BIM35805 - Capital/revenue divide: computer software: purchased before 10 March 1992

Capital expenditure qualifies for capital allowances: revenue expenditure allowed as incurred

Expenditure on computer software incurred before 10 March 1992 should normally be dealt with as set out in the paragraphs below. If in any particular case you do not consider that this provides a reasonable result, guidance should be sought from CT&VAT (Technical).

Software acquired with associated hardware or acquired separately - capital or revenue expenditure?

When software is acquired along with the associated hardware (and the expenditure on acquisition of the system is capital expenditure) you should normally accept that the system as a whole qualifies for capital allowances as plant. But when software is acquired separately, you should consider whether the expenditure is revenue or capital. If the expected life of the software is sufficiently short for the expenditure to be regarded as revenue, the timing of the deduction for tax purposes will normally follow correct accounting principles (see BIM31090 onwards). Whether or not the cost of software can be regarded as revenue expenditure will depend on the circumstances of individual cases, but an expected life of two years or less may be taken as a broad guideline for treating the expenditure as revenue.

Capital expenditure

If the expenditure is capital, it will usually be regarded as qualifying for capital allowances as plant, provided that the software is sufficiently durable to satisfy the ’permanent employment in the trade' test to be regarded as plant. It will satisfy that test if it has an expected life of more than two years. Alternatively, if the expenditure has been amortised in the accounts over a period related to the expected life of the software, this treatment should normally be followed for tax purposes.

Payments for licence to use software

Regular payments for a licence to use software will normally be revenue expenditure, allowable as they are incurred. A lump sum payment for a licence will not, however, necessarily be capital. You should consider the terms of the agreement and the expected life of the software. Because the software will not belong to the licensee, capital allowances are not available for this type of expenditure.