Treatment of Purchased Software for tax purposes

[Altwood]

My question is in relation to the treatment of purchased software in the accounts and how that might impact corporation tax.
The company bought the said software outright, including the IP and source code, and that software is now used as the backbone for our service offering.

My accountants have designated the software as an intangible asset and intend to amortise the cost over 10 years. However, when completing the tax return they have added the amortisation back so it has no impact on our corporation tax liability, claiming ths is due to it being an intangible asset.

My questions are:

1. Can anyone confirm whether this expenditure should be treated as capital, like plant and machinery, and therefore subject to capital allowances, or as an intangible fixed asset?
2. Depending on which of the treatments in question 1 is correct, what is the treatment for corporation tax purposes?

Thanks

 

[Paul Kelly ICHYB]

I am sure that our accounting friends will come in and correct me, but if you have paid for the software, it is a business cost and can be used in that years accounts (hence contributing to the reduction of corporation tax).

 

[Galactus2024]

The depreciation or amortisation in the accounts is NOT reflected in the corporation tax but is done on a fixed percentage (not sure what is current) as a reducing balance so in theory the software will never be fully amortised for tax purposes and will remain way past being written off in the companies books.

 

[UK Contractor Accountant]

1. Can anyone confirm whether this expenditure should be treated as capital, like plant and machinery, and therefore subject to capital allowances, or as an intangible fixed asset?
2. Depending on which of the treatments in question 1 is correct, what is the treatment for corporation tax purposes?

Me thinks you need to change Accountants.

This comes under the Intangible Asset regime where corporation tax relief follows the amortisation write off in the company's accounts.

So in your case 1/10 of the costs is tax deductible each accounting period.

The corporation tax regime includes specific rules regarding the tax treatment of intangible assets, referred to as the ‘intangible assets regime’, which can be found in Part 8 of CTA 2009.

It should also be noted that software is excluded from the intangible assets regime2 if:

• it is treated for accounting purposes as part of the related hardware; or
• the company makes an election under s815 CTA 2009 to exclude it from the regime.

Where any of the above applies to exclude an asset from the intangible assets regime, it may qualify for capital allowances instead.

It may be beneficial to make an election under s815 CTA 2009 if claiming capital allowances would give relief faster than deducting the amortisation or impairment costs recognised in the accounts (for example, because the Annual Investment Allowance (AIA) or full expensing will cover the expenditure in full or the intangible asset will be amortised over a long period

 

[Altwood]

Thank you for your responses. It is as I suspected so it is useful to get a second opinion.

 

[syedsheraz]

My question is in relation to the treatment of purchased software in the accounts and how that might impact corporation tax.
The company bought the said software outright, including the IP and source code, and that software is now used as the backbone for our service offering.

My accountants have designated the software as an intangible asset and intend to amortise the cost over 10 years. However, when completing the tax return they have added the amortisation back so it has no impact on our corporation tax liability, claiming ths is due to it being an intangible asset.

My questions are:

1. Can anyone confirm whether this expenditure should be treated as capital, like plant and machinery, and therefore subject to capital allowances, or as an intangible fixed asset?
2. Depending on which of the treatments in question 1 is correct, what is the treatment for corporation tax purposes?

Thanks

This is a common area of confusion. Where software is purchased outright including IP and source code, it will usually fall under the corporate intangibles regime rather than plant and machinery. In that case, the accounting amortisation is added back in the tax computation, with corporation tax relief instead given under the intangible assets rules.


By contrast, “off-the-shelf” or purely operational software can often qualify for capital allowances. Based on your description, the intangible asset treatment sounds appropriate, but it would be sensible to ask your accountant to confirm whether any relief is available under the intangibles regime and why capital allowances were ruled out.

 

[macScot]

I think If this software is old e.g. pre-2002 then it may affect how you can claim if in the tax return e.g. you may not be able to use amortisation in the tax calculation and therefore have to add it back, however you could elect to use it in your capital allowances calculation.