Tax Relief for Intangible Fixed Assets
Companies can obtain a corporation tax deduction for certain expenditure incurred on intangible assets...
Newly created or purchased intangible assets can attract a corporation tax deduction provided they meet certain conditions.
What are intangible assets?
The term intangible asset covers not only intellectual property such as patents, trade marks, copyrights and know–how, but also a variety of other assets with commercial value like agricultural quotas.
In the case of companies, the accounting standard FRS 10 defines intangible assets as: “non–financial fixed assets that do not have physical substance but are identifiable and controlled by the entity through custody or legal rights”.
FRS 10 makes it clear that an intangible asset can be purchased on its own, as part of a business or can be internally generated by the company. In summary, the definition of intangible assets covers specified intellectual property rights that are recognised and protected by UK law. These include:
- Trade marks
- Registered designs
- Any information or technique having economic value
- Any licence or right in respect of such property rights, information or technique
Additionally, the tax rules specifically state they apply to goodwill and to ‘fungible assets’. A fungible asset is one that can be dealt in without identifying the particular assets involved and that can grow as additional assets are acquired or diminish as they are realised, such as milk quotas.
Under International Financial Reporting Standards (IFRS), goodwill is not amortised and will instead be subject to an annual impairment review. IFRS may also require goodwill to be classified into its underlying components. Any underlying intangibles may have a mix of finite and infinite lives. Where an asset has an indefinite life, a tax deduction can only be obtained if the value of the asset is impaired. Therefore, it may be beneficial to elect for the fixed rate deduction for tax purposes (see below).
What is the tax treatment of intangible assets?
The tax rules concerning intangible assets have sought to align the tax and accounting treatment in this area. A company acquiring or creating a post–31st March 2002 intangible will be allowed a tax deduction for the write off (such as amortisation) charged in the accounts. Similarly, disposal proceeds realised on the sale of an intangible will be brought into the tax computation as a revenue receipt.
As an alternative to a deduction for amortisation, the company may irrevocably elect to write off the intangible asset at a fixed rate of 4% per annum. This election must be made no later than two years after the end of the accounting period in which the asset is created, or acquired, by the company.
Assets acquired or created before 1st April 2002 are still within the previous rules and their tax treatment will depend upon the specific rules for that type of asset.
What transitional rules apply?
Intangible assets that the company owned prior to 1st April 2002 will remain outside of the regime for as long as they are owned, as will any assets acquired from a related party since 31st March 2002 which the related party owned prior to 1st April 2002.
Internally generated goodwill is regarded as created before 1 April 2002 if the business in question was carried on at any time before that date by either the company or a related party. For any business carried on by a company before 1 April 2002, internally generated goodwill will continue to be dealt with under the capital gains rules.
Are there any exceptions?
The rules do not apply to tangible assets or to rights over them.
Where an acquisition is of both a tangible and an intangible asset, separate values must be attributed to both in order to allocate consideration between the two elements.
As well as the assets mentioned above, the following intangibles are entirely outside the rules:
- Oil licences
- Financial assets
- Rights in companies, trusts etc
- Rights over land or tangible moveable property
- Assets held for non–commercial purposes
- Expenditure on research and development will be taxed under the research and development rules and capital expenditure on software will be within the capital allowance regime.
Is rollover relief available?
Where the proceeds from the sale of intangible assets are reinvested in similar assets, reinvestment relief is available.
Unlike the rules for capital gains tax rollover relief, there is no requirement that the asset be used for the company’s trade, so an intangible held for investment purposes could qualify.
In order to claim reinvestment relief, the old asset must fulfil both of the following criteria:
- Have been a chargeable intangible asset of the company throughout the period of the company’s ownership
- The proceeds arising on disposal must exceed cost
Where the asset has not always been a chargeable intangible asset throughout its period of ownership, a just and reasonable apportionment may be made to identify a separate asset that does meet the criteria.
Additionally, the new asset must fulfil all of the following:
- Be capitalised for accounting purposes
- Be acquired between 12 months before and three years after the date of disposal
- Be an asset that will be treated as a chargeable intangible asset immediately after acquisition
The relief works by deducting the gain realised on sale from the acquisition cost of the new asset, thus reducing the amount available for relief through amortisation on the new asset.
A claim for rollover relief must be made within six years from the end of the accounting period either in which the disposal takes place or the acquisition is made, whichever is later.
A provisional claim to rollover relief can be made on the disposal of an asset in anticipation of reinvesting the proceeds. Unless it is superseded by an actual claim, the provisional claim expires four years after the end of the accounting period in which the disposal took place and adjustments must be made for any tax due.
In certain circumstances, reinvestment relief is extended to the acquisition of a company that owns intangible fixed assets. Where the parent company acquires a controlling interest of a target and it, or its subsidiaries, own intangibles, the parent may treat the expenditure on acquiring the target as if it were incurred on acquiring the underlying assets. Full reinvestment relief is only available where both the tax value of the intangible assets and the amount paid for the shares are greater than the proceeds realised by the parent company on the disposal of the old intangibles.
What are the transitional rollover rules?
Reinvestment relief is available on the disposal of a pre–1 April 2002 asset that would have qualified as a chargeable intangible had it been acquired on or after 1st April 2002, where all or part of the proceeds are reinvested in a chargeable intangible asset.
What are the rules for pre–1st April 2002 assets?
The general tax principles of capital and revenue apply to intangible fixed assets acquired or created prior to 1st April 2002.
When an intangible is treated as a capital asset for tax purposes, capital allowances may be available. Where it is treated as revenue for tax purposes, a full deduction of expenditure may be available.
However, as well as basic tax law principles there are specific rules for particular types of intangible asset.
Are there any other restrictions?
Where an asset has been revalued for accounts purposes its future amortisation will be based on the revalued amount. However, the allowable tax deduction is still based on the amortisation of the original cost.
Any expenditure on acquiring the intangible that is disallowable under general tax principles must be identified so that only a percentage of the amortisation of the total expenditure is deductible for tax purposes.
Given the generosity of this regime, there have been various planning arrangements that attempt to bring assets acquired before 1 April 2002 within the regime. However, a raft of anti–avoidance provisions have been introduced in an attempt to prevent such arrangements.
These include, most recently, provisions announced in the 2008 Budget that widen the related party rules from 12th March 2008 to include companies and partnerships that are subject to insolvency arrangements, for example liquidation, administration or other insolvency proceedings.