Tax: Intangible reforms in the wind
By Donald Drysdale for ICAS
12 March 2018
Intangible fixed assets play an increasingly prominent role in many companies, and Donald Drysdale encourages ICAS members to lobby for their tax treatment to be simplified.
Introduction
In his Budget of 22 November 2017, Chancellor Philip Hammond announced that the Government would consult on possible changes to the intangible fixed assets regime, to consider how it encourages growth and whether targeted changes might be made.
The existing regime
Since April 2002 the intangible fixed assets regime has determined how the corporation tax system treats goodwill and other intangibles such as copyrights, patents and trademarks.
The regime applies to all companies, large and small, but not to unincorporated businesses. It provides companies with corporation tax relief for the cost of acquiring intangibles by allowing deduction of amortisation and impairment debits recognised in their accounts, while taxing corresponding receipts including disposal proceeds as income. It offers a number of reliefs, similar to those that apply for chargeable gains, including reinvestment relief and the ability to make tax-neutral transfers within groups.
The stated aim of the regime is to support UK competitiveness by providing a fair and consistent approach to the tax treatment of intangible assets, aligned as closely as possible with the approach taken in companies’ accounts.
Changes to the regime have been made from time to time since 2002. These have concentrated largely on closing down avoidance schemes and removing perceived unfairness within the existing tax rules. Recent examples include two new measures from 22 November – one regarding disposals involving non-cash consideration, the other concerning licences between related parties.
The Government now believes that a more comprehensive review is needed. This reflects the growing importance of intellectual property (“IP”) to the productivity of modern businesses, and the restructuring of IP ownership within multinational groups in response to recent international tax changes.
Scope of the consultation
On 19 February a consultation document was published.
Its aim is to review the operation of the intangible fixed assets regime and consider whether there is scope for targeted, value-for-money reforms that support the regime’s administration and its international competitiveness.
The consultation is not a comprehensive review of the regime as a whole. Instead, it identifies a number of specific aspects on which it is seeking stakeholders’ views:
- the exclusion of pre-Finance Act 2002 assets;
- the restriction on goodwill and customer-related intangibles;
- the impact of the regime’s de-grouping rules on mergers and acquisitions; and
- the use and competitiveness of the election for a 4% per annum fixed rate of relief.
Not only businesses but also the Office of Tax Simplification have voiced concerns that the pre-FA02 rule could be making the UK a less attractive location in which to hold IP. They quote the unnecessary complexity of similar assets being treated in different ways without clear justification, and the unfairness which can result. They also point to more generous regimes in some other major economies. Any change that involved eliminating this differentiation might involve some challenging transitional issues.
New restrictions introduced from July 2015 deny relief for ‘relevant assets’, which include goodwill in the form of customer information, customer relationships, unregistered marks or signs, and also licences in respect of any of these things. Some businesses have raised concerns that the absence of relief for such customer-related intangibles creates complexity by introducing a further boundary that does not align with accounting treatment.
After a tax-neutral transfer within a group, a charge to tax under the regime can re-emerge on ‘de-grouping’ within the following six years. Under the chargeable gains regime a corresponding de-grouping charge may be washed out by the substantial shareholdings exemption, but there is no such exemption in the case of intangible fixed assets. The consultation asks about difficulties this may cause with mergers and acquisitions, and whether the de-grouping charge might be modified to remove such difficulties.
Depending on the accounting framework adopted, intangible fixed assets are typically amortised in the accounts or, if judged to have an indefinite life, are tested for impairment annually. The Government considers that the regime is correct in allowing deductions that follow the accounts, but questions whether the alternative option of a 4% per annum fixed rate of relief is appropriate. It invites views on this.
More generally, the Government wants to understand whether there are targeted changes that might be made to the intangible fixed assets regime to support its policy objectives.
Costs of reform
We are accustomed to consultations which insist from the outset that any changes in law must be revenue-neutral. This one is different. It acknowledges that some of the changes it explores with regard to the intangible fixed assets regime would come at a cost to the Exchequer – a cost that might be justified in supporting economic growth.
The Government wants to understand what economic and fiscal benefits the changes would bring to the UK, including the extent to which the changes would make:
- UK businesses more likely to invest in intangible assets;
- the UK more attractive as a location for mobile business activities; and
- the UK more attractive as a place for multinational groups to own IP and, in light of the BEPS transfer pricing reforms, the impact that would have on the location of skilled personnel and value-generating functions in the UK.
An opportunity to influence the outcome
Changes made to the regime might affect companies of all sizes but probably won’t happen in the way we want unless we ask for them. The consultation invites responses by 11 May, and ICAS plans to respond if views are intimated by any members, affiliates or students.
While specific questions raised by the Government are summarised on pages 16–17 of the consultation document, there’s no need to respond to them all. If you have an opinion, idea or observation on even one of the questions raised, please share it by emailing tax@icas.com as soon as you can – preferably no later than 30 April.
Article supplied by Taxing Words Ltd