What is a capital asset?
Discussion
(From the point of view of the flat rate VAT scheme)
Bit of background - I'm an IT contractor and I'm Flat Rate registered. I'm trying to expand my business and would like to develop a mobile app. I need to pay for various items of work, such as designs for the app. If I pay someone for said designs, do they count as capital assets or have I just paid for a service?
Bit of background - I'm an IT contractor and I'm Flat Rate registered. I'm trying to expand my business and would like to develop a mobile app. I need to pay for various items of work, such as designs for the app. If I pay someone for said designs, do they count as capital assets or have I just paid for a service?
Forget about VAT for a moment. What constitutes a "Capital Asset" is dictated by basic accounting rules and conventions.
By and large, HMRC's interpretation of "Capital Assets" for both tax and VAT purposes follows from the accounting definitions.
Usually, we are referring to land, buildings, plant and machinery, equipment, vehicles etc when we are talking about Capital Assets. However, the term can also apply to expenditure on software as well - if the software is substantial and is intended to be used by the business for a long time (at least 5 years, I would suggest).
If you are developing software for your business it is likely that the costs could be substantial enough for the expenditure to be classified as the acquisition of an asset which will have a longer than one year life and consequently should be treated as expenditure on a fixed asset and depreciation would be charged to the profit and loss account over the assets expected economical life.
For tax purposes, the expenditure would attract Capital Allowances.
For VAT purposes, the business can reclaim any Input VAT on the cost of the software itself and/or the development cost of the software.
If you are on the VAT Flat Rate Scheme, you can reclaim the Input VAT on the software costs
a) if the VAT Exclusive cost of the item(s) exceeds £2,000
b) the £2,000 relates to a single purchase or a series of purchases which results in a single item (such as development costs leading to a piece of functioning software).
By and large, HMRC's interpretation of "Capital Assets" for both tax and VAT purposes follows from the accounting definitions.
Usually, we are referring to land, buildings, plant and machinery, equipment, vehicles etc when we are talking about Capital Assets. However, the term can also apply to expenditure on software as well - if the software is substantial and is intended to be used by the business for a long time (at least 5 years, I would suggest).
If you are developing software for your business it is likely that the costs could be substantial enough for the expenditure to be classified as the acquisition of an asset which will have a longer than one year life and consequently should be treated as expenditure on a fixed asset and depreciation would be charged to the profit and loss account over the assets expected economical life.
For tax purposes, the expenditure would attract Capital Allowances.
For VAT purposes, the business can reclaim any Input VAT on the cost of the software itself and/or the development cost of the software.
If you are on the VAT Flat Rate Scheme, you can reclaim the Input VAT on the software costs
a) if the VAT Exclusive cost of the item(s) exceeds £2,000
b) the £2,000 relates to a single purchase or a series of purchases which results in a single item (such as development costs leading to a piece of functioning software).
ecs said:
Thanks for your reply! Very helpful 
Point b at the end is especially of interest, I didn't realise that the £2k limit could be split across a series of payments (which is useful since you tend to pay designers and developers in instalments as different milestones are hit).
HMRC have criteria that must be met if a series of transactions taken together counts as one transaction (we aren't talking about "payments", we are talking about costs - which are not the same thing).Point b at the end is especially of interest, I didn't realise that the £2k limit could be split across a series of payments (which is useful since you tend to pay designers and developers in instalments as different milestones are hit).
I made one mistake in my first post - the £2,000 limit is based on the VAT INCLUSIVE value of the purchase.
Per HMRC -
15.3 What counts as a single purchase of capital goods?
The normal VAT rules are used to determine whether any particular supply is one, or more than one, purchase and whether supplies are of goods or services.
Examples of a single purchase are:
a computer package (computer, printer, camera, scanner, speakers etc.) bought as one package is one purchase of capital expenditure goods. If the package costs £2,000 or more (incl. VAT) then input tax can be claimed
items of kitchen equipment (a pizza oven, a fridge and a dishwasher) bought for a restaurant. If all the items are from one supplier at one time, then they count as one purchase of capital expenditure goods. If they are from three different suppliers or at three different times then they will be three purchases and each must be £2,000 or more (inc VAT) to qualify for a reclaim of VAT
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