There’s an interesting article in the Peterborough Telegraph on how you should account for any website development costs in your business accounts so they are correctly taxed. To date a new website has just been perceived as another form of advertising/marketing or IT cost to a business like any other costs such as newspaper adverts or servers, wheres now the HMRC are seeing them as a whole new entity.

They’ve realised the potential of websites generating significant income for a business, and therefore this income-generation potential of a website is now being considered not just the function of the website which will then determine whether they are treated as revenue expenditure in your profit-and-loss, or capital expenditure in a balance sheet.

In reality this probably won’t effect most small businesses with straight forward website design costs, and if it does then it’s something your accountant can help clarify, however without getting bogged down with the detail of this it’s critical to understand the gist of this in case it does affect you now or in the future and any HMRC queries.

So here’s 3 bottom-line steps to get this sorted:

1. Understand the difference between the two types of accounting. The first is ‘capital expenditure’, which is where you’re spending on something that has value now but can continue with a form of value into the future, hopefully going upwards but possibly downwards. It’s like buying a car – you’ll still have it tomorrow and it will be worth something if you sold it, probably less over time although can be more if it’s say a classic car.

In the accountancy world you deal with these separately, and then ‘tweak’ your main businesses’ profit-and-loss figures to reflect these costs and changes, which can include 100% capital allowances in the year of expenditure – this can then require a separate balance sheet to account and capitalise/reduce these costs over time.

The second is ‘revenue expenditure’, which is a more bog-standard costs of doing business which is then taken away from any income to produce actual remaining profit in any one year. Sort of like putting the petrol in your new car, once it’s used it has no value, and it’s simply a ‘cost’ of being able to use your ‘asset’ car. So these are just accounted for in your normal profit-and-loss accounts.

2. Get your website development costs split between these two types of costs. So the capital-expenditure costs are now ‘enduring assets’ and apparently your main website costs as HMRC perceive your website as an asset that not only keeps its value, but can increase in value as it grows and develops income for the business.
These can include the domain name, hosting, software, infrastructure, hardware, design, publishing, designing, and content-development costs. A crude benchmark is if the net income expected from the website (like direct sales, subscriptions, advertising or other income) is higher than your design costs, then it normally falls into this category.

The other type is when things are simply changed through say a new website refresh, but the basic ‘asset’ is already there, or where there is just running and maintenance costs. These are your normal ‘revenue expenditure’ costs that you will take off your business income in that year.

3. Decide if these two costs need to be accounted for in the two types of accounting, which may affect the tax you pay now and in the future. The best way is to then involve an accountant or bookkeeper right at the beginning rather than passing the invoices afterwards, as they can help confirm things correctly. Generally speaking this only becomes an issue though with larger companies and total design-costs of over £1,000 ish or where the website plays a significant part of the business income, for example if there are a lot of online sales. Also, even though you technically need to account for these two ways, it can have little net effect on taxes paid now, with the effect of say capital allowances and being able to benefit from full tax relief on these costs anyway in the year of expenditure.