Software subscriptions

Conditions

1. GOV.UK's self-employed expenses guidance lists computer software your business uses for less than 2 years, and computer software if your business makes regular payments to renew the licence (even if you use it for more than 2 years), among the costs you can claim as allowable expenses.
2. For a sole trader, HMRC's Business Income Manual says regular payments for a software licence that are akin to a rental are revenue (BIM35805), and that periodical licence payments are deductible unless they are shown to be instalments of a capital sum (BIM35810).
3. Timing differs by accounting method. Under traditional accounting, HMRC says the timing of relief for periodical licence payments follows generally acceptable accounting practice, charging the cost against profits over the shorter of the useful life of the software or the term of the licence (BIM35810). Under cash basis you only count the expenses you've actually paid.
4. A limited company deducts the costs of running its business before Corporation Tax. The test is statutory: section 34 ITTOIA 2005 for sole traders and section 54 CTA 2009 for companies allow no deduction for expenses not incurred wholly and exclusively for the purposes of the trade, but do not prohibit a deduction for an identifiable part or identifiable proportion of an expense that is.
5. Where one subscription serves the business and personal use, HMRC distinguishes two cases. Where a definite part or proportion of the expense is wholly and exclusively for the trade, that part is not disallowed (BIM37600). Where an expense is incurred for a dual purpose, it fails the statutory test and there is no provision that allows a 'business' proportion (BIM37007).
6. A one-off (lump-sum) licence is different. For a sole trader, HMRC asks whether the licence is a capital asset, which in broad terms means whether it has a sufficiently enduring nature; where software is expected to have a useful economic life of less than two years, HMRC accepts the expenditure is revenue (BIM35805). GOV.UK says to claim other software for your business as capital allowances, unless you use cash basis — if you do, check the treatment with an accountant.
7. For a company, bought software usually follows the corporate intangible fixed assets regime rather than capital allowances. HMRC says licences and rights over software usually fall within that regime where created or acquired from an unrelated party on or after 1 April 2002, that capital allowances are not available for rights within it, and that for assets within the regime the capital/revenue divide has no effect (BIM35801). Capital allowances remain available in the cases HMRC lists, including where the company elects under section 815 CTA 2009 to exclude capital expenditure on computer software from the regime (CA23410). Which route suits a company is a question for its accountant.
8. An employee can deduct an expense only if they are obliged to incur and pay it as holder of the employment and it is incurred wholly, exclusively and necessarily in the performance of the duties of the employment (section 336 ITEPA 2003). HMRC adds that the expense must be one that each and every holder of that employment would have to incur (EIM31630).
9. For an employee's mixed-use costs, HMRC says a single expense can be apportioned if a definite part or proportion of it can properly be attributed wholly and exclusively to the performance of the duties, but you cannot apportion expenditure where it serves two or more purposes concurrently and one of those purposes is not to do with the duties (EIM31661).

Common mistakes

• Claiming personal streaming or lifestyle subscriptions as business software.
• Treating a one-off licence for software you will use for years as a running cost just because it was a single payment. HMRC asks whether the licence has a sufficiently enduring nature, and accepts revenue treatment where the expected useful economic life is under two years (BIM35805).
• Assuming software has a short life because updates come out often. HMRC says the issue is whether the business in fact trades up to the new versions at intervals short enough to give a particular version only a transitory value (BIM35810).
• A company claiming capital allowances on bought software as if it were a sole trader. For companies, the intangible fixed assets regime takes precedence over capital allowances unless one of HMRC's listed exceptions, such as a section 815 election, applies (CA23410).
• Claiming a business share of a subscription taken out for a mixed purpose. A dual-purpose expense with no definite business part gets no deduction (BIM37007).

What to keep

• Subscription invoices and receipts showing the supplier, the period covered and the amount.
• For a licence paid as a lump sum, a note of how long you expect to use the software, because that decides whether it is revenue or capital.
• Where one subscription covers business and personal use, a record of how the business part was identified.
• For a company, a copy of any section 815 election. HMRC says it must specify the expenditure it relates to, be made in writing within two years of the end of the accounting period in which the expenditure was incurred, and cannot be revoked (CIRD25180).

Real-world example

A freelance graphic designer using traditional accounting pays a monthly subscription for a design suite used only for client work. That is a regular licence payment akin to a rental, so it is revenue and claimed as a running cost. In the same year she makes a single payment for a perpetual licence to a type-management tool she expects to use for several years. That payment is not a subscription, and software that will function as a tool of her trade for several years is likely to be capital, claimed through capital allowances rather than as an expense. Had she expected to use it for less than two years, HMRC would accept the cost as revenue.

Frequently asked