Software - asset or expense?

Mandrake · Apr 26, 2007

I have what is probably a very, very basic question about my tax accounting. I am a sole-trader.

I have purchased a fairly expensive piece of software that is vital to my business. It cost somewhere around UKP 700.

For my company's accounts and my tax return, can I count this as a simple "expense" (i.e. cost of running the business), so I can offset 100% of its cost against my profit in the tax year I purchased it? Or do I have to treat it as an asset? If it's an asset, do I have to depreciate it over a number of years, etc? I'm simply trying to keep my tax setup as simple as I possibly can.

Sorry for the very basic question, and thanks in advance for any help.

Alpha · Apr 26, 2007

Really depends upon the nature of the purchase.

If it is a one off purchase then I would say that it is an asset and should therfore be depreciated in your accounts and be subject to capital allowances in the tax computation.

If it was licensed (i.e. pay every month/year) then it would be classified as an expense.

Dawg · Apr 26, 2007

It's an expense. It has no resale value, (you probably are not allowed to resell it per the EULA), and thus no value as an asset on your Balance Sheet.

Alpha · Apr 26, 2007

Dawg said:
It's an expense. It has no resale value, (you probably are not allowed to resell it per the EULA), and thus no value as an asset on your Balance Sheet.

It still has a usable life of greater than one year and therefore cannot be an expense...it is an asset.

Philip Hoyle · Apr 26, 2007

According to HMRC business income manual, software with a life of two years is NOT an asset, but an expense to be written off against profits according to its useful life. So if you bought a piece of software that only lasted a year (say payroll which needs updating annually), you spread the cost over the year and claim whatever proportion falls into your relevant accounting years. If you software will last more than two years, it is an asset and must be treated as plant, i.e. claim capital allowances according to the prevailing capital allowance rules.

Dawg · Apr 26, 2007

Could I claim that a bit of software that has automatic updates, (MS Office, Photoshop, Acrobat), is a new bit of software each time and thus an expense?

Also: Part of the cost of the software is the update service, and as a service this is a revenue expense?

Alpha · Apr 26, 2007

Dawg said:
Could I claim that a bit of software that has automatic updates, (MS Office, Photoshop, Acrobat), is a new bit of software each time and thus an expense?

Also: Part of the cost of the software is the update service, and as a service this is a revenue expense?

Yes if you actually pay for the updates in addition eg every year then they could be put through as revenue.

No if you want to claim that part of the software cost includes those updates unless specifically designated as costs in the license agreement.

Alpha · Apr 26, 2007

According to the business income manual the revenue will accept that software with a life of less than two years is a revenue expense however there isn't much in the way of software that will have only a two year life span.

lyonssolutions · Apr 26, 2007

I hope I'm not being stupid. What about software's developed in house?

KM-Tiger · Apr 26, 2007

Alpha said:
................ however there isn't much in the way of software that will have only a two year life span.

Well I can think of two good examples:-

Any payroll software that is effectively obsolete unless updated due to budget changes etc. Arguably this is maintaining an asset, rather than replacement due to obsolescence, but as I say it's arguable.

Autocad. The vendors of this (expensive) software have a policy of screwing their customers by not maintaining backwards file compatibility when updating versions, which is at least once every 2 years. You have a very short time window to buy an upgrade, after that you have to buy a new product. Effectively your 'asset' has become obsolete.

Dawg · Apr 26, 2007

There is also, (forgive me Linuxistas), software such as XP, Vista etc.which would be obsolete unless updated very frequently: a liability rather than an asset.
Why shouldn't the original cost be deemed to have a prepaid portion for the updates, said portion deemed immaterial to designate a prepayment on the BS, and thus the whole thing a revenue charge?
It is really a few quid, and a much easier way to deal with it.
(Tags: red tape, Gordon Brown, political promises, snake oil.)

Alpha · Apr 27, 2007

Kent Manufacturer said:
Well I can think of two good examples:-

Any payroll software that is effectively obsolete unless updated due to budget changes etc. Arguably this is maintaining an asset, rather than replacement due to obsolescence, but as I say it's arguable.

Autocad. The vendors of this (expensive) software have a policy of screwing their customers by not maintaining backwards file compatibility when updating versions, which is at least once every 2 years. You have a very short time window to buy an upgrade, after that you have to buy a new product. Effectively your 'asset' has become obsolete.

Well in the case of most payroll packages they are either licensed(you pay every year and get updates/upgrades eg moneysoft) or will last 5 years but you have to pay for support eg Sage (In this case the software is arguably an asset and the support costs revenue).

Don't know anything about autocad but again will an upgrade render the software useless? or can you still use it but not get support ala Sage where the software life is 5 years and then it becomes unsupported(however it is by then very stable and you really don't need support anyway)

KM-Tiger · Apr 27, 2007

Alpha said:
Don't know anything about autocad but again will an upgrade render the software useless? or can you still use it but not get support ala Sage where the software life is 5 years and then it becomes unsupported(however it is by then very stable and you really don't need support anyway)

Not totally useless, but very nearly. What I should have said is that it does not maintain forward compatibility, ie if we have the old version we cannot read a file produced by the new version. In a world where exchange of files with clients is a vital activity, we are very much forced to stay up to date, despite the old version being able to function in isolation.

We're down to some very fine detail here. As a fully paid up member of the "bang it on the P&L" club, it's always interesting to see the other point of view!

Mandrake · Apr 30, 2007

OK, thanks for all your feedback. At least it looks like I needn't have worried about this being an over-simple question!

Uddie · Mar 9, 2012

Sorry to resurrect this topic, but I have a similar queery that I am hoping you can clarify a little better for me.

Im a new business registered as a sole trader. I have a small turnover as I only do it in my spare time a homer if you must. In my first year my earnings are only a little over what my software overhead cost. 3DS max, and Adobe Creative Suite. Total software cost £5000. That is pretty much my only overheads as I already had equipment etc. Can I offset my additional earnings against this. I would still turn a profit but not a huge amount, around £1200.

My argument is that yes I can call it an expense as:

1) The software cannot be sold on due to both Autodesks and Adobes licensing agreements
2) I will likely need to upgrade in 2 years time to keep up with the technology. Yearly cycle is not cost effective, 2 is more reasonable.

Any help or advice you could give me would be great, its going to be my first tax return. Trying to get everything in order.

Cheers

Scalloway · Mar 9, 2012

You can put your software through your books as an asset then claim 100% Annual Investment Allowance on your tax return. For 2011/12 AIA will be a maximum of £100,000 so for your size of business the difference is academic.

andygambles · Mar 9, 2012

One of the main reasons I have moved to pretty much leasing everything including software wherever possible.

Just stick it on the P&L

.

Uddie · Mar 9, 2012

Thanks for the responses guys. aia looks like a decent way forward from what I have read. this tax stuff can be quite overwhelming with so many routes to the same neopoint with same outcome but so much red tape surrounding each part lol.

Sorry for my newness but what's "p&l"?

Scalloway · Mar 10, 2012

The Profit and loss account list all your sales and revenue expenditure for a defined period and shows if you have made a profit or loss for that period.

Cookie Consent

Essential

Analytics

Marketing

Software - asset or expense?

Dawg

Dawg

lyonssolutions

Dawg