Do software upgrades mean that licence purchases count as opex rather than capex?

[John Paulson]

This is from an article from the website of the Association of Taxation Technicians (ATT):

If a lump sum payment is made for a licence it will be necessary to consider whether the licence will have a sufficiently enduring nature to be classed as a capital asset. This requires consideration of both the function of the software and how long it will last. As noted above, HMRC will generally accept that a payment is revenue in nature if the useful life of the software is expected to be less than two years. However, they will not accept that software has a limited life solely because new updated versions are released at intervals of less than two years – the question is whether the business actually trades up to the new version at sufficiently short intervals.

To me, this means that if I buy a licence for a software application, if I keep on upgrading the software application in line with the release cycle, HMRC interprets that licence as being a revenue expense, or opex, rather than a capital expense, or capex. Have I got that right?

 

[fisicx]

That’s correct. A bit like insurance or a utility bill.

Remember that you don’t own the software. You just pay for a license to use that software.

 

[John Paulson]

That’s correct. A bit like insurance or a utility bill.

Remember that you don’t own the software. You just pay for a license to use that software.

Ah I see, so this is more relevant in the world of SaaS, where you just lease the software essentially.

Whereas if you pay a lump sum for some software, you're not expected to update it anytime soon.

 

[fisicx]

Whereas if you pay a lump sum for some software, you're not expected to update it anytime soon.

But it's still just a license you pay for. You never own the software. A license is not capex.

 

[numbersrule]

My geotechnical company uses software for assessing slope stability and having paid a few grand for a Perpetual Licence we pay an annual Maintenance Fee, so the value of the software is maintained. As I anticipated retirement 10 years after the original purchase I recorded it as an Intangible Asset with a straight line 10% depreciation.

This method is acceptable following revised regulation of Intangible Assets a couple of years or so back.