Recent events in the ecommerce world i.e. websites are making lots more money, have led HMRC to reconsider their taxation brackets and if you’re not sure whether your design changes and tweaks fall within capital-expenditure or revenue-expenditure then read on for more info.
New tax guidelines have helped to segregate web-generated finances from the usual marketing and IT channels and are intended to bring them into line with a more appropriate bracket of taxation.
Pure and simple functionality was how a website used to be recognised by HMRC however, thanks to a much more savvy perception you’ll now discover that costs incurred through redesigns, hosting and development of content will also be taken into consideration.
Website owners now need to be aware of the difference between what goes into the profit and loss column and what just goes onto the business balance sheet.
Although small businesses, spending less than £1000 on web development costs, shouldn’t really have to worry too much about heavy taxation issues it’s still good practice to understand the basic differences between capital-expenditure and revenue-expenditure.
Below is a brief guide to the different expenditures mentioned above and if you’ve got some web developments to make or you’re just interested in finding out more, then chat to your accountant or bookkeeper to ensure you’re filling out tax forms in-line with the new guidelines.
This is when you’re purchasing something of value that will retain its value but probably hasn’t been bought to create actual profits. For example: a lap-top computer. The computer will still retain its value but is only used for functionality as opposed to generating an extra income purely from itself. In the future the actual value of the lap-top will no doubt decrease and these costs and changes would then be added to your business’s general balance sheet.
These are considered to be costs which need to be taken away from your general income in order to calculate your final year’s profit margins. For example: using electricity to power your lap-top computer. The electricity bill will show that costs have been incurred however, once the juice has been used it doesn’t have any remaining value. Revenue-expenditure costs should be accounted for in general profit and loss columns on your end of year tax sheet.
How to divide your web development costs
Once you’ve identified your website’s development costs i.e. skin designs, content management, hardware, software packages etc. you’ll be able to calculate whether your site’s projected net income through sales, marketing, subscriptions etc. is higher than the financial outlay afforded to the developments highlighted above. If it is then this will fall into the capital-expenditure bracket on the tax sheet and should be considered as such.
However, if you’re just making minor tweaks and just refreshing your site then the chances are that you won’t be contributing any more additional value to your basic asset i.e. your website. This is when you get to fill in the revenue-expenditure section of the tax form which also should include costs for running, up-keep and general maintenance.
As mentioned, any website owners who aren’t spending considerable sums of cash on redevelopments needn’t worry too much about the new HMRC guidelines. NB: Best practice is always to talk to your accountant or a professional bookkeeper to ensure you’re on the right track.
Able Accountants are a local firm of accountants with a regular blog on accounting and financial tips and tricks.