UK tax relief reintroduced for acquired goodwill with 'strong connection' to IP

Out-Law News | 12 Nov 2018 | 10:20 am | 2 min. read

The UK government intends to re-introduce tax relief for acquired goodwill, but only to the extent that it has a 'strong connection' to intellectual property (IP) itself qualifying for relief, a consultation document response published alongside the Finance Bill 2019 confirms.

Tax relief was withdrawn in 2015 for companies trying to write-off the cost of purchased goodwill and certain customer-related intangible assets. The stated policy objective of the withdrawal of the relief was to remove the "artificial incentive" to structure a business acquisition as an asset purchase rather than a share purchase and bring the UK regime in line with other major economies.

In partially reinstating the relief the government says it intends to provide targeted relief for goodwill in the acquisition of IP-intensive businesses.

As a proxy for the contribution of IP assets to goodwill, the government proposes to allow relief for goodwill by reference to the value of the eligible IP in the acquired business. Relief for the cost of acquired goodwill will be capped at the fair value of the eligible IP in the acquired business.

"It is disappointing that the relief will be limited as the 2015 withdrawal of tax relief for acquired goodwill hit many transactions which were structured as asset sales for purely commercial reasons and not to avoid tax. However, the reinstated relief, although potentially complex to administer, will be welcomed by IP-intensive businesses," said Eloise Walker, a corporate tax expert at Pinsent Masons, the law firm behind Out-Law.com

The consultation response said: "The government recognises that the goodwill restriction may have had a pronounced negative impact on the acquisition of IP-intensive businesses, which are frequently valued at a significant premium to their underlying individual asset values - often due to asset synergies or valuation methods. The government accepts that to wholly deny relief for goodwill in these situations is not consistent with the government’s wider approach to provide relief for the cost of acquired IP assets."

The consultation response document gives the example of company A acquiring the business of company B for £100 million. At the time of acquisition, company A accounts for the cost as £20m of eligible IP assets, £50m of tangible capital assets, and £30m of goodwill. It says that the new relief would provide relief for the amortisation of £20m of that goodwill.

For the purpose of the new relief, the categories of IP that are eligible would broadly correspond to the existing definition of IP in rules, including patents, registered trade marks, registered designs, and copyright or design rights.

The government intends to conduct a brief consultation on the detailed design of the new rules. The leading proposal is that the rate at which relief is given will continue to be based on accounting amortisation and impairment debits, subject to an optional election for fixed rate relief at 4% per annum. However, the amount of goodwill that qualifies for relief will be capped at the fair value of eligible IP or the total value of goodwill, whichever is lower.

The document confirms that the government does not intend to reinstate relief for customer-related intangibles. It says that these are identifiable assets in their own right, so their value is not derived from other identifiable IP assets.

The government intends that the new rules should apply in relation to acquisitions of goodwill occurring on or after 1 April 2019. Goodwill acquired prior to that date will continue to be subject to the tax treatment that applied at the time it was acquired.

The government first announced the change in the Budget, when it announced that the corporate intangibles tax regime would also be reformed to prevent a de-grouping charge on a share sale qualifying for the substantial shareholdings exemption (SSE).