Lambert Chapman LLP's Sarah Brewer looks at Website costs and asks Capital or Revenue expenditure?

Websites are used for a variety of business purposes, including promotion and advertising of products and services, taking orders for products or services and selling access to information that is contained on the Website. Many companies have websites these days and the costs incurred in developing a website are significant.

So, should these costs be included as an expense in the profit and loss account or capitalised as a tangible fixed asset and depreciated?

UITF abstract 29 attempts to answer this question.

Under the extract the costs of developing a website are split into the following categories:

Planning costs – these include the cost of feasibility studies, identifying appropriate hardware and selecting suppliers and consultants.

Application and infrastructure development costs – these include the cost of obtaining and registering a domain name, buying and developing of hardware and software.

Design costs – expenditure to develop the design and appearance of the website

Content costs – expenditure incurred on preparing, accumulating and posting the website content.

In deciding whether these costs are capital or revenue expenditure we must ask the question:

‘Does the expenditure give rise to a future economic benefit?’

Of these costs planning costs should not be capitalised and should be charged to the profit and loss account as incurred. This is because planning costs do not in themselves give rise to a future economic benefit.

The remaining costs could potentially give rise to an asset if the future economic benefit is sufficiently certain. However there is often substantial uncertainty regarding the viability, useful economic life and value of a website. As such the UITF took the view that you could only be certain that a website would create future economic benefits in excess of the amounts capitalised if the website is capable of generating revenues directly. I.e. orders could be placed on the website. If this is not the case the expenditure should be treated as revenue and charged to the profit and loss account.

Application for small companies

Companies applying the FRSSE are exempt from this abstract.

The rules for a FRSSE company are simply:

Website planning costs should be charged to the profit and loss account as incurred.

All other website costs listed above should be capitalised as a tangible fixed asset under FRS 15.

If you would like to discuss this further with Sarah please contact her on 01376 326266 or alternatively refer to your local Lambert Chapman LLP contact.

Date:2 June 2009

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