Smart Ways to Account for Website Costs.

Watch our Video on Website Costs on our YouTube Channel.

1. Capitalising vs Expensing

Before we explore the different ways of treating website costs, let’s see the difference between expensing and capitalising costs.

1.1 Expensing a Cost

Imagine this: you've spent £40 on a new set of propellers for your drone. This purchase is a classic example of an 'expense' that maintains the usability of the asset. Maintenance costs are always seen as part of the day-to-day operations of the business. When you expense a cost, you directly reduce your profit for the year by the amount of the expense, in our case £40. These type of costs are also known as revenue expenditures.

1.2 Capitalising a Cost

Now, consider a different scenario: you've decided to invest £5,000 in a high-tech drone with advanced mapping capabilities that you will be using for years to come. In accounting terms, you would 'capitalise' the cost of this drone. However, you wouldn’t (or you shouldn’t) expense £5,000 against your profits in the year you purchased the drone. Instead, you will spread the £5,000 over its useful life, let’s say 5 years, deducting from your profits £1,000 each year.

That's the big picture of capitalising vs. expensing. Remember that you can only expense expenditure that are wholly and exclusively related to your business. You can see a detailed list of them at the following link:

https://www.gov.uk/expenses-if-youre-self-employed

2. Website Costs

In the previous section I gave an example with propellers and a high-tech drone which are both tangible assets. Something you can feel and touch. However, you can’t touch a website. Trust me I’ve tried. That’s why in accounting terms, a website is treated as intangible asset.

The recognition criteria for website costs spans across a few different standards (IAS38, IAS16, SIC-32 and others), so without going into TOO MUCH detail, let’s go through some examples of cost that you can choose to either expense or capitalise.

2.1 Website Costs – Expense

Generally, all expenditures associated with planning, advertising, and training cannot be capitalised and need to be expensed. For example, paying for online tools to research your target market or SEO trends (planning), Social Media/Google Ads (advertising), or fees for drone training or specialised courses to teach yourself a skill (training). These are no-no, and should be expensed, in order to keep HMRC happy.

2.1 Website Costs – Capitalise

Capitalising website costs requires more professional judgement and it needs to answer the criteria for IAS 38 Intangible Assets (which is not very fun to read, haha), but in GENERAL:

Website development: If you are paying a professional to design your website, which is expected to generate future economic benefits, costs such as coding, designing the interface, setting up a secure payment system, and testing can be capitalised

Purchase of Domain Name: The purchase of a unique domain name for a period longer than one year can be capitalised as an intangible asset.

Costs for Creating Unique Content: These could be costs associated with the creation of video tutorials, guides, blogs, or other types of content for the website, which will be used to generate revenue over time.

Training Courses: If you pay for the creation of a unique, high-quality video tutorial series about drone flying, maintenance, or tips and tricks (which is when you educate your audience, not when you are paying for courses educating yourself as referenced in Section 2.1) , this could potentially be capitalised. The video series will be a long-term asset attracting customers to your website.

This list is not extensive, but it’s important to realise that capitalising intangible costs is subject to a strict set of rules, and I will strongly discourage you to do this on your own without consulting with professional accountant. If you want to discuss this more, why not book a 30 Minutes Free call with me, and I can tell you all about it?

Here is the link for your convenience (:

https://www.theflyingaccountant.co.uk/freeconsultation

3. Pros and Cons for Capitalising Website Costs

Website costs are capitalised over the useful life of the website as described in Section 1.2. If you have several different expenses that could count as capital costs, you can add them all up and treat them as one big 'intangible' figure.

Now, you might be asking, 'How long should this asset's lifespan be?' Well, typically we're talking about a period between 3 to 5 years. The tax folks at HMRC see anything less than 2 years as short-term – more like regular operating costs than a long-term asset. So, if your website’s life expectancy is less than 2 years, these costs will be treated as an expense, rather than a capital investment.

3.1 Pros

Capitalising costs enhances the assets of the company: When costs are recognised as intangible assets that increases the value of the total assets of the company which are made up of Tangible + Intangible Assets. This could potentially improve the company's attractiveness to lenders as it displays more assets that can generate future economic benefits.

Smoothing out the income statement: Capitalising the costs allows you to spread the impact on profits over several periods through amortisation, instead of taking a large upfront hit on your profits, you amortise the expense over the useful life of the asset. This can smooth earnings and possibly make the company's financial results look more stable and predictable.

Deferred Tax Liability: When you capitalise a cost, you spread the cost over the useful life of the asset. This means that instead of recognising the entire cost as an expense in the year it was incurred, you recognise a smaller portion of the cost each year over the asset's useful life. This extra cost reduces your profit in future years, which consequently reduces your tax bill too.

3.2 Cons

Future profits must absorb amortisation: Once costs have been capitalised, they are deducted from profit over time. This directly impacts the future profits of the business. If the website does not generate the expected future benefits, the company could be left with an overvalued asset (because the probable future economic benefits assumed at the beginning didn’t materialise) and reduced future earnings.

Increased complexity and judgement: Determining whether a cost meets the criteria to be recognised as an intangible asset requires judgement. Costs must be directly attributable to the website and generate probable future economic benefits. This can create complexity in accounting and potential for inconsistencies.

3.3 Conclusion

Overall, whether it's beneficial to recognise website costs as intangible assets will depend on factors such as the company's financial strategy, the expected future benefits of the website, and the level of certainty around those benefits. It's important to discuss these considerations with a professional accountant or financial advisor.