Calling this blog\’s beancounters

Here\’s a little something I\’d like to know about a piece I need to write over the weekend.

A software manufacturer is moving their customers from a buy a permanent license and buy the upgrade every couple of years to an online pay a monthly fee and get the upgrades as they come.

The software suite costs, say, $2,000. Now, with that sort of money, how would the buyers be accounting for it?

Obviously, the monthly fee is now just going to be operating costs. Just like the electricity required to run the computers. But before that: with 2k pieces of software. Would they have been writing that off in year one? Heck, it\’s an operating cost so the hell with it? Or would they have been forced to depreciate it over time?

My guess is that a £50 piece of s/ware just gets writtne off an an operating expense. A £5 million investment in Oracle is a capital expense amortised over time. But where\’s the cut off point for one treatment and the other? Are there HMRC rules on this or is it, well, depends?

18 thoughts on “Calling this blog\’s beancounters”

  1. So far as HMRC are concerned, if it’s going to be used for the enduring benefit of the trade then it’s capital and should be treated as such. That means sticking it in the capital allowances pool and getting 18% per year on reducing balance basis.

    HMRC’s rule of thumb is that something with a life of two years counts as enduring and should be capitalised. Anything less can be safely written off as incurred. If you had 3-year licences that you renewed, though, they’d normally take that as being revenue that you could just write off.

    In practical terms, most companies get away with a pragmatic “if it costs less than

  2. Someone’s writing about Adobe!

    Absolutely depends on the size of the company – If it’s a giant Multi-national they’d almost certainly expense the 2k, a smaller operation would probably capitalise it.

    You’d have to release the cost over the period it was being used for when deciding on depreciation policy.

    God knows what the capital allowance rules are for purchased software. Long, wordy and imprecise I should think.

  3. So far as HMRC are concerned, if it’s going to be used for the enduring benefit of the trade then it’s capital and should be treated as such. That means sticking it in the capital allowances pool and getting 18% per year on reducing balance basis.

    HMRC’s rule of thumb is that something with a life of two years counts as enduring and should be capitalised. Anything less can be safely written off as incurred. If you had 3-year licences that you renewed, though, they’d normally take that as being revenue that you could just write off.

    In practical terms, most companies get away with a pragmatic “if it costs less than GBP1,000/GBP500/USD2,000/whatever it’s not worth tracking so we’ll expense it”, and HMRC don’t particularly mind. The threshold needs to be reasonable for the business, though.

    In my experience, in small businesses accountants follow what they think HMRC will want them to do; in larger businesses they do their own sweet thing and drive the tax department nuts.

    The small/large divide can be defined as “Is the person responsible for the fixed asset register also responsible for the tax computations?” 😉

  4. Chris: Capital allowances for software are dead easy – bung it in the pool. Software is tangible (allegedly).

  5. In Australia, expenditure on off-the-shelf software is depreciated over four years, unless it’s worth less than $300 in which case it’s an operating expense.

    Unless you’re a small business (turnover under $2m) in which case any expenditure under $1000 is an operating expense, which is why my last two laptops both cost $999.

  6. I agree with Pellinor.

    dealing just with the tax angle: the second method is defintiely a revenue expense, claimed as expended. The first really does depend on the length of ‘permanent’ and the materiality of the quantum relative to the business.

    There might not, however, be a great deal of difference. I think, though I don’t know and I’m not researching it, that there may well be accelerated capital allowances that can be claimed.

  7. I assume you’re talking about Adobe creative Suite.

    As I work in publishing can tell you almost everybody I know is utterly furious about this.

    It is a fantastic deal

  8. AAAARRGGH!

    I assume you’re talking about Adobe creative Suite.

    As I work in publishing can tell you almost everybody I know is utterly furious about this.

    It is a fantastic deal — if you are a power user who uses lots of different Adobe products, wants to remain on the absolute cutting edge of technology and upgrades. It’s great news. An absolute bargain.

    If, on the other hand, you’re the typical independent designer, Illustrator, small publisher etc who is quite happy to buy the creative Suite, or upgrade, every 2-3 years, you are Shit out of luck. Your costs have just increased from 500 to 800 pounds every two or three years to paying a minimum of six hundred pounds a year. Every year for the rest of your life. Or until Adobe decides to jack it up to 1000, or two thousand, or three thousand– Who knows?

    Plus, as someone I know confirmed on the phone to Adobe the other day, if you ever stop paying you will not be able to open your existing files. This isn’t such a big problem with image files, but with page layout files like In Design it is a massive problem. As there currently isn’t really any other alternative.

    When Adobe wrenched the page layout business from Quark (who were behaving like complete scumbags) they were all ears to their customers. Nothing was too much trouble. Prices were low, feedback was excellent.

    For the last five years Adobe have stopped listening.

  9. HMRC’s advice for their Inspectors: Capital/revenue divide – computer software: General considerations

    *You should not contend that software with an expected useful life of less than two years is capital. But you should not accept that a particular piece of software has such a limited life solely because updates appear at frequent intervals. The issue is whether the business concerned in fact trades up to the new versions at intervals, which are short enough to give a particular version only a transitory value to that business.*

  10. As my eyes glaze over reading these responses, I’m increasingly of the view that we should scrap corporation tax. All these little rules would just disappear.

  11. For corporation tax (not income tax), software can in some circumstances fall under the intangible fixed assets rules rather than under the capital allowances rules. Under the IFA rules, the tax treatment will follow the accounting treatment which is (for once) a simplification.

  12. guys,

    the wider question is…why do such minutiae matter! It is area where accounting treatments abut against straightforward cash accounting. For most concerns, cash is king…unless you buy a really significant fixed asset, such as St Paul’s Cathedral.

  13. @15

    But once a company gets over a certain size, actual money becomes of little concern. Few big corporations have to pay much attention to cash-flow, or their actual cash in the bank. They care about paper profits and reserves etc.

    I doubt the Chief Exec of Tesco has ever seen a fiver that Tesco owned. They say that the quickest way to ruin a small business is to stick the CEx of a FTSE 100 company in charge, for precisely this reason.

  14. You call for a beancounter’s input.

    Is there not a celebrity beancounter with whom you have a very special relationship who might be willing to opine, one R Murphy?

  15. In accounting terms, purchased software is an asset, as it gives rise to future benefits.

    Purchased software is easy to account for, as you know how much you’ve spent on it. Unlike internally generated software, where you have judgements to make around what internal costs to capitalise.

    So, you slap it on the balance sheet and amortise it over its useful economic life. In this case, the length of the licence or how long you think you’re going to use it for. Whichever is shorter.

    Of course, for small amounts, you can do whatever the hell you want, because accounting standards don’t apply to immaterial items.

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