The Government is reviewing the UK’s tax regime for intangible fixed assets (IFA), which was introduced in 2002, to “examine whether there is scope for reforms that would simplify it and make it more effective in supporting economic growth”.
The consultation is clearly a first stage of a wide-ranging review with the 17 open questions covering how it is working now (particularly since the new restrictions were introduced in 2015). One key proposal to streamline the rules relates to the implications of bringing pre-FA 2002 assets within the IFA regime.
Problems with the current distinction between pre and post-FA 2002 assets
The current system creates challenges for companies in identifying and valuing pre and post-FA 2002 assets and this often raises difficulties in preparing for, and assessing the impact of, transactions.
For the majority of intangible assets that are not legally registered, the identification of pre and post-FA 2002 assets can be complex, particularly where the assets themselves are subject to iteration over time. This is seen, for example, in the case of know-how that satisfies the relevant criteria to be treated as an IFA. The body of know-how within an organisation evolves over time, and it can be very challenging to compartmentalise know-how between pre and post-FA 2002 assets.
Valuing unique intangibles is a challenging exercise in itself. Breaking down groups of intangible assets into pre and post-FA 2002 categories, and then determining appropriate approaches to the valuation of individual components of the broader intangible asset base, can be a hugely complex exercise. Where a business has pre and post-FA 2002 intangibles, the intangibles will often be exploited together and, therefore, there is frequently no readily apparent way in which to identify the value which individual intangibles contribute to the business. Equally, for consumer brands, how do you quickly identify and segregate ‘heritage’ value from value arising from innovation post-1 April 2002 when brands must evolve and develop all the time to protect their value?
Intangible assets are becoming increasingly important to the global success of organisations so it is vital to know how they will be taxed and relieved in the UK when planning transactions. However, the complexity associated with identifying and then distinguishing between pre and post-FA 2002 assets alongside a lack of tax relief for amortisation of goodwill and certain customer related intangibles can skew commercial decision making when viewed in an international context. Some businesses will find themselves having to commit to a major commercial decision of owning intangible assets in the UK without being certain what their tax profile will be post-amortisation.
Aligning the treatment of pre and post-FA 2002 assets
In our experience, some groups choose to locate substantial intangible assets and innovation functions in other territories due to the complexity and corresponding lack of certainty achievable under the UK regime. Therefore, simplifying the rules by allowing pre-FA 2002 assets to come within the IFA regime would help to level the international playing field and increase the UK’s attractiveness as an innovation hub.
While simplicity is clearly attractive, if an approach were adopted whereby it was mandatory to bring pre-FA 2002 assets into the IFA regime, as the law currently stands, there would be a loss of the ability to hive out businesses tax free, which is currently possible for pre-FA 2002 assets under the relatively recent revisions to the de-grouping provisions in TCGA 1992. Therefore, any mandatory transition should be accompanied by changes to allow the hive out of businesses under the IFA regime.
Further transitional rules may also be needed. We believe it would be sensible to introduce a joint election by the seller and purchaser of intangible assets to treat the assets as being taxable under the IFA regime. Under this approach, transition from treatment as pre-FA 2002 assets to post-FA 2002 assets would be dependent upon a transaction being undertaken as well as election by the taxpayer(s). In practice, this election would likely only be made in a scenario where:
- The seller is not subject to UK corporation tax (and therefore the transaction is more likely to be base accretive to the UK)
- The seller has full tax basis in the asset (and therefore there is no avoidance of taxation of any latent gains or tax skewing of the transaction form between asset and share deals).
The elective regime could potentially be layered over the top of the existing regime, thereby eliminating the uncertainty that could arise through wholesale law change. This could include:
- Retention of existing base protection measures (for example to prevent ‘refreshing’ of old assets into new in scenarios not aligned to the policy objective)
- The existing regime could potentially continue to apply in the case of UK to UK M&A, unless the seller of the assets has full tax basis in the assets; this is potentially relevant in the context of the policy objective to the 2015 law change
- Non-amortisation of certain goodwill under IFRS could require groups to elect into the (current) 25 year straight line writing down regime; however, the ultimate availability of amortisation for goodwill may be sufficient to balance competitiveness of the UK regime with other foreign regimes in practice.
The benefits of getting this right
As intangibles increasingly drive value within groups, the returns to the UK for establishing an environment that is internationally competitive and enables the UK to realise its commercial strengths as an innovation hub could be significant. We consider that now is the right time for change to be effected given that many groups are reassessing their intangible asset strategies as a consequence of the OECD BEPS measures introduced to date and the recently enacted US tax reform. However, we are still at the start of the process and the potential impact to the exchequer of allowing tax amortisation on assets which would not currently qualify will need further quantification. We believe concerns can be managed through an elective regime as outlined above; however, the UK Government may feel compelled to narrow the scope of any changes to limit the potential short term fiscal impact.
If you would like to read BDO’s full response to the consultation, or have any questions on structuring your group’s IFAs, please contact Ross Robertson.
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