This factsheet considers the UK corporation tax regime for intangible fixed assets (IFAs), which applies to IFAs acquired or created on or after 1 April 2002. Since that time there have been numerous changes to the rules, particularly in relation to goodwill and customer-related intangibles.
There are many beneficial claims and elections available to taxpayers to accelerate the available relief or to defer tax arising from profits on the sale of IFAs.
Separate factsheets are available in respect of research and development tax credits and the UK’s patent box regime.
Who do these rules apply to and what assets are covered?
These rules apply to companies liable to UK corporation tax that hold (or have held) IFAs. These are defined, in the first instance, in line with accounting standards, although the assets are not required to be capitalised in the company’s accounts for the rules to apply.
Qualifying intangible assets include:
- Intellectual property including patents, trademarks, designs and copyrights;
- Licences and options in respect of intellectual property;
- Goodwill; and
- Player registrations (in the case of sports clubs).
Assets specifically excluded in the legislation include:
- IFAs created or acquired before 1 April 2002;
- Any rights over tangible assets;
- Financial assets and assets held for non-commercial purposes;
- Certain IFAs representing qualifying expenditure for the purposes of the UK’s creative sector tax reliefs; and
- Assets acquired from related parties, such as IFAs created by the related party before 1 April 2002 or goodwill created on the incorporation of a business.
How relief is given for IFAs
The starting position is that tax relief matches the amortisation of IFAs as recognised in the company’s accounts. It is possible to make an election so that tax relief is given at 4% of cost per annum on a straight-line basis, which may be beneficial where the assets are not being amortised or have a useful life of greater than 25 years.
Goodwill and customer related intangibles
The tax treatment of goodwill and other customer related intangibles (such as customer lists) has recently changed so that assets acquired on or after 1 April 2019 attract relief at 6.5% of cost per annum, subject to a cap of six times the value of any qualifying intellectual property (see above).
The treatment of assets of this type acquired prior to 1 April 2019 will depend on the date of acquisition, with tax relief disallowed in some cases.
Disposals of IFAs
The disposal of IFAs that fall within the rules can give rise to income gains or losses, depending on the extent to which the proceeds received is greater than or less than the tax carrying value of the disposed assets.
Large taxable income gains may accrue to companies in the sports industry where a player’s registration is transferred to another club for a profit.
Where the disposing company reinvests the proceeds from the sales into a replacement IFA within a prescribed period it may be possible to defer some of the income gain by making a rollover relief claim. The effect of a claim is to reduce the tax basis of the replacement assets which lower the amount of deductible amortisation over its lifespan.
IFAs and groups
Transfers of IFAs between group companies can be undertaken on a tax neutral basis, provided both the transferor and transferee are within the charge to UK corporation tax and they are both members of the same group for IFA purposes.
When a company leaves the group within six years of a tax-neutral transfer a degrouping charge may arise, calculated by reference to the IFA’s market value at the date of transfer. While the degrouping charge initially arises to the transferee, is it possible to elect for the charge to arise to another group company.
Rollover relief can also be claimed in instances where one company disposes of an IFA and the replacement asset is acquired by a group company and may also be claimed in respect of degrouping charges.
How we can help
We can advise on the impact of the IFA rules ahead of any significant acquisition or disposal, or in relation to the purchase or sale of a business. We can also advise you on the potential benefits of making one of the claims or elections mentioned above, or on the interaction between accounting treatment and tax implications.
For more information on the tax regime for intangible fixed assets, please contact your usual Saffery partner or speak to Sean Watts.
This factsheet is based on law and HMRC practice at 1 February 2020.