CIRD11678 - Intangible assets within FA02/SCH29: time test: general conditions: time when asset created or acquired: whether expenditure on creation or on enhancement of asset

Practical issues

General

In applying the time test to goodwill and other internally generated assets normally built up out of revenue expenditure, special rules (see CIRD11675) avoid the need to determine to what extent the realisation proceeds of such an asset, partly created before and partly after 1 April 2002, fall within Schedule 29.

But in the case of other internally generated assets there is no special rule and it is a question of fact whether expenditure incurred on or after 1 April 2002 is on the creation of a new asset or the enhancement of an existing asset.

Internal software development expenditure

It may be difficult to decide whether expenditure on such software incurred soon after 1 April 2002 constitutes:

• an enhancement of an existing asset created before 1 April 2002 (which would be not allowable under Schedule 29), or
• creation of a new asset after 31 March 2002 (and so within Schedule 29), or
• part of a continuous process of creating an asset which is not yet complete - in which case the expenditure after 31 March 2002 will again fall with Schedule 29 (under the general rule described in CIRD11670).

Where the company has written off the expenditure as incurred this issue is likely to have significant practical consequences only if expenditure incurred on or after 1 April 2002 regarded as enhancing an existing asset would be capital on general tax principles.

Cases where expenditure on enhancing an existing asset (rather than creating a new one) can be viewed as capital are only likely to arise where it has been accepted that the earlier creation of the system was capital, see BIM35845. Cases of capital enhancement expenditure are therefore likely to be unusual.