The tax treatment of goodwill had remained undisturbed since 2002 but alongside a surprise move, linked to new restrictions on entrepreneurs’ relief (ER) on business incorporations, changes for related party transfers of goodwill and similar intangible fixed assets (IFAs) were announced in the 2014 Autumn Statement. It was an even bigger surprise when these restrictions were extended to all transfers of goodwill from the date of the 2015 summer Budget.
Related party transfers
Since 3 December 2014, tax relief has been restricted on the transfer of post-April 2002 goodwill between related parties. The effect on transfers which are caught is twofold:
a.The company that acquires the ‘relevant asset’ will not be able to claim a tax deduction for any accounting debits in relation to the relevant asset (for example, amortisation or impairment of goodwill).
b.If the relevant asset is eventually realised at a loss, the loss arising will be treated as a non-trading debit rather than as part of the trading loss (so use of the loss may be more restricted).
‘Relevant assets’ are defined as goodwill and other similar business related IFAs such as:
- Customer information
- Customer relationships
- Unregistered trademarks and
- Related licences.
The restriction does not apply to patents, registered trademarks or designs, copyrights and know how.
The new rules apply to transfers to the company from either:
a. An individual who is a related party in relation to the company or
b. A ‘firm’ (ie a partnership or LLP), which includes as a member an individual who is a related party in relation to the company.
The effect is that the company receiving the transfer of post-April 2002 goodwill from a sole trader or trading partnership which is a related party on or after 3 December 2014, will not be able to claim tax relief for amortisation/impairment and will be more restricted in the use of any losses arising on realisation. Also, the sole trader or partner is likely to be denied ER on any gain on the goodwill transferred.
Changes from 8 July 2015
For all accounting periods beginning on or after 8 July 2015 (and to the latter part of accounting periods which straddle this date), the 3 December 2014 changes apply to all transfers. Therefore, a company that acquires a relevant asset will not be able to claim a corporate tax deduction for accounting debits on the asset (for example, amortisation/impairment) and, if the relevant asset is eventually realised at a loss, the loss will be treated as a non-trading tax debit rather than a trading loss. The definition of relevant assets remains as above.
The policy statement made at the time of the 2015 summer Budget stated that the legislation is intended to address perceived distortions in the market caused by companies acquiring the business rather than the shares of their targets. The draft legislation does not appear to disturb the rules for the transfer of IFAs between members of a 75% group – such transfers should continue to be tax neutral transfers.
These changes make the purchase of the trade and assets of a target company (rather than the purchase of its shares) less attractive from a tax perspective than they were before. However, tax relief will continue to be available where purchased goodwill is realised at a loss, and also, relief can be claimed against total profits in the final accounting period.
Tax treatment of intangible fixed assets – summary table
G - Goodwill IFAs
O - Non goodwill IFAs
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