Intangible Assets in One Line
An intangible asset is something your business owns or controls that has value, will benefit you for more than a year, and has no physical form.
Software, trade marks, patents, customer lists, licences and a properly built website can all be intangible assets. A van, a laptop and a shop fit out cannot, because you can touch them. Those are tangible assets.
Both sit in the same part of the balance sheet as fixed assets, meaning they are kept for the long term rather than sold or used up in the next twelve months. The difference is how they get there, how they are written off and how they are taxed. That is where small businesses tend to go wrong, so most of this guide is about those three things.
Examples of Intangible Assets
The Companies Act balance sheet formats split intangible assets into four headings. Every UK company that shows intangibles uses some version of this list:
| Balance sheet heading | Typical examples in a small business |
|---|---|
| Development costs | In-house software, a new product or process you designed and built yourself |
| Concessions, patents, licences, trade marks and similar rights | Registered trade marks, patents, software licences, franchise rights, domain names, purchased customer lists, music or image rights |
| Goodwill | The premium paid when you buy another business, over and above its separable assets |
| Payments on account | Deposits paid towards an intangible you have not received yet |
Other common examples include broadcasting or taxi licences, mobile app code, purchased databases, non-compete agreements bought as part of a deal and copyrights in books, photographs or courses.
Goodwill sits under the intangible assets heading on the balance sheet, but the accounting rules treat it separately. We cover it in its own guide, so this article focuses on everything else.
Tangible vs Intangible Assets
| Tangible assets | Intangible assets | |
|---|---|---|
| Physical form | Yes | No |
| Examples | Property, machinery, vehicles, computers | Software, trade marks, patents, customer lists |
| Written off by | Depreciation | Amortisation |
| Can you build your own and capitalise it? | Usually yes, at cost | Only in narrow cases (development costs) |
| Main tax relief for companies | Capital allowances | Corporate intangibles regime, usually following the accounts |
| What a lender thinks it is worth | Often something, as security | Often nothing, it gets stripped out |
That last row matters more than most owners expect. We come back to it below.
When Can an Intangible Go on the Balance Sheet?
This is the question that decides everything else. Most UK small companies report under FRS 102 (including the smaller company version, Section 1A) or, if they are very small, FRS 105, the micro-entity standard. Section 18 of FRS 102 sets three tests.
1. It must be identifiable. It either can be separated from the business and sold, licensed or rented out on its own, or it arises from a contract or legal right. A registered trade mark passes. "Our great reputation in Barnet" does not.
2. Future economic benefit is probable. You expect it to bring in money or save money.
3. The cost can be measured reliably. You have an invoice, a purchase agreement or a timesheet record.
Meet all three and you capitalise the cost, meaning it goes on the balance sheet as an asset instead of hitting the profit and loss account straight away. This is the same capital versus revenue judgement we explain in capex vs opex, just for things you cannot touch.
The list that is always an expense
FRS 102 then shuts the door on a group of costs, however valuable they feel. Paragraph 18.8C says these must be expensed when incurred:
- Internally generated brands, logos, publishing titles and customer lists
- Start-up costs, such as legal fees to set up the company or pre-opening costs
- Training staff
- Advertising and promotional activity
- Relocating or reorganising the business
- Internally generated goodwill
This is the rule that surprises owners most. Spend ten years building a brand and a loyal client base, and none of it appears on your balance sheet. Buy a competitor's client list for £30,000 and it does. The asset is the same kind of thing. The difference is that a purchase gives you an independent price, while your own effort does not.
Development costs: a choice under FRS 102, banned under FRS 105
Research, the early "will this even work?" stage, is always an expense. Development, the stage where you are building something you can show is technically feasible and will generate benefits, is different.
Under FRS 102 a company can choose an accounting policy to capitalise development costs once they meet the conditions in paragraph 18.8H. Under FRS 105 the micro-entity standard does not allow it at all. Development costs are expensed, full stop.
So two identical software businesses can report very different profits purely because one files micro-entity accounts and the other does not. The worked example below shows how large that gap gets.
Is Software an Intangible Asset?
It depends on whether the software can live without the hardware.
- Software that comes with and runs the hardware, like the operating system on a laptop, is treated as part of that tangible asset.
- Separately bought software, such as a perpetual licence or a bespoke system you paid a developer to write, is an intangible asset if it meets the tests above.
- Monthly or annual subscriptions (Xero, Microsoft 365, most cloud apps) are not assets at all. You do not own anything. They are ordinary running costs.
In our experience most small businesses now have almost no capitalised software because nearly everything is a subscription. The exceptions are firms that commission bespoke systems or build their own.
Is a Website an Intangible Asset?
Sometimes. A website is a mix of costs, and they get treated differently:
- Domain name purchase from a third party: an intangible asset, if the price is material.
- Design and build of a site that earns money, such as one that takes orders or bookings: usually capitalised. Most accountants show it as an intangible, though some show the hardware side as tangible.
- A brochure site that mainly advertises you: closer to advertising, so many accountants expense it, especially if the cost is modest.
- Hosting, maintenance, content updates and SEO: always running costs.
The tax point is useful. HMRC's guidance confirms that website development costs bought from a third party will often fall under the intangibles regime, but a company can elect to take software spending out of that regime and claim capital allowances instead. We cover that election next.
How Intangible Assets Are Written Off
Once on the balance sheet, an intangible is amortised over its useful life, usually on a straight line. Amortisation is depreciation's twin. Our amortisation guide covers the mechanics.
The UK rule to remember is FRS 102 paragraph 18.20. If you cannot reliably estimate the useful life, you must use no more than ten years. There is no "indefinite life" option under UK GAAP, unlike IFRS, so every intangible a UK small company holds gets amortised.
Our usual starting points, adjusted to the facts:
| Asset | Typical useful life we use |
|---|---|
| Bespoke software | 3 to 5 years |
| E-commerce or booking website | 3 years |
| Purchased customer list | 3 to 5 years, based on how fast clients leave |
| Registered trade mark | 10 years (it renews every 10 years) |
| Patent | Remaining legal life, or shorter if the tech will date |
| Licence | The licence term |
You should also check each year whether anything is impaired, meaning worth less than its book value. A customer list where half the clients have already left needs writing down, not leaving to amortise quietly.
How Intangible Assets Are Taxed
For companies, intangible assets bought or created since 1 April 2002 fall under the corporate intangibles regime in Part 8 of the Corporation Tax Act 2009. The basic idea is simple: tax relief follows the accounts. Your amortisation charge is normally deductible for corporation tax, and any profit when you sell the asset is taxed as income.
There are three twists worth knowing.
The 4% fixed rate election. A company can elect to claim 4% a year instead of following its accounts. Under FRS 102 that is almost never worth it, because the accounts already write intangibles off over ten years or less. It mainly helps groups reporting under IFRS that do not amortise at all.
The software election. Section 815 of CTA 2009 lets a company take capital spending on software out of the intangibles regime and claim capital allowances instead. That usually means the Annual Investment Allowance and a 100% deduction in year one, rather than relief spread over the useful life. It must be made in writing within two years of the end of the accounting period and cannot be revoked.
Goodwill is different. Relief on purchased goodwill has been restricted since 2015 and only partly restored since April 2019. Our goodwill guide covers the 6.5% rule.
Sole traders and partnerships are outside the corporate regime. They generally get relief through capital allowances for software, and little or nothing for other intangibles. That is one more reason to review your structure if you are building IP, which we discuss in sole trader vs limited company.
If your development work involves genuine technical uncertainty, it may also qualify for R&D tax relief. Capitalising those costs in the accounts does not normally delay the R&D deduction, but the claim needs handling carefully.
A Worked Example: Same Spending, Two Profits
Oakmere Digital Ltd is a marketing agency in Finchley with a 31 March year end. In the year to 31 March 2027 it spends £81,000 on five things, all at the start of the year to keep the numbers simple:
| Spend | Cost |
|---|---|
| A retiring competitor's client contracts, bought under a written agreement | £30,000 |
| That competitor's brand name, registered trade mark and domain | £6,000 |
| New website with online booking, built by an outside developer | £14,000 |
| Client reporting dashboard built by its own staff (timesheet costs) | £22,000 |
| Logo refresh and a launch advertising campaign | £9,000 |
| Total | £81,000 |
Under FRS 102, capitalising development costs
| Item | Treatment | Year 1 charge |
|---|---|---|
| Client contracts | Capitalise, 5 years | £6,000 |
| Brand, trade mark, domain | Capitalise, life uncertain so 10 years | £600 |
| Website | Capitalise, 3 years | £4,667 |
| Dashboard | Capitalise as development, 4 years | £5,500 |
| Logo and advertising | Always an expense | £9,000 |
| Total charge to profit | £25,767 |
Intangible assets at 31 March 2027: £72,000 cost less £16,767 amortisation, so £55,233 on the balance sheet.
Under FRS 105, as a micro-entity
The only change is the dashboard. FRS 105 bans capitalising development costs, so the full £22,000 is an expense now.
Total charge to profit: £42,267. That is £16,500 lower profit in year one, with exactly the same cash spent. In years two to four the FRS 105 version looks better, because there is no dashboard amortisation left to charge.
The tax side
Oakmere expects taxable profits of about £180,000, which sits in the marginal relief band where each extra pound of profit is taxed at an effective 26.5%.
The client contracts and brand follow the accounts under Part 8, so £6,600 is deductible this year either way. The website is where planning pays. Without an election, relief follows the £4,667 amortisation. With a section 815 election, the £14,000 qualifies for the Annual Investment Allowance and is deducted in full this year. The extra £9,333 deduction saves about £2,473 of corporation tax now. It is a timing gain, not a permanent one, but cash today is worth more to a growing agency than cash in 2029.
Our view on Oakmere: we would capitalise the client contracts and website, consider the dashboard carefully (see below), make the software election on the website and treat the logo and campaign as costs without a second thought.
Our View: Do Not Capitalise to Flatter the Numbers
Capitalising intangibles makes profit look higher. That is exactly why we are cautious about it. Four things we tell clients:
Banks often ignore intangibles. Lenders frequently test "tangible net worth", which is net assets with intangibles taken off. A balance sheet that looks healthy only because of £55,000 of capitalised software may look very different to the credit team. If you have loan covenants, check the definitions before choosing a policy. Our gearing ratio guide explains how lenders read your balance sheet.
Capitalised development costs can block dividends. Under section 844 of the Companies Act 2006, development costs shown as an asset are generally treated as a realised loss when working out what you can pay as a dividend, unless there are special circumstances and the directors explain them in a note. Higher reported profit does not always mean more distributable reserves.
Small amounts are not worth the admin. Your own trade mark registration costs £205 online for one class and £60 for each extra class (fees went up on 1 April 2026), plus any solicitor's fee. Capitalising a £600 item and amortising it at £60 a year for a decade adds nothing useful. Set a capitalisation threshold, often £1,000 to £2,500 for a small company, and expense anything below it.
Write down why. If you capitalise in-house development, keep timesheets, a short project note on why it is technically feasible, and evidence that it will earn or save money. HMRC, an auditor or a buyer doing due diligence will ask, and "it felt like an asset" is not an answer.
For most of the small companies we work with, the honest answer is that they hold very few intangible assets. The ones that do, usually after buying a client book or building their own software, benefit from getting the treatment right in the first year because it then runs on autopilot.
Common Mistakes
- Putting your own brand or client list on the balance sheet. Only purchased ones qualify.
- Capitalising software subscriptions. You own nothing, so there is no asset.
- Never amortising. Every intangible under UK GAAP has a finite life, ten years at most if unsure.
- Missing the software election deadline. Two years after the period end, then it is gone.
- Capitalising development costs in micro-entity accounts. FRS 105 does not allow it.
- Forgetting impairment. A lost contract or a dead product means a write down now.
- Mixing capital and running costs on one invoice. Split website build from hosting and SEO.
How IAK Can Help
We prepare accounts for limited companies, startups and affiliate and website businesses across North London and Hertfordshire, many of whom hold more value in software, domains and client relationships than in anything physical.
Our accounting service sets a clear capitalisation policy and keeps your intangible asset register up to date. Our tax planning team handles the corporate intangibles rules, the software election and acquisitions. If you are about to buy something you cannot touch and want to know how it will land in your accounts, get in touch.
Sources
- FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, Financial Reporting Council, Section 18 Intangible Assets other than Goodwill, including paragraphs 18.8C, 18.8H and 18.20.
- FRS 105 The Financial Reporting Standard applicable to the Micro-entities Regime, Financial Reporting Council, for the ban on capitalising development costs.
- CIRD10101 Intangible assets: introduction, HMRC Corporate Intangibles Research and Development Manual, for the scope of the corporate intangibles regime.
- CIRD25180 Computer software: election for capital allowances, HMRC, for the section 815 election and its two year deadline.
- Corporation Tax Act 2009, Part 8, legislation.gov.uk, the intangible fixed assets legislation, including the 4% fixed rate election in section 730.
- Companies Act 2006, section 844, legislation.gov.uk, treatment of development costs when calculating distributable profits.
- IAS 38 Intangible Assets, IFRS Foundation, the international standard, for comparison with UK GAAP.
- Trade mark fees, Intellectual Property Office, GOV.UK, for the online application fees in force from 1 April 2026.