Making the intangible fixed assets regime more competitive and manageable
New tax breaks for goodwill (involving intellectual property) and de-grouping charges.
Following a review and consultation in early 2018, in Budget 2018 the chancellor announced changes to tax relief which are designed to make the intangible fixed assets regime more competitive and manageable. The relief will apply from April 2019.
You may recall the Finance Act 2015, when the government introduced a restriction to the IFA regime denying relief for ‘relevant assets’, which include goodwill and those assets that would typically be subsumed within, or closely associated with, the business goodwill. Until 2015, many small companies had taken advantage of the tax deductibility of the amortisation of goodwill.
The government made these changes as it saw the deductions for amortisation of goodwill as an expensive relief. It also wanted to remove a tax incentive to structure an acquisition of a business as a trade and asset (including goodwill) purchase rather than a share purchase.
So the good news is that tax relief for goodwill is making a limited ‘comeback’ as the chancellor’s announcement involves targeted relief for the cost of goodwill – the amount paid for a business that exceeds the fair value of its individual assets and liabilities – in the acquisition of businesses with eligible intellectual property.
It is difficult to precisely measure the contribution of IP assets to goodwill arising on a business acquisition. By its nature, goodwill is a residual value that cannot be attached to identifiable assets.
The government therefore proposes to introduce a proxy for the contribution of IP assets to goodwill, by allowing relief for goodwill by reference to the value of the eligible IP in the acquired business.
Specifically, the government proposes to allow relief for the cost of acquired goodwill up to the fair value of the eligible IP in the acquired business.
For example, company A acquires the business of company B for £100 million. At the time of acquisition, company A accounts for the cost as £20 million of eligible IP assets, £50 million of tangible capital assets, and £30 million of goodwill. The new relief would provide relief for the amortisation of £20 million of that goodwill.
The government proposes that, for the purpose of the new relief, the categories of IP that are eligible should broadly correspond to the existing definition of IP in the Part 8 rules at section 712(3), including:
registered trade marks,
registered designs, and
copyright or design rights.
The leading proposal is that the rate at which relief is given will continue to be based on accounting amortisation and impairment debits, subject to an optional election for fixed rate relief at 4% per annum. However, the amount of goodwill that qualifies for relief will be capped at the fair value of eligible IP or the total value of goodwill, whichever is lower.
The government does not intend to re-instate relief for customer-related intangibles. These are identifiable assets in their own right, so their value is not derived from other identifiable IP assets.
The details about the exact commencement are also rather vague – the responses document states that ‘Following a brief consultation, the government will therefore seek to introduce legislation for these changes through government amendment to the Finance Bill 2018/19’.
De-grouping charges – what are the changes?
In addition, with effect from 7 November 2018, the government will reform the de-grouping charge rules, which apply when a group sells a company that owns intangible.
Currently part 8 of CTA 2009, they allow groups of companies to transfer assets between companies in the group without incurring a tax charge or realising a tax deduction. This is known as ‘tax neutral’ treatment.
However, the rules contain an anti-avoidance provision, known as a de-grouping charge, which crystallises a tax charge or deduction if a company that has received an asset on a tax neutral basis leaves the group within six years of the transfer. Part 8 will be amended so that a de-grouping charge will no longer arise in situations in which a company leaves a group as a result of a share disposal that qualifies for the substantial shareholding exemption.
The government intends the amended clause to remove an obstacle to commercially-motivated merger and acquisition activity. It also aligns the Part 8 de-grouping rules with the equivalent provisions in the chargeable gains code.
The Finance Bill 2018/19 is scheduled to introduce legislation to give effect to the de-grouping changes from 7 November 2018.