Acquired Goodwill: The re-introduction of tax relief
On the purchase of a business by a company, the term ‘goodwill’ is often used as a generic description for the miscellaneous intangible assets transferred.
Some might use this catch-all term to cover the value of assets which are harder to explain individually – or measure directly – such as patents, trade marks and copyrights, as well as a business’s reputation, customer loyalty, a solid customer base and good customer and employee relations.
However, under tax law, it is vital to differentiate between assets that have a definite useful life and those that have an indefinite life e.g. the value of your brand.
In 2015, tax relief was withdrawn for companies trying to write-off the cost of purchased goodwill and certain customer-related intangible assets. Then it was announced in last year’s Budget, that in certain circumstances, corporate tax relief for some intellectual property assets acquired when one business is purchased by a company in the UK, was to be reintroduced from April 2019.
The new tax relief applies at a fixed rate of 6.5 percent per annum on cost and not by reference to the accounts depreciation, which is how the deduction works for other assets. It is also capped and can only be on an amount up to six times the value of any qualifying intellectual property assets acquired in the purchase.
Qualifying assets will include:
• Patents
• Registered designs
• Copyright and design rights
• Plant breeders’ rights
The updated legislation retains restrictions on the depreciation of the goodwill when the business is purchased, as well as certain other anti-avoidance / anti-base erosion measures. Companies are also required to determine the value of goodwill on their financial statements at least once a year and record any impairments.
While the new relief is a welcome move, it should be noted that much of the value of goodwill that is acquired in many circumstances may not actually be deductible. For instance, if a manufacturer is producing generic items, most of the goodwill acquired may relate to its brand and customer base rather than longstanding intellectual property rights.
Therefore, to obtain greater clarity on their tax position and optimise the statutorily available reliefs, businesses contemplating major transactions should think through carefully, and seek counsel from their professional advisers, on the valuation / purchase price they would want to allocate for the different intangible fixed assets that are being purchased as part of the transaction.
It will also be vital to demonstrate how each intangible fixed asset was identified (as separate from the goodwill of a business) and how the valuation of each asset was arrived at.
IFRS (International Financial Reporting Standards) guidance, especially IFRS 3 guidance on business combinations, can provide helpful supporting rules and principles for recognition of a wide range of assets separate from the general goodwill of the enterprise that is being purchased. Visit www.ifrs.org/issued-standards/list-of-standards/ for more information.
Phil Hall is Tax Partner at BDO LLP T: 01603 756905 E: phil.hall@bdo.co.uk or visit bdo.co.uk Twitter@BDOEastAnglia
