What do you know about Corporate Intangibles Tax Treatment
Corporate intangibles tax treatment
The corporate tax treatment essentially follows the treatment of intangibles in the accounts. There are, however, restrictions on the deductibility of debts about goodwill and other customer-related intangible assets depending on the date of acquisition or creation.
The corporate intangibles regime has gone through several iterations since its introduction in April 2002, most recently in July 2020, mainly about goodwill and other customer-related intangible assets.
The regime is complex and requires detailed recording keeping by companies and their advisers, particularly about acquisition dates, relationships between companies, and the asset’s market value at the time of the first acquisition under the new rules. Therefore, advisers need to confirm the history of an intangible fixed asset when it is being acquired from a related party.
Corporate intangible regime
Most intangible assets are within the corporate intangible’s regime, but some types of expenditure are excluded completely or excluded apart from royalties derived from the intangible asset. The corporate intangible regime also interacts with other corporate tax regimes where the same expenditure qualifies for both regimes.
Debits and credits on intangible assets are generally treated for tax in the same way as they are included in the accounts. Still, tax adjustments follow similar rules for other expenditure items. Alternatively, a company can write down an intangible asset at a fixed rate instead of following the accounts.
What is an intangible fixed asset?
Intangible assets include operational assets that lack physical substance. For example, goodwill is a fixed asset, patents, copyrights, trademarks, and franchises. A company’s intangible assets are often not reported on its financial statements, or they may be reported significantly less than their actual value. This is because assets are accounted for at their historical cost.
Unlike tangible fixed assets such as a building or machinery, intangibles are often developed internally without any direct, measurable cost that can be capitalised. When an intangible is purchased, however, or when costs can be directly traced to the development of the asset, the cost is recorded as an intangible asset on the balance sheet.
Date of acquisition or creation
Generally, an asset is treated as created or acquired on or after 1 April 2002 when expenditure on its creation or acquisition is incurred on or after that date. Where expenditure is incurred partly before and after this date, it is possible to apportion the expenditure on a just and reasonable basis.
This general rule is amended if the asset:
- Was acquired from a related party
- Is internally generated goodwill
For assets acquired from related parties before 1 July 2020, the relevant date to consider is the first date a related party acquired the asset from an unrelated party. For acquisitions made on or after 1 July 2020, the relevant date is simply the date of acquisition, unless the related party is a company within the same capital gains group (in which case, the pre-1 July 2020 rules still apply). If the relevant date is on or after 1 April 2002, the asset will fall within the corporate intangible’s regime.
Which assets fall within the corporate intangible’s regime?
After determining the date of acquisition or creation, broadly, an intangible fixed asset is within the corporate intangibles regime if it was:
- Created by the company on or after 1 April 2002
- Acquired by the company on or after 1st April 2002 from a person who is not a related party
- Acquired by the company between 1st April and 30th June 2020 from a related party but only where:
- the party is a company, and the asset was already within the corporate intangible’s regime for the related party.
- That related party acquired the asset from a third party on or after 1st April 2002, and the third party is sufficiently unrelated
- The asset was created (by any person) on or after 1st April 2002
- Acquired on or after 1st July 2020 from a related party (but not from the same capital gains group company)
- Owned immediately before 1st July 2020 by a company that was not within the charge to UK corporation tax in respect of that asset.
Which assets do not fall within the corporate intangible’s regime?
- Created by a company before 1st April 2002 (and ownership has not changed since)
- Acquired by a company before 1st April 2002
- Acquired by a company between 1st April 2002 and 30th June 2020 from a related person where that related person created or acquired the asset before 1st April 2002
- Acquired by a company on or after 1st April 2002 from a company where both companies are in the same group and the related company disposing of the asset created before 1st April 2002.
Assets that fall outside the corporate intangible’s regime require different tax analyses depending upon the type of asset in question. However, most will be treated as capital assets under the chargeable gain’s legislation.
Intangible fixed assets – common mistakes
HMRC highlighted five of the most common mistakes around the intangible’s regime:
- Asset identification – it is important that companies and their advisers undertake a detailed analysis to support any asset identification
- No business acquisition – where a company has not acquired a business, relief for goodwill is not available under the intangible fixed asset regime
- Date of acquisition – any IFAs acquired should be correctly identified so that the correct tax treatment can be applied – especially when the acquisition falls close to the date of one of the regime legislative changes. Companies should keep contemporaneous documents to evidence the date of acquisition.
- Valuation – companies must obtain at least one professional independent valuation of all assets to ensure that the correct assets are valued on the proper basis, mainly if the acquisition is from a related party.
- Documentary evidence – related parties are expected to document transactions and agreements as if they were with an unrelated third party. Records should be kept for six years from the end of the financial year to which they relate.
How we can help
We can advise on the impact of the IFA rules ahead of any significant acquisition or disposal or about the purchase or sale of a business. We can also advise you on the potential benefits of making one of the claims or the interaction between accounting treatment and tax implications.
For more information, please contact us at WIM Accountants at firstname.lastname@example.org or call us on 02082271700.