Satwaki Chanda discusses the new corporate tax rules for goodwill relief, which apply from 1 April 2019.
For companies, the tax treatment of goodwill falls under the ‘intangibles’ regime, which has applied since 1 April 2002. Under these rules, profits and gains are recognised in accordance with the accounting treatment and taxed on revenue account.
‘New’ intangibles created on or after 1 April 2002 automatically fall within these rules – intangible assets created before this date are not included until they are sold to an outside unrelated third-party.
What is the tax treatment of goodwill?
The tax treatment for goodwill acquired by a company under a business sale has varied over the years, and may be summarised as follows:
- from 1 April 2002 to 7 July 2015, the cost of goodwill can be written down either in line with the accounting treatment or by using a 4% straight line writing down rate (CTA 2009, ss 729-730);
- from 8 July 2015 to 31 March 2019, tax relief is withdrawn for goodwill on a business acquisition – however, relief for losses on sale is still available (CTA 2009, s 816A, repealed by FA 2019, Sch 9, para 5);
- from 1 April 2019, tax relief for goodwill acquisitions has been reinstated, but only where the assets of the business include other intangibles which are eligible for tax write-downs. Relief is given in line with the accounting treatment, or by reference to a fixed writing down rate of 6.5% (CTA 2009, Ch 15A, inserted by FA 2019, Sch 9, para 6).
The above rules and restrictions also apply to intangibles such as customer lists and relationships and unregistered trademarks and signs used in the course of a business.
What is the impact of the new rules on goodwill post 1 April 2019?
The reinstatement of goodwill relief should be welcome to corporate businesses. However, it is hedged around with various restrictions:
- relief is only available for goodwill acquired under a business sale which also includes ‘qualifying IP’. Qualifying IP includes assets such as patents, design rights, copyright, registered designs or plant breeder's rights (CTA 2009, ss 879I, 879J). These assets must themselves be within the intangibles regime. The company is entitled to write down the whole of the cost of the goodwill provided that this is not more than six times the expenditure on the other qualifying IP assets acquired under the business sale. If the goodwill expenditure is greater than this amount, the amount of relief is reduced accordingly (CTA 2009, ss 879M, 879O).
- no relief is available where the company has acquired the relevant asset from a related individual or a firm where one of the partners is a related individual. As a consequence, a company is unable to write down the cost of goodwill and customer related intangibles acquired on the incorporation of a business, irrespective of whether the asset is already within the intangibles regime or would otherwise have qualified for the 6.5% writing down relief. This is subject to exceptions where the individual or firm acquired the relevant asset from a third-party (CTA 2009, s 879K).
Practical Tip:
When a company buys a business, it is important to identify those intangible assets which are eligible for relief under the intangibles regime. In particular, care should be taken in allocating values between the qualifying IP assets and goodwill to ensure that the relief is optimised.
