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Budget 2018: 'welcome' reforms of intangible tax regime

The government intends to reform the corporate intangibles tax regime to partially re-instate relief for acquired goodwill and to prevent a de-grouping charge on a share sale qualifying for the substantial shareholdings exemption (SSE), according to the Budget documents.02 Nov 2018

"This is a very welcome announcement," said Eloise Walker, a corporate tax expert at Pinsent Masons, the law firm behind Out-law.com.

The intangible fixed assets (IFA) tax regime was introduced in 2002 and sets out how  companies are taxed  in relation to  intellectual property (IP) and  goodwill created or acquired from an unrelated party on or after 1 April 2002. Profits and losses in respect of intangible assets are taxed and relieved as income, generally in accordance with accounting principles.

Where an asset within the IFA regime is transferred from one group member to another, the transfer will be treated as tax-neutral. However, where a transferee company ceases to be a member of the group within six years of a tax-neutral intra group transfer, the transferee company is deemed to dispose and reacquire that asset, which can give rise to a tax charge.

This IFA de-grouping charge currently causes specific difficulties where the sale of a business by a company is structured as a hive-down. A hive-down involves the transfer of a business to a new wholly-owned subsidiary (Newco), creating a group, followed by a sale of Newco to a buyer outside the group.

Under the current rules if intangibles which are not within the IFA regime are hived down and the shares are sold, SSE usually wipes out any gain. However, if the intangibles are caught by the IFA regime, SSE does not currently apply and Newco is deemed to have disposed of and reacquired the relevant intangibles for market value immediately after the intra-group transfer.

The Budget announcement states that the government intends to alter the IFA regime’s de-grouping charge rules so that a charge will not arise where de-grouping is the result of a share disposal that qualifies for SSE.

"The de-grouping change can expect to be met with jubilation by advisers who have hitherto had to brief clients on the distinction between pre and post 2002 intellectual property when advising in a commercial hive down and sale scenario, with all its attendant practical difficulties around due diligence activities when IP might have arisen," Eloise Walker said.

"We suggested this change should be made, in our response to the government's consultation on potential reforms to the IFA regime. It is good that the government has listened to concerns that the current rules mean that transactions involving the sale of assets within the IFA regime often result in a higher tax cost, than a similar sale of pre-2002 intangible assets," she said.

Since 8 July 2015 tax relief has not been available for companies trying to write-off the cost of purchased goodwill and certain customer related intangible assets. The stated policy objective of this change was to remove the "artificial incentive" to structure a business acquisition as an asset, rather than a share, purchase and bring the UK regime in line with other major economies. 

The government has said it will publish detailed proposals on 7 November setting out how it intends to partially re-instate relief for acquired goodwill in the acquisition of businesses with eligible IP. It intends to include legislation for both changes in the Finance Bill 2019.

"We will have to await further details to know how beneficial this change will be in practice," said Walker.

The changes to the de-grouping rules will have effect in relation to de-groupings occurring on or after 7 November 2018. It is not clear when the goodwill change will take effect.