Re-introduction of relief for acquired goodwill
As announced in Budget 2018, corporate tax relief for goodwill is to be reintroduced, in certain circumstances, from 1 April 2019. New legislation has now been added to Finance Bill 2018/19, through an amendment at the Report stage of its journey through Parliament.
The proposed relief applies at a fixed rate of 6.5% per annum on cost (not by reference to the accounts depreciation, which is how the deduction works for other assets) on an amount up to 6 times the value of any qualifying intellectual property assets that have been acquired. Qualifying assets will include:
- Registered designs
- Copyright and design rights
- Plant breeders’ rights.
The updated legislation retains restrictions on amortisation of goodwill on an incorporation event, as well as certain other anti-avoidance/anti-base erosion measures.
While the new relief is a welcome move, much of the value of goodwill that is acquired in many circumstances may not be deductible. Therefore, to obtain greater clarity on their tax position and optimise the statutorily available reliefs, companies contemplating major transactions should think carefully through the valuation/purchase price allocation for the different intangible fixed assets that are purchased as part of the transaction.
It will also be vital to demonstrate how each intangible fixed asset was identified (as separate from the goodwill of an enterprise) and how the valuation of each asset was arrived at. IFRS guidance (for example, IFRS 3 guidance on business combinations) can provide helpful supporting methodologies for recognition of a wide range of assets separate from the general goodwill of the enterprise that is acquired. However, each transaction will turn on the facts, and will require careful review.
Impact of new Crown dependency treaties
Updated tax treaties between the UK and Guernsey, Jersey and Isle of Man treaties are now in force. As well as introducing new substance requirements for offshore companies from 2019, the treaties are interesting from an intangibles perspective for two reasons.
Firstly, they mean that the UK’s new income tax charge on non-residents that comes into force from 1 April 2019 is unlikely to apply to the extent that groups hold their IP in one of these territories: this is because the new treaties contain a non-discrimination clause and, therefore, are outside the scope of the new income tax charge. However, the Diverted Profits Tax and other anti-avoidance/anti-base erosion measures could still apply, depending on the facts.
Secondly, the new treaties also change the way the withholding tax exemption works and, in many cases, makes it narrower unless the competent authority agrees to the application of the relief. This is because under the ‘old’ treaties, there may have been an argument that if an active business was being carried on in the crown dependency, a treaty exemption for royalties paid by a UK company to the crown dependency may have been available.
However, under the new treaty, there are a series of mechanical tests to be applied by reference to the status/residence of the recipient of the royalties and/or its shareholders, with a fall-back of seeking agreement from the competent authority. There are a few circumstances where relief may be available under the old treaty but not the new treaty (without specific agreement of the competent authority).
Any groups who are making IP-related payments from the UK either directly or indirectly to the crown dependencies should review their position and seek expert advice.
Read the new treaties: Guernsey, Jersey, and Isle of Man.
For help and advice on intangible fixed assets, please get in touch with your usual BDO contact or Ross Robertson.