At the Autumn Budget in November 2017 the UK government announced a review of the corporate intangible assets regime.  This regime introduced in April 2002 allows companies tax relief for the cost of acquisition of intangible fixed assets and goodwill by means of a deduction for the amortization and impairment of the assets included in the accounts. Receipts in relation to intangible fixed assets are taxed as income.

On 19 February 2018 a consultation document was published in relation to the proposed changes. Comments are invited from interested parties by 11 May 2018. The document discusses the possibility of amendments to the following aspects of the current regime.

Exclusion of pre-2002 assets

The tax regime does not apply to intangible assets already in existence on 1 April 2002 unless they were acquired from an unrelated party on or after that date. The capital gains rules would continue to apply to the assets excluded from the new regime.

The consultation paper asks about the types of asset typically affected by the pre-2002 rule, the difficulties of distinguishing between pre and post 2002 intangibles and extra compliance costs. If pre-2002 assets were to be brought into the regime the paper asks about the valuation of such assets for tax purposes. Bringing pre-2002 assets into the regime would potentially prevent companies using capital losses on their disposal to offset other capital gains and the paper asks about transitional provisions that would be required to address this situation.

Exclusion of goodwill and customer-related intangibles

In 2015 the government introduced a restriction to the tax regime denying relief for relevant assets including goodwill and closely associated assets such as customer information; customer relationships; unregistered trademarks or signs; or a license in respect of any of those assets.

One reason for that move was that it gave a tax incentive to structure an acquisition of a business as a purchase of a trade and asset including goodwill rather than by way of a share purchase. This potentially caused a distortion in the way business mergers and acquisitions were carried out. The relief for amortizing goodwill was also expensive for the government.

However goodwill amortization is a business expense recognized in the accounts and the absence of tax relief is out of line with international practice. This could impact on competitiveness as businesses locate their intangible assets and the economic functions associated with the assets in jurisdictions allowing greater tax relief.

The consultation document asks for input on situations where companies pay more for a business than the fair value of the assets and views on what the difference represents. Input is also requested on the impact of the 2015 changes denying relief for goodwill and on how changes could be made that deal with the issues that led to the 2015 changes.

De-grouping charge

If assets are transferred within the same group of companies this has a tax neutral treatment for the purposes of the intangible assets regime with the acquiring company inheriting the tax history of the transferor in relation to the asset. This means however that groups could try to avoid tax when selling to a third party by putting the intangibles in a separate group company before disposal and selling the shares of that company to the third party.

The intangible assets regime therefore includes a de-grouping charge that is applicable if a company leaves the group within six years after assets were transferred to it from another group company on a tax neutral basis (and the assets are still held within the company when it leaves the group). The company is deemed to dispose of and re-acquire the assets at their market value at the time of the tax-neutral transfer. A taxable gain or loss then arises when the company leaves the group.

However where the substantial shareholding exemption applies to the disposal of the company owning the intangible assets the de-grouping charge would generally be exempt from tax.

The consultation paper asks for input on difficulties caused for mergers and acquisitions by the de-grouping charge. The paper asks for input on how the de-grouping charge could be modified to eliminate any difficulties and how this could be done in an affordable manner for the government, retaining its ability to claw back deductions given in excess of the economic cost.

Election for fixed rate relief at 4% per year

The intangible assets regime permits companies to elect for a tax deduction at a fixed rate of 4% on the accounting cost of the assets.  This is an irrevocable election that can be made on an asset by asset basis. Generally companies would make the election in relation to any assets that are amortized over more than 25 years (or not amortized at all).

The consultation paper asks for comments on the circumstances in which companies normally elect for the fixed rate relief. It asks for input on whether the UK legislation on fixed rate relief deters international businesses from locating intangible assets in the UK. Input is requested on ways in which the fixed rate relief could be changed and the impact on business decisions.

Comments are also requested on the benefits to the UK from international businesses holding intangible assets in the country and on ways to make the intangible fixed assets regime more cost-effective.