The government announced in the Budget in October 2018 that it was proposing to partially reinstate tax relief for the amortisation of purchased goodwill with a 'strong connection' to acquired IP, but the full details only became clear when government amendments to the Finance Bill were published on 20 December.
The government's initial proposal was to cap the tax relief for acquired goodwill at the fair value of the eligible IP, but it has now decided to make the cap six times the value of the IP.
Tax relief was withdrawn in 2015 for companies trying to write-off the cost of purchased goodwill and certain customer-related intangible assets. Before that time relief was available on business acquisitions for purchased goodwill, in the same way as for the acquisition of other intangible assets.
"It is positive that the amount of goodwill that can qualify for relief has been increased to six times the expenditure on qualifying IP assets," said Jamie Robson, a corporate tax expert at Pinsent Masons, the firm behind Out-Law.com. "However, it remains disappointing that relief for goodwill amortisation has not been reinstated in full. Partial relief will mean more complexity for taxpayers."
The categories of eligible IP rights include patents, registered designs, copyright and design rights as well as plant breeders' rights.
The government initially proposed that the relief would only be available in respect of goodwill and not customer related intangibles, despite both of these categories having been included in the 2015 withdrawal of relief. However, customer related intangibles and unregistered trade marks will now be included within the scope of the reinstated relief. Customer related intangibles are information relating to customers or potential customers and relationships with customers.
"The proposed reintroduction is particularly important in the context of business sales," Robson said. "Typically, the amount of goodwill acquired on the acquisition of a business is any positive difference between the value of the assets of the business and the purchase price paid for the business. Since April 2015, no relief has been available to the purchaser for the decline in value of such goodwill over time but the proposed changes should allow for some tax relief to be claimed provided that the other assets of the business include qualifying IP and depending on the values allocated to the goodwill and other assets on the sale."
The purchaser will have no choice about how to give effect to the relief. The relief must be taken by way of debits at a fixed annual rate of 6.5% of the amount of the relevant goodwill. There is therefore no option to claim amortisation relief based on the actual decline in value of the purchased goodwill within the accounts of the purchaser.
The restriction on relief will continue to apply in relation to internally-generated goodwill acquired from a related party.
The draft provisions are to be included as a new Schedule to the Finance Bill currently making its way through the UK parliament and are broadly expected to apply to acquisitions of goodwill occurring after 1 April 2019.
The amendments will be considered in the House of Commons at the report stage for the Bill, which is due to take place on 8 January.