The announcement as part of Budget 2020 that the corporation tax treatment of intangible fixed assets was to be reformed came as a surprise to many, especially because there had been a consultation on the intangibles regime in 2018, which subsequently led to changes to the corporation tax treatment of intangible assets being implemented by Finance Act 2019.
As such, another round of changes soon after were less expected…
Background & Scope of Corporate Intangibles Regime
Prior to the changes implemented by Finance Bill 2020, the corporation tax treatment of intangible fixed assets were broadly determined as follows:
- Assets created before 1 April 2002, including assets acquired after that date from a ‘related party’, were treated as falling within the corporate capital gains regime. Consequently, despite the accounting treatment, no tax amortisation relief was available for goodwill or other intangible assets acquired or created by a company before 1 April 2002.
- Assets created or acquired from an unrelated party on or after 1 April 2002 were treated as falling within the intangibles regime, allowing companies to claim tax deductions for the amortisation or impairment of such intangible assets.
Despite the distinction above, more assets remained within the capital gains regime than expected.
Firstly, goodwill is treated as created before 1 April 2002 where the business to which the goodwill relates commenced before this date. Consequently, the goodwill of many businesses remained within the capital gains regime as a result of those businesses having existed before 1 April 2002.
Secondly, the definition of a ‘related party’ highlighted above is broad, meaning that certain transfers of pre-April 2002 assets on or after 1 April 2002 failed to bring these assets within the intangibles regime.
Changes Introduced by Finance Acts 2015 & 2019
The feature of the post April 2002 regime allowing amortisation and impairment relief was abolished by Finance Bill 2015. This meant that that no deductions were given for the amortisation or impairment of goodwill and customer-related intangible assets acquired on or after 8 July 2015.
However, Finance Act 2019 introduced another change, allowing a fixed annual deduction of 6.5% for goodwill acquired on or after 1 April 2019, provided they can be related to ‘qualifying IP assets’ acquired as part of a business acquisition.
Broadly speaking, prior to the changes announced in Budget 2020, there were four main categories of goodwill and intangible assets for corporation tax purposes:
- Goodwill and intangibles purchased or internally created before 1 April 2002;
- Goodwill and intangibles acquired or created between 1 April 2002 and 7 July 2015;
- Goodwill and customer-related intangibles acquired or created between 7 July 2015 and 31 March 2019
- IP-related goodwill acquired on or after 1 April 2019.
The Position Post Finance Bill 2020
For acquisitions on or after 1 July 2020, changes implemented by Finance Bill 2020 broaden the circumstances as to when acquired intangible assets fall within the intangibles regime, via the introduction of two new commencement provisions.
A fixed annual deduction of 6.5% for goodwill acquired on or after 1 April 2019
First New Rule
The first rule states that an intangible asset acquired by a company on or after 1 July 2020 will be classified as a post April 2002 asset, and hence fall within the corporate intangibles regime, even if the asset is acquired from a related party.
As can be expected, a wide range of acquisitions would be considered related party acquisitions for the purposes of the intangibles regime. As such, the Finance Bill 2020 change in rules to treat intangibles acquired on or after 1 July 2020 as post April 2002 assets would mean that a significant number of cases could fall within the intangibles regime. This would mean, for example, that an asset could be brought into the corporate intangibles regime simply by transferring it to another UK group company.
Exception in Respect of Transfers within a UK Capital Gains Group
In order to prevent this, there is an exception to the above rule in Finance Bill 2020 in respect of transfers between related parties. This rule applies such that if a pre April 2002 asset is subject to a transfer that is treated as being at no gain and no loss between two UK capital gains group companies, that asset will remain within the pre April 2002 capital gains regime. Therefore, an asset held by a UK group company cannot be brought into the corporate intangibles regime by transferring it to another UK group company.
The relevance of the Budget 2020 reforms to UK corporate groups is therefore likely to be relatively limited.
Second New Rule
Budget 2020 made it clear that the changes to the intangibles regime will be subject to restrictions to prevent tax avoidance, taking the form of transitional provisions, which prevent related party transactions being used to obtain a tax advantage by bringing assets into the intangibles regime at market value.
The provisions recognised that where a company acquires intangible assets from a related party and accounts for this at market value, then tax deductions might be available if the assets are treated as post April 2002 assets in the hands of the acquiring company.
However, the transitional provisions deny tax deductions in respect of an intangible fixed asset acquired on or after 1 July 2020 from a related party in situations where the asset is a ‘restricted asset’
The provisions will treat the first acquisition on or after 1 July 2020 as being at no cost for the purposes of the intangibles regime. Consequently, no deductions are available while the asset is held by the acquiring company.
When will an asset will be ‘restricted’?
The transitional provisions describe three different cases in which an intangible fixed asset will be a ‘restricted asset’.
In the first case, an asset is a restricted asset if it was acquired by a company on or after 1 July 2020 from a related party and, either of the two apply:
- The asset was a pre-April 2002 asset of any company on 1 July 2020 and has not been the subject of a ‘relieving acquisition’. Essentially, if an asset was held by a company on 1 July 2020 which was within the pre-April 2002 capital gains regime, it will not be possible to change its tax treatment by subsequently transferring it to a related party, unless there has been a ‘relieving acquisition’ involving an unrelated party. A ‘relieving acquisition’ is one where a company acquires an asset from a person who is not a related party.
- The asset was created before 1 April 2002, it was held by a person other than a company immediately before 1 July 2020 and has not been the subject of a ‘relieving acquisition’ on or after 1 July 2020. This restriction will not be in point where the person from whom the asset is acquired (the intermediary) acquired the asset after 1 April 2002 from a third party that is unrelated both to the intermediary at that time and to the company acquiring the asset on or after 1 July 2020. Essentially, if an intangible asset was acquired before 1 July 2020 that would have resulted in that asset becoming a post April 2002 asset if the acquirer had been a company subject to UK corporation tax, the asset should not then be treated as a restricted asset when acquired on or after 1 July 2020.
If any of the above aspects of the first case apply, the first company acquiring that asset on or after 1 July 2020 is treated as having done so at nil cost. In respect of any other company acquiring the asset on or after 1 July 2020 after the first company, the intangibles regime will generally apply only to the increase in value between the first acquisition and the following acquisitions.
It will often be necessary to carry out a detailed analysis of the history of the asset to see whether any of the above aspects of case 1 apply.
An asset is a restricted asset if it was acquired by a company on or after 1 July 2020 from a related party
Cases 2 & 3
Cases 2 and 3 are based on existing anti-avoidance provisions.
Case 2 deals with arrangements such as those involving licences, where a new asset created on or after 1 July 2020 acquired by a company on or after 1 July 2020 from a related party and that asset derives its value from a pre-April 2002 intangible asset, not having been the subject of a relieving acquisition. Therefore, this restriction is to ensure that the new rules cannot be circumvented by simply creating an asset over an existing non-qualifying asset.
Case 3 deals with assets acquired in connection with the disposal of a pre-April 2002 asset or a restricted asset by a related party and will typically include transactions such as a sale and lease-back transaction.
The government’s announcement of creating a single regime for intangibles acquired by companies from 1 July 2020 was a pleasant surprise to many. However, this appears to be at the cost of significant additional legislative complexity which will require even more detailed analysis and record-keeping. Nonetheless, these reforms could still present opportunities to take advantage of tax deductions available to companies which were restricted prior to the changes enacted by Finance Bill 2020.
Please note this is only a general summary and is does not constitute advice.
It is critical that you seek professional advice which is tailored to your specific circumstances. We at ETC would be delighted to discuss any questions or concerns you may have. Contact us on 0161 711 1320 or email firstname.lastname@example.org