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In the latest UK200Group blog post, Stuart Gooderham, Corporate Tax Senior Manager at Dains Accountants discusses the implications of the relaxation of the goodwill restriction

Stuart Gooderham
When dealing with a company purchase, historically a trade and asset purchase would always be the preferred route and often give the buyer very good arguments to negotiate on price in respect of commerciality but also the availability of future tax relief in the form of goodwill amortisation relief. Since 2015 and the removal of goodwill amortisation relief the purchaser has lost tax relief for the amortisation.

Keeping in line with the Government’s theme of incentivising innovative companies, they introduced a relaxation of the goodwill restriction in April 2019 when purchased with certain intellectual property. This article outlines these changes and the further considerations to think about when advising clients on an acquisition.

Firstly, a bit of background on the changes in intangible assets. Since the introduction of the Intangible fixed asset regime on 1 April 2002, companies have dealt with Intangible fixed assets outside of capital gains tax. Initially, the introduction of the regime meant that all intangibles, purchased after 2002, could receive a tax deduction for the amortisation (debits) released to the profit and loss account. For many, this meant that companies could receive tax deductions for amortisation after 2002.

This was until the enactment of the second Finance Act in 2015, where for accounting periods beginning on or after 8 July 2015, no debits were allowed for relevant assets until disposal, these relevant assets being;

• Goodwill;
• Customer information lists
• Unregistered trademarks

For acquisitive companies, goodwill can be one of the company's most significant assets in a trade and asset purchase and losing this relief was a significant change.

Good news for these acquisitive companies is that from 1 April 2019, the government has introduced legislation that offers companies the ability to again claim an allowable tax deduction against an element of purchased goodwill and other intangibles (above) that form part of the business acquired, where the acquisition also includes qualifying Intellectual Property.

The qualifying intellectual property assets include:

• Patents
• Unregistered trademarks
• Registered designs,
• Copyrights
• Design rights,
• Plant breeders’ rights.

The amount of allowable deduction which can be claimed is at a fixed rate of 6.5% per annum on the cost of goodwill, however, this value is restricted to six times the value of the qualifying intellectual property in the business.

An example to demonstrate the impact of the changes is below:

If Bill Limited acquired Ben Limited with goodwill valued at £750,000 and patents valued at £40,000 after 1 April 2019. Bill Limited would be able to claim tax relief on the amortisation of the goodwill as it is associated with the intellectual property acquired. The total amount of goodwill which you can obtain an allowable deduction for however is capped at 6 times the value of the qualifying intellectual property.

Using the numbers above, the goodwill attributable to the intellectual property is capped at 6 x £40,000 = £240,000. Therefore, amortisation of the goodwill which is allowable for corporation tax purposes will be £15,600 (£240,000 x 6.5%) per annum for a period of just over 15 years until an allowable deduction on the full £240,000 has been claimed.

The legislation does not permit relief for internally generated goodwill, such as that created on incorporation. The relief is not available if the asset was acquired before 1 April 2019, or if the asset was acquired from a related party. Relief is also not available, even where goodwill is acquired, if the business acquired does not include any qualifying Intellectual property assets (listed above).

With these changes being brought in, it is now even more important to plan and discuss with clients as early as possible, where appropriate, to correctly identify and negotiate a split of consideration to intellectual property and goodwill to ensure that the allocation of proceeds maximises the availability of future amortisation relief. Tax relief could be lost if intellectual property assets were included in an acquisition but not identified separately in the SPA. It has been commonplace for some time to describe all IP as “goodwill”, where this happens, tax relief may never be received within the consideration allocated to goodwill.

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