Thinking of spending big on a new website for your business? If so, there are some important tax points to consider.
A website can be an amazing revenue-generating ‘asset’ for your business. As a result, the tax people can view the money you spend on them in two different ways. This is important to note for both your own book-keeping, and how you will get tax relief on those costs.
The HM Revenue & Customs viewpoint: a shop window
The HMRC considers creating and updating your website as two different activities.
– Creating your shop window
HMRC can see the costs incurred on creating your website as similar to that of a shop window.
When constructing a shop window that will last, say, more than two years you’ve created an ‘asset’. This asset sits on your company ‘Balance Sheet’. The Balance Sheet is a statement of your business’ financial position, so shows things like what it owns, and what it owes.
For accounting purposes, websites that appear on your Balance Sheet are slowly written off over time. This means the cost does not come off your profits all in one go. This is what is known as ‘capital expenditure’.
You spend £15,000 on developing a new webstore that will last a few years. So, you have created an asset. This will then go on as a Balance Sheet ‘Asset’ item. You might choose to create a new account for ‘Website Build’ or similar, or even put it in your ‘Plant and Machinery’ account.
– Updating your shop window
After running your website for a while, you might need to pay for updates to the products and images, or to add more functionality. This is known as a ‘revenue’ cost, and goes down as a business expense similar to other running costs.
Any ongoing monthly or annual maintenance and hosting would also be classed as revenue costs.
You might put these update costs to an item in your book-keeping called ‘website maintenance’ or similar. This will show on your ‘Profit & Loss’ report when looking at what profits the business has made this year.
In terms of the shop window, HMRC say this is similar to ‘changing the display from time to time’.
Tax relief on website costs
In many instances, the actual tax result of these two different methods won’t be too different. You will normally get tax relief for the money you’ve spent, as the cost will come off your profits before you are taxed. It’s just done in two different ways.
- If you’ve created an asset, this expenditure normally gets tax relief through the ‘Capital Allowances’ rules. Under these rules, your website will often count as ‘Plant and Machinery’. So, you will be able to claim 100% deduction in the year you spend the money.
- For the other costs such as maintenance, updates and hosting, you will also get instant tax relief under the normal rules for business profits. This means you can claim 100% relief for the costs in the year you spend the money.
As you can see, the outcome is usually the same, but there are different places in your accounts and tax returns to claim these costs.
Super Deduction and websites
One area where there could be a difference, is the new ‘Super Deduction’ announced the in Budget this year, and temporarily available to limited companies only.
When your website costs end up on the Balance Sheet as described above, they may qualify for this new 130% tax relief if created between 1st April 2021 and 31st March 2023. This tax relief means that for every £1 you spend, you save 25p in tax.
Usual disclaimer at this point! There are some scenarios where the above isn’t the case. We are talking about the majority of simple cases in this article. As always, you should seek professional advice on your own situation.
Research and Development tax credits
Finally, it’s worth saying that if you are developing a website as part of a new Research and Development project, any Research and Development Tax Credits position should be considered. This is a specialist area and outside the scope of this article, but do seek advice if this sounds like you!
Need a little extra help with accounting for website costs?
Ask your accountant or book a consultation with us to help you make the most of tax breaks for new websites. We offer a paid 1-hour, 1-2-1 consultation so you can ask simple questions of an accountant. You don’t have to become a client, so it’s a great way for you to get the help you need, when you need it.