Portfolio company intellectual property strategy after recent UK tax changes
The taxation of intangible assets is an important consideration for portfolio company groups in the current tax environment, due to the combination of increasing investment in intangibles assets, and a rapid pace of change in the taxation of these assets around the world.
Whilst there is no one size fits all approach to development of an effective intangible assets strategy, there is a tried and tested process for determining the right fit which we discuss in the following tax insight article:
Developing a tax strategy for intangible assets
Aside from the larger strategic question of what an effective intangible asset strategy looks like, there are a few recent developments in the UK and at a global level worth being aware of that we summarise below.
Re-introduction of relief for goodwill in the UK
Corporate tax relief for ‘goodwill’ has been partially reintroduced with effect from 1 April 2019 in certain circumstances. Broadly, the proposed relief applies at a fixed rate of 6.5% per annum on cost on an amount up to 6 times the value of any qualifying intellectual property assets that have been acquired. Qualifying assets will include patents, registered designs, copyright and design rights and plant breeders’ rights.
Whilst this is a welcome move, particularly for businesses pregnant with software IP (which may be qualifying assets by virtue of copyright), it will remain challenging to obtain deduction for much of the value of acquired goodwill in a number of circumstances given that ‘brand’ assets and know how are not in themselves qualifying assets for these purposes. It would, therefore, be prudent to think carefully through the valuation/PPA and the ability to support the attribution of value to identifiable intangible fixed assets separate from the goodwill of an enterprise to optimise the post-tax value of investments.
De-grouping rules in the UK
The chargeable gains de-grouping rules were reformed in 2011 to enable exemption of a de-grouping charge where the disposal of the shares in a company qualifies for the Substantial Shareholding Exemption (SSE). This effectively rebases the assets of the business to market value on a tax-free basis, and enables the flexible carve out of business assets to suit the commercial goals of an organisation or investor. However, this reform was not extended to the intangible fixed assets (IFA) de-grouping charge, where complex structuring was often required to achieve the same effect (relevant for intangible assets created or acquired after 1 April 2002). This was often a challenge in practice due to the application of the IFA rules for recent innovations.
Following consultation, legislation was introduced at the end of 2018 to treat the de-grouping charge on IFAs as tax neutral where the share disposal qualifies for SSE. This treatment applies to de-groupings tax events that occur on or after 7 November 2018. This legislation, in combination with the pre-existing legislation on chargeable gains assets, makes it much easier to separate or de-merge intangible assets and associated operations (be it as part of an operational integration across portfolio assets or an exit event) without tax cost. It may, therefore, be worth revisiting former plans to integrate or separate ownership of IP assets within a portfolio if such plans were previously dismissed due to the potential for tax cost.
A debate is currently raging regarding the taxation of the digital economy.
The debate started with a primary focus on the taxation on large tech businesses, but it has quickly evolved to be relevant for any international business. While the end is far from clear at this stage, the latest direction of travel is an increasing likelihood of greater attribution of profits to market jurisdictions, and away from owners of centralised IP. This could have an important impact on post-tax cash flows, particularly for IP rich groups that are reliant on low taxation of centralised IP related profits as a key part of their tax structure.
Although global changes are unlikely to happen within the next two years, change within a 5 year horizon seems likely – particularly as some countries are taking unilateral action already to address perceived imbalances in the current tax framework through the introduction of digital service taxes that apply to gross revenue rather than profit. Leading proponents of such taxes include France, Spain, Mexico, as well as certain provinces in Canada. This is an area that is evolving quickly, and which will require close monitoring.
Read more about the OECD developments here.
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