Intangible fixed assets: changes to regime
Consistency at last
The taxation of intangible fixed assets (IFAs) is complex, to say the least. What’s more, the numerous changes that have been made to the regime since 2002, particularly in relation to goodwill, have only served to further muddy the waters.
Finally, calls for simplification seem to have been heard, with the 2020 Budget confirming that a single, consistent IFA regime will apply to intangibles acquired from 1 July 2020.
Outline of the IFA regime
The IFA regime was introduced on 1 April 2002. Applying to companies, it covers the taxation of intangibles, including goodwill and intellectual property. At its simplest, intangible assets are classed as either pre-April 2002 or post-April 2002 assets.
Pre-April 2002 assets. IFAs created or acquired before 1 April 2002 are typically taxed under the chargeable gains rules under the Taxation of Chargeable Gains Act 1992 (TCGA) .
Post-April 2002 assets. IFAs created or acquired from a third party on or after 1 April 2002 are, subject to some exemptions, taxed under the provisions within Part 8 of Corporation Tax Act 2009 (CTA) .
Pro advice 1. Before the Budget 2020 announcement, a pre-April 2002 IFA would typically only move into Part 8 where it was acquired by an unrelated party. This meant that an acquisition of a pre-April 2002 asset by a related party would still leave the IFA within the TCGA provisions, even if the acquisition occurred after 1 April 2002.
Pro advice 2. Part 9 CTA 2009 also contains provisions.
Subject to some exemptions, broadly, under Part 8, IFAs are taxed in line with their accounting treatment, i.e. amortisation or impairment debits can be claimed as a corporation tax deduction. Alternatively, a fixed rate relief at 4% per annum can be claimed, although this has changed in respect of goodwill as discussed below.
Pro advice. When an IFA is sold, receipts are taxed as income, although rollover relief may be available in certain cases.
Changes to the treatment of goodwill
There have been some significant changes to how Part 8 of the IFA regime operates since its introduction in 2002. Goodwill, in particular, has seen its fair share of revisions, which can be briefly summarised as follows:
- between 3 December 2014 and 7 July 2015, relief for amortisation, impairment, etc. on goodwill acquired on incorporation from a related party was denied
- between 8 July 2015 and 31 March 2019, these restrictions were extended, meaning relief was denied in respect of any goodwill and customer-related intangibles created or acquired during this time
- since 1 April 2019, relief for goodwill has been reinstated in limited circumstances.
Pro advice. The tax treatment of goodwill follows when the goodwill was acquired. For example, goodwill acquired prior to 3 December 2014 can still attract amortisation and impairment relief, while relief for goodwill acquired between 8 July 2015 and 3 March 2019 will not be available.
Budget 2018 changes
Following an announcement at the 2018 Budget, corporation tax relief was reinstated for goodwill and other relevant assets, but only where they are purchased as part of a business acquisition with qualifying intellectual property. This applies to acquisitions made on or after 1 April 2019. Under the Finance Act 2019 changes, relief is given at a fixed rate of 6.5% per year on the lower of the cost of the relevant asset or six times the cost of any qualifying IP assets in the business purchased. Relief is given yearly until the limit is reached.
Pro advice. No relief is available where relevant assets are not acquired with qualifying IP, or not acquired with a business. Relief is also restricted for certain related party transactions. In practical terms, this means some goodwill acquired post-1 April 2019 will continue to be denied relief.
This partial reinstatement of goodwill accompanied an amendment to the degrouping charge rules so that a charge does not arise in a commercial share disposal that qualifies for the substantial shareholding exemption. This amendment more closely aligns the degrouping charge rules with their equivalent in the chargeable gains code and applies to degroupings that occur on or after 7 November 2018.
Government U-turn
The possibility of bringing pre-April 2002 assets into the IFA regime was discussed during a government review. The government acknowledged as part of its summary of responses that, while the exclusion of pre-April 2002 assets was a “source of complexity” in the regime, particularly in relation to business acquisitions, the benefits of bringing in pre-April 2002 assets wouldn’t outweigh the likely costs and negative impacts on businesses. However, the view had apparently changed by the 2020 Budget.
Single regime
The 2020 Budget included an announcement (see Follow up ) that pre-April 2002 intangible assets acquired from related parties will now be brought within Part 8 of the IFA regime for acquisitions on or after 1 July 2020. Provisions will be introduced to preserve the tax treatment of pre-April 2002 assets prior to 1 July 2020.
Pro advice. Although these measures mean that, from 1 July 2020, the tax treatment of acquired IFAs will be treated under a single regime, this does not mean the end of IFAs taxed under TCGA 1992 . For example, pre-April 2002 goodwill that has remained in a company would still be taxed under the chargeable gains legislation.
Targeted anti-avoidance will apply to restrict the amount of relief a company can claim where it acquires a pre-April 2002 asset or a restricted asset from a related party, whether directly or indirectly, e.g. through a licence arrangement.
Pro advice. The changes are detailed in clause 30 to Finance Bill 2019-21 (see Follow up ).
What do these changes mean?
The best way to consider the impact of the changes is to look at an example.
Example. Company A purchased goodwill for £1 million and a registered trademark for £100,000 in 2000. It cannot claim an amortisation deduction for either IFA. In August 2020 Company B purchases goodwill created before April 2002 for £1 million as part of a business acquisition (with qualifying intellectual property) and a registered trademark from 2001 for £100,000. It can potentially claim an annual deduction of £65,000 in respect of the goodwill, and £4,000 in respect of the trademark, saving up to £13,110 (£69,000 x 19%) in tax.
Contact your clients to inform them of the changes, and suggest that a review of their IFAs might be a pertinent exercise.
Pro advice. It could also be an incentive for international clients to bring intellectual property onshore. Contact such clients as a priority.
Simpler?
While the changes are certainly welcome, and bring some much-needed simplicity, the IFA regime will remain a complex area of taxation. Clients that have made multiple acquisitions over the years will still need to keep track of what IFAs have been acquired, and when, in order to determine the correct tax treatment.
Pro advice. This is especially true of goodwill, which, depending on when and how it was created or acquired, may be allowed an amortisation or impairment deduction, no deduction at all, or receive limited relief.
Budget announcement on the IFA regime changes
Clause 30 to Finance Bill 2019-21
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