisions, follow the accepted accounting treatment. Changes
to the regime made in 2014 and 2015 now mean that the tax deductions for goodwill
amortisation are more limited.
Using links within this document
Blue underlined text are links within this document.
Green bold text are hyperlinks to external documents on the internet (access to the internet is
necessary to view these).
We have a range of services for people with disabilities, including guidance in Braille, audio and
large print. Most of our forms are also available in large print. Please contact any of our
helplines if you need these services.
Dealing with HMRC if you have additional needs
Effective from 6 April 2018
5
Giving HMRC feedback on toolkits
HMRC would like to hear about your experience of using the toolkits to help develop and
prioritise future changes and improvements. HMRC is also interested in your views of
any recent interactions you may have had with the department.
Send HMRC your feedback
Effective from 6 April 2018
6
Client Name:
Period Ended:
Checklist for
Capital v Revenue expenditure
Acquisition, improvement and alteration of assets
Yes
No
N/A
N/K
1
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2
Have all items of expenditure on the improvement or
alteration of an asset been treated correctly?
Has any expenditure on essential repairs to a newly
acquired asset been treated correctly?
Has any incidental expenditure incurred when acquiring or
disposing of an asset been treated correctly?
Legal and professional fees
Has any expenditure on an unsuccessful attempt to obtain
an asset or other advantage for the enduring benefit of the
business been treated
correctly?
Has any expenditure incurred in connection with the capital
structure of the business been treated correctly?
3
4
5
6
Effective from 6 April 2018
7
7
Legal and professional fees continued
Have any costs incurred on the recruitment of additional
partners to a partnership been treated correctly?
Have any costs incurred on training for the proprietor or a
partner in the business been treated correctly?
Finance costs
Where any financial payment includes a capital element has
it been treated correctly?
Have all payments made by a proprietor or partnership to
acquire a franchise been treated correctly?
Are the arrangement fees for any long term security
correctly spread over the lifetime of the security in
accordance with GAAP?
IT costs
Has the cost of any computer software acquired been
treated correctly?
Has any expenditure incurred on website development been
allocated correctly?
☐ ☐ ☐ ☐
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8
9
10
11
12
13
Effective from 6 April 2018
8
14
Corporate intangible assets
Has the correct tax treatment been followed for any
amortisation of goodwill acquired by a company?
Has the correct tax treatment been followed for the transfer
or licencing of an asset within the corporate intangible
assets regime either to or from a related party?
General
Has depreciation been added back to the accounts profit in
the tax computation?
☐ ☐ ☐ ☐
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15
16
Effective from 6 April 2018
9
Explanation and mitigation of risks
Acquisition, improvement and alteration of assets
1. Has all capital expenditure on the purchase of assets been identified and
allocated appropriately?
Risk
Capital expenditure on the purchase of assets may have been charged to the profit and loss
account, for example, fixtures and fittings included in repairs and renewals, expenditure on
items of computer hardware included in IT costs, or vehicles purchased included in motoring
expenses.
Mitigation
Consider whether any items of capital expenditure on the purchase of assets might have been
treated as revenue expenditure in the profit and loss account. Developments in the business,
such as relocation or expansion, may suggest potential areas in which this may have occurred.
A review of accounts such as repairs and renewals, other expenses, motoring expenses etc
may reveal items of a capital nature, which are not allowable as revenue expenditure. However
a capital allowances claim may be possible.
For further guidance on distinguishing capital from revenue expenditure see BIM35005+.
For further guidance on capital allowances see our Capital Allowances Manual (CA).
back to checklist
2. Have all items of expenditure on the improvement or alteration of an asset been
treated correctly?
Risk
When a business carries out refurbishment of an existing or newly acquired asset, such as a
property, some or all of the expenditure may relate to improvement or alteration of the asset.
This expenditure will normally be capital for tax purposes, but it may have been included in
repairs and renewals or other profit and loss account headings in the accounts. It is not possible
to treat some of the expenditure on improvements as ‘notional repairs’.
Specific attention may be required in respect of the integral features rules. See explanation
below.
Mitigation
Where a business carries out work to repair or refurbish either a new or an existing asset,
review the expenditure to identify any items that represent improvements or alterations rather
than repairs and ensure that they are treated as capital expenditure as appropriate for tax
purposes.
Explanation
A repair to an asset restores it to what it originally had been and is normally an allowable
revenue expense. For example the cost of replacing roof tiles blown off by a storm. The cost of
alterations, however, are normally capital for tax purposes as they involve improving or
changing an asset and so providing an enduring benefit to the business, rather than simply
restoring it to its previous state. For example extending the area of the roof or taking off the roof
and building another storey.
For further guidance see BIM46900+.
Effective from 6 April 2018
10
A repair or replacement of a part of an asset using modern materials may look like an
improvement, but if the new materials are broadly equivalent to the old materials then the cost is
normally an allowable expense. For example, replacing single-glazed windows with double
glazed windows. For further guidance on using different materials see BIM46925.
If the work results in the renewal or replacement of an asset as a whole, then all of the
expenditure incurred should be treated as capital expenditure.
The importance of good record keeping is also relevant in cases where it may be possible to
apportion the total of the expenditure between capital and revenue. For example a debit in the
profit and loss account may read "building works" in an amount of £100,000. However an
analysis of the detailed invoices may indicate that £40,000 was spent on an identifiable
improvement of the building, which would correctly be capital in nature and the balance of
£60,000 was identified as revenue expenditure. This would allow for an acceptable
apportionment of the total expended of £100,000 and result in the balance of £60,000 being a
revenue expense of the business as repairs.
Where the records kept do not allow for such an apportionment to be identified then all the
expenditure will be treated as capital. An example of mixed expenditure could be legal fees
incurred in relation to a planning permission application, part of which involves new or extended
planning permissions (capital) and part of which relates to a renewal of an existing planning
permission (revenue) If the invoices do not split the legal fees incurred between these two
elements, then, ordinarily, all the legal fees should be treated as being capital in nature.
The possibility of expenditure on improvement or alteration should particularly be considered
where a newly acquired asset is being subjected to a change of use, and therefore needs to be
altered to adapt it for its new purpose.
For further guidance on improvements and alterations see BIM46915.
There are also special rules relating to expenditure on specified parts of buildings called
‘integral features’. The following are integral features:
an electrical system (including a lighting system)
a cold water system
a space or water heating system, a powered system of ventilation, air cooling or air
purification, and any floor or ceiling comprised in such a system
a lift, an escalator or a moving walkway
external solar shading
Under these rules if expenditure on an integral feature represents the whole, or more than 50%,
of the cost of replacing the integral feature, then the whole of the expenditure is to be treated as
capital expenditure on the replacement of an integral feature for capital allowances purposes.
No deduction is then available for the expenditure in computing the profits of the trade (except
under the capital allowances rules).
For further guidance see
CA22310+
and
CA22340
.
back to checklist
3. Has any expenditure on essential repairs to a newly acquired asset been
treated correctly?
Risk
If an asset cannot be used as soon as it is acquired because of its poor condition and the
purchase price was substantially reduced to reflect the need for repairs, then the cost of those
repairs may be capital expenditure.
Effective from 6 April 2018
11
Mitigation
Identify any instances where the business has acquired an asset at a reduced cost because
essential repairs are required, and the business is prevented from bringing the asset into use
until the repair work is done. Consider whether these repair costs should be treated as capital
expenditure.
Explanation
There are circumstances in which the cost of repairs may constitute capital expenditure even
though the work does not improve the asset but merely restores it to an acceptable condition.
Factors that may be relevant are:
whether the asset could be used in the business without being repaired
whether the asset could only be used in the short term as its long term use was dependent
upon the repairs being carried out
whether the purchase price of the asset was substantially reduced because the asset needed
repairing
Example
A business purchases a vehicle that has failed its MoT and cannot be used; this was reflected in
the purchase price. Carrying out the repairs necessary to obtain a MoT certificate will not
improve the vehicle. However it will contribute to the cost of acquiring an asset of lasting benefit
to the business. In these circumstances the cost of the repairs constitute capital expenditure for
tax purposes and a revenue deduction is not available in computing the taxable profits.
However a capital allowances claim may be possible.
For further guidance see
BIM46915
and
BIM35450+
.
back to checklist
4. Has any incidental expenditure incurred when acquiring or disposing of an asset
been treated correctly?
Risk
Incidental expenditure incurred when acquiring or disposing of an asset should be treated as
capital expenditure. The most common example of such expenditure is legal and professional
fees incurred in acquiring or disposing of an asset. Incidental expenditure may also include the
cost of such items as the transportation and installation of the asset.
Mitigation
Consider whether any incidental costs have arisen as a consequence of the acquisition of new
assets or the disposal of assets. Review the profit and loss account for any such incidental
costs of a capital nature, and ensure that they are treated appropriately.
Explanation
Expenses incurred in the course of capital transactions are not allowable as revenue
expenditure, except where incurred by a company in relation to intangible assets, where the
corporate intangible assets regime may apply.
For further guidance on the corporate intangible assets regime see BIM35501 and Corporate
Intangibles Research & Development Manual (CIRD) CIRD10000.
Costs such as Stamp Duty or legal and professional fees, for example architects’, engineers’ or
surveyors’ costs, incurred when acquiring or disposing of an asset should be treated as capital
expenditure.
Effective from 6 April 2018
12
Costs incurred in bringing a new asset into use, such as transporting it to its intended site or
erecting and installing it should also be capitalised as part of the cost of the asset. However the
cost of removing trading stock, stores, equipment or plant and machinery for the purpose of
relocation to new premises will generally be allowable in computing the taxable profits, where
the relocation is not part of a more general plan to expand the business.
For further guidance see BIM42530.
Professional fees, such as legal costs, survey fees, architects' fees, or quantity surveyors' fees,
may qualify for capital allowances as expenditure on the provision of plant or machinery if they
relate directly to the acquisition, transport and installation of the plant or machinery.
For further guidance see
CA20070
.
back to checklist
Legal and professional fees
5. Has any expenditure on an unsuccessful attempt to obtain an asset or other
advantage for the enduring benefit of the business been treated correctly?
Risk
When a business incurs expenditure on an unsuccessful attempt to obtain an asset or other
advantage that will be of enduring benefit to the business the expenditure is classified as capital
for tax purposes, just as it would have been if the attempt were successful.
Mitigation
Establish whether the business was involved in any unsuccessful attempt to obtain an asset or
other advantage for enduring benefit of the business during the period, and if so whether any
related legal and professional fees or other costs incurred are capital for tax purposes. These
costs are not allowable as revenue expenditure for tax purposes, except where the corporate
intangibles regime applies.
Explanation
Incidental expenditure incurred in trying to obtain something that will be of enduring benefit to
the business is normally not deductible for tax purposes, even if the attempt was unsuccessful.
The costs incurred in these circumstances are sometimes known as ‘abortive expenditure’.
A typical example of ‘obtaining something of enduring benefit’ is the acquisition of an asset, but
it may also mean trying to dispose of, or alter a burdensome asset, if the advantage delivered
by doing so is sufficiently enduring.
An example of abortive expenditure, depending on the nature of the trade, is the cost of an
unsuccessful planning application. If the application is successful the expenditure will be
capitalised. Where the application fails, and no asset is acquired or modified, the expenditure
will normally be charged to the profit and loss account, but should be treated as capital
expenditure for tax purposes.
For further guidance see BIM35325.
However where the abortive expenditure relates to an attempt to obtain an intangible asset by a
company, rather than a sole trader or partnership, the expenditure may be covered by the
corporate intangible assets regime, in which case the accounting treatment may be followed for
tax purposes.
For further guidance on the corporate intangible assets regime see BIM35501 and CIRD10000.
back to checklist
Effective from 6 April 2018
13
6. Has any expenditure incurred in connection with the capital structure of the
business been treated correctly?
Risk
Legal and professional fees incurred in connection with changes in how the ownership of a
business is structured are generally regarded as capital for tax purposes and not allowable as a
revenue deduction. For example, changing from a sole trader or partnership to a limited
company is a change in the capital structure of a business, as is a change in the membership of
a partnership.
Mitigation
Establish if any legal and professional fees have been incurred on issues relating to the
ownership or capital structure of the business, and ensure they have been treated correctly.
Explanation
Fees incurred in connection with the acquisition, alteration or enhancement of how the
ownership of a business is structured should generally be disallowed. This will include costs
incurred on items such as the following:
forming, varying or dissolving a partnership
the incorporation of a sole trader’s or a partnership’s business
a partnership becoming a limited liability partnership
defending a petition by shareholders to wind up a company
For further guidance see BIM46435.
back to checklist
7. Have any costs incurred on the recruitment of additional partners to a
partnership been treated correctly?
Risk
Costs incurred by a partnership on recruiting new partners will normally be allowable as
revenue expenditure. However, there are some circumstances in which these costs may be
viewed as capital expenditure for tax purposes and so would not be allowable as a revenue
deduction.
Mitigation
Where a partnership has incurred expenditure on the recruitment of a new partner or partners,
check the circumstances surrounding the recruitment. Examples of where it may be necessary
to consider whether the recruitment costs are capital expenditure include:
Where the admission of the partner has a fundamental impact on the structure of the firm’s
business. However this must involve more than a mere expansion of the business
Where the partner is recruited as part of the acquisition of a business
Where the new partner’s capital contribution is a material factor in the recruitment
In any of these circumstances however, whether or not the costs of recruitment are capital
expenditure will be a question of fact and degree
Explanation
In general, the cost of recruiting both equity and salaried partners to a partnership, whether they
are replacement or additional partners, is revenue expenditure. In most cases the firm is paying
to recruit a fee earner, who will generate profits for the firm, not to change the firm’s structure or
to obtain a capital contribution. It is only where there is a significant additional factor relevant to
Effective from 6 April 2018
14
the recruitment of a partner, such as those outlined above, where consideration may need to be
given as to whether the expenditure is capital and therefore not allowable as a revenue
deduction.
back to checklist
8. Have any costs incurred on training for the proprietor or a partner in the
business been treated correctly?
Risk
In some circumstances where costs are incurred on training and development for a proprietor or
partner acquiring new skills etc., these may be regarded as capital expenditure for tax purposes
and therefore not allowable as a revenue deduction.
Mitigation
Establish whether training and development undertaken by business proprietors or partners is
to update expertise which they already possess, or to give them new expertise, knowledge or
skills. In the latter case, if the training brings into existence an advantage of sufficiently enduring
benefit the expenditure incurred may be capital for tax purposes and if so not allowable as a
revenue deduction.
Explanation
In addition to the Capital v Revenue expenditure test, to be allowable the costs of training and
development for the proprietors or partners must also be incurred wholly and exclusively for the
purpose of the trade or profession at the time the training is undertaken. For example, where a
completely new specialisation or qualification is acquired as a result of the expenditure, it is
possible that the expenditure will not be wholly and exclusively for the purposes of the existing
trade. Consideration should therefore be given to the allowability of the expenditure on the basis
of the ‘wholly and exclusively’ test as well as Capital v Revenue grounds.
For further guidance see BIM42526 and BIM35660.
back to checklist
Finance costs
9. Where any financial payment includes a capital element has it been treated
correctly?
Risk
Payments made in respect of finance costs, for example a mortgage, hire purchase (HP)
agreement or leasing of assets used in the business may include both capital and revenue
elements. Following the appropriate accounting treatment for any particular financial obligation
will normally ensure that only the revenue element is allowed for tax purposes.
Mitigation
Review any expenditure charged to the profit and loss account in respect of finance payments,
such as for mortgage, HP or leasing costs. Identify the exact nature of any such finance
payments, and the accepted accounting treatment that is appropriate in respect of each of
them. Following the appropriate accounting treatment will normally produce the correct
allocation of expenditure to capital or revenue for tax purposes.
If any interest has been capitalised as part of the initial asset costs, relief may be available for
tax purposes by means of an adjustment in the tax computation.
Effective from 6 April 2018
15
For further guidance see BIM45665+ and BIM45351, and for companies Corporate Finance
Manual (CFM) CFM30150, CFM30170 and CFM33160.
back to checklist
10. Have all payments made by a proprietor or partnership to acquire a franchise
been treated correctly?
Risk
An initial payment made by a sole trader or partnership for the acquisition of a franchise is
usually capital expenditure, as are any related legal fees. This is the case whether the payment
is made in one sum or in instalments over a period of years.
Deductions should not be made on the basis that elements of the initial payment relate to
allowable revenue expenditure for specific services, unless they are clearly supported by both
the franchise agreement and the facts.
Mitigation
Ensure that all payments relating to an initial fee are treated as capital expenditure, and that
any deductions made in the accounts for amortisation are added back. Review legal and
professional fees and disallow any costs associated with the acquisition of the franchise.
Consider the franchise agreement and the facts before seeking any alternative deduction on the
basis that an element of the initial payment is deductible in respect of actual services provided.
Explanation
Generally the annual fees payable in respect of a franchise agreement will be an allowable
revenue expense. The initial payment however, together with any related legal fees, is usually
capital expenditure for tax purposes and not allowable as a revenue deduction. An initial fee for
the acquisition of a franchise will still be capital expenditure even if it is paid by instalments over
a number of years.
In some cases a deduction may be possible for an element of the initial payment on the basis
that it relates to the provision of services by the franchisor, but only if both of the following
conditions are met:
specific services are actually provided by the franchisor in accordance with the franchise
agreement
the agreement stipulates that these services are paid for by reference to the initial payment
and not the annual fees
and then only to the extent that the amount allocated to revenue expenditure is commensurate
with the services provided.
For companies, initial payments for franchises may be covered by the corporate intangible
assets regime, and accordingly their amortisation over the lifetime of the franchise agreement is
normally allowable.
For further guidance see BIM57600+.
For further guidance on the corporate intangible assets regime see BIM35501 and CIRD10000.
back to checklist
Effective from 6 April 2018
16
11. Are the arrangement fees for any long term security correctly spread over the
lifetime of the security in accordance with GAAP?
Risk
Fees paid for the arrangement of long term loans or securities will generally be spread over the
lifetime of the loan in accordance with generally accepted accounting practice.
For companies, generally accepted accounting practice for arrangement fees should be
followed for tax purposes. For sole traders or partnerships, relief may be claimed for incidental
costs of loan finance under S58 and S59 Income Tax (Trading and Other Income) Act 2005
(ITTOIA).
Mitigation
Review long term loans or securities to identify any arrangement or rearrangement fees. Where
any such fees are incurred by a company, ensure that generally accepted accounting practice is
followed for tax purposes. For sole traders or partnerships ensure that, if appropriate, relief is
claimed for such fees as incidental costs of loan finance.
Explanation
For companies, long term securities and expenses incurred in respect of them (such as bank
arrangement fees) are governed by specific rules on the taxation of loan relationships. These
rules specify that generally accepted accounting practice should be followed for tax purposes.
For further guidance see CFM30170 and CFM33060, and for special rules relating to loan
relationships between connected parties CFM35000.
Proprietors and partnerships (except partnerships including companies) are not covered by
these loan relationship rules. S58 and S59 ITTOIA however gives relief for certain incidental
costs of obtaining loan finance where these would otherwise be disallowed as incidental costs
of the capital transaction of obtaining finance.
For further guidance see BIM46430 and BIM45800+ and BIM45801 in particular for timing of
these deductions.
back to checklist
IT costs
12. Has the cost of any computer software acquired been treated correctly?
Risk
Where a lump sum payment is made for the acquisition of a software licence, it will be accepted
for tax purposes that the expenditure is revenue where the useful life of the software is
expected to be less than two years. Where the expected useful life of the software is longer the
correct tax treatment will depend on the circumstances, as set out in the explanation below.
Mitigation
Identify all payments for the acquisition of new software licences, and distinguish between
regular periodical payments and lump sum payments. For any lump sum payments establish
what the useful life of the software is expected to be for the business. For proprietors and
partnerships where the expenditure is capitalised and the expected useful life is more than two
years, any amortisation is not allowable as a revenue deduction, and a claim should be made
for capital allowances. For companies the appropriate tax treatment will depend on the exact
nature of the software involved.
Effective from 6 April 2018
17
Explanation
Most off-the-shelf computer software is now acquired under licence. If the licence is paid for by
regular periodical payments then these should be treated as revenue expenditure and normally
spread over the useful life of the software.
If a lump sum payment is made for the software licence, and it is evident that the useful life of
the software is greater than two years, consideration should be given to treating the payment as
capital expenditure.
For proprietors and partnerships any amortisation of capital expenditure in these circumstances
should be disallowed, and a claim should be made for capital allowances. The same treatment
will apply to companies if the software acquired is in the nature of an operating system, or
similar system designed to bring a computer system into its intended use within the business,
which may be regarded as a tangible asset.
For further guidance see BIM35801+ and for further guidance on capital allowances see
CA11110+ and CA23081.
However where expenditure may be regarded as an intangible asset, then for companies such
expenditure may fall within the corporate intangible assets regime. In these circumstances any
amortisation of the capitalised expenditure may be allowed for tax purposes, or alternatively the
company may elect to exclude the expenditure from the intangible assets regime and claim
capital allowances instead.
For further guidance see CA11110+ and CIRD25140, and in relation to capital allowances
elections see CIRD25180 and CIRD25190.
back to checklist
13. Has any expenditure incurred on website development been allocated
correctly?
Risk
The appropriate treatment of expenditure on developing a website is dependent on the nature of
the expenditure and the function the website performs for the business. If the costs incurred
create an enduring asset, consideration should be given to treating the expenditure as capital. If
such costs are not identified, there is a risk that these may be incorrectly claimed as revenue
expenditure.
Mitigation
Review all payments relating to the business website(s), bearing in mind that these may be
posted to marketing, advertising or IT costs. Where these include any expenditure on website
development, consider whether this creates an enduring asset and should be treated as capital
expenditure.
Explanation
Even though expenditure on website development may be shown in the accounts as
advertising, marketing or IT costs, this does not necessarily mean that it is allowable as revenue
expenditure. In order to identify the correct tax treatment the exact nature of the website costs
should be examined.
Application and infrastructure costs, including domain name, hardware and operating software
that relates to the functionality of the website should normally be treated as capital expenditure.
Design and content development costs should normally be treated as capital expenditure to the
extent that an enduring asset is created. One such indication may be an expectation that future
Effective from 6 April 2018
18
revenues less attributable costs to be generated by the website will be no less than the amounts
capitalised.
A website that will directly generate sales, subscriptions, advertising or other income will
normally be regarded as creating an enduring asset and consideration should be given to
treating the costs of developing, designing and publishing the website as capital expenditure.
Whilst a revenue deduction would not therefore be allowable, this capital expenditure will
generally qualify as expenditure on plant and machinery for capital allowances purposes.
Expenditure on initial research and planning, prior to deciding to proceed with development, is
normally allowable as revenue expenditure.
The cost of maintaining or updating a website (in relation to price changes, for example) should
be treated as revenue expenditure.
For further guidance see
BIM35800
,
BIM35300
and
CIRD25145
.
back to checklist
Corporate intangible assets
14. Has the correct tax treatment been followed for any amortisation of goodwill
acquired by a company?
Risk
The goodwill of a business carried on by a company or a related party at any time before 1 April
2002 does not qualify for inclusion within the corporate intangible assets regime. Relief is
therefore not available for amortisation of this goodwill until it is acquired by an unrelated
company after that date.
Mitigation
Where a company’s accounts and tax computations include any deductions in respect of
goodwill, consider the history of the goodwill and its acquisition by the company. If the goodwill
was that of a business carried on by any party before 1 April 2002 then it does not fall within the
corporate intangible assets regime until it has been acquired by an unrelated party, and until
that time any amortisation of it should be disallowed in computing taxable profits.
If a company acquires the goodwill from a related individual or firm ("goodwill on incorporation")
on or after 3 December 2014 then the amortisation should also be disallowed, even if the
business started after 1 April 2002. Any part of the goodwill amortisation that relates to goodwill
previously purchased by the individual or firm from an unrelated party may still be an allowable
deduction.
All amortisation for goodwill acquired on or after 8 July 2015 should be disallowed regardless of
when the goodwill was created and from which party it was acquired.
The restrictions introduced in 2014 and 2015 include customer related intangible assets such
as; customer information, customer relationships and unregistered marks, signs and logos. The
restriction applies to amortisation and fixed rate deductions.
Explanation
The corporate intangible assets regime affects assets created or acquired from an unrelated
party on or after 1 April 2002. UK accounting standards consider that goodwill and intangible
assets have a finite useful life and so should be amortised on a systematic basis over those
lives. For assets falling within the corporate intangible assets regime the tax treatment generally
followed that accounting treatment and allowed tax relief for the amortisation. Changes to the
Effective from 6 April 2018
19
regime made in 2014 and 2015 now mean that the tax deductions for goodwill amortisation and
fixed rate deductions are more limited.
As an alternative to following the accounting treatment a company may elect for deductions at a
fixed rate of 4 per cent per year of the tax cost of a particular intangible asset. However, the
2014 and 2015 goodwill restrictions also restrict fixed rate deductions.
For further guidance see CIRD11505+, CIRD11625+ and CIRD48290, and for guidance on the
fixed rate of deductions see CIRD12905+.
For further guidance on the definition of ’related party’ see CIRD45105.
For guidance on the changes to the treatment of goodwill and 'relevant assets' related to
goodwill see CIRD44001+.
back to checklist
15. Has the correct tax treatment been followed for the transfer or licencing of an
asset within the corporate intangible assets regime either to or from a related
party?
Risk
Where there is a transfer of an asset between related parties, and the asset is a chargeable
intangible asset in the hands of at least one of those parties, the transfer is generally deemed to
have taken place at market value for both parties. There is also a valuation rule that applies to
the grant of a licence between related parties on or after 22 November 2017. If the existence of
a related party transaction of this kind is not identified then the wrong amount may be taken into
account for tax purposes.
Mitigation
Establish whether any disposals or acquisitions by the company to or from a related party
during the accounting period were of assets within the corporate intangible assets regime. For
any such transaction, ensure that the amount brought into account for tax purposes reflects the
market value of the asset at the date of the transfer.
Explanation
The corporate intangible assets regime affects assets created or acquired on or after 1 April
2002. In general, the tax rules relating to such assets follow the accounting treatment so if
expenditure on qualifying assets is written off there is usually a corresponding tax deduction.
Similarly, the taxation of disposals of qualifying intangible assets will follow the accepted
accounting treatment.
However when a company transfers an asset within the regime to a related party, or acquires
such an asset from a related party, the transaction is deemed to have taken place at market
value in most cases. Rules were also introduced from 22 November 2017 to remove any tax
advantages where licences are granted between related parties. Consequently, for tax
purposes, for an acquisition, including a licence arrangement, from a related party any
amortisation charged should therefore reflect the market value or arms-length price of the
asset.. Similarly for a disposal or grant of a licence the higher of arms-length price or market
value, rather than any other value, should be treated as the disposal proceeds for tax purposes.
The notion of a ‘related party’ is similar to that of a 'connected person’ used in other areas of
specific tax legislation, but is modified in a number of respects to reflect the particular
requirements of the corporate intangible assets regime. For further guidance on the definition of
‘related party’ see CIRD45105.
For other relevant guidance see
CIRD45010+
and
CIRD11625+
.
For guidance on the treatment
of related party licences see CIRD48350.
Effective from 6 April 2018
20
back to checklist
General
16. Has depreciation been added back to the accounts profit in the tax
computation?
Risk
Depreciation of capital items is generally not an allowable expense for tax purposes, except
where the asset is within the corporate intangible assets regime.
There is a risk that the depreciation may not be added back to profit in the tax computation
where appropriate. Depreciation of capital items should be added back in the computation even
where capital allowances have not been claimed.
Mitigation
Ensure that depreciation of capital items is added back to the profit in the tax computation
where appropriate.
Explanation
For companies the amortisation of goodwill and other fixed intangible assets is allowable in
certain circumstances. Further information concerning risks associated with corporate intangible
assets can be found at Q14 and Q15.
For further guidance see BIM42051 and BIM35501.
In addition, any profit or loss on disposal should be deducted or added back in the computation
as appropriate.
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