Intangible fixed assets

This article considers the UK corporation tax regime for intangible fixed assets (IFAs), which applies to IFAs acquired or created on or after 1 April 2002.

Since that time there have been numerous changes to the rules, particularly in relation to goodwill and customer-related intangibles.

There are beneficial claims and elections available to taxpayers to accelerate the available relief or to defer tax arising from profits on the sale of IFAs.

Separate articles are available in respect of research and development tax credits and the UK’s patent box regime.

Who do these rules apply to and what assets are covered?

These rules apply to companies liable to UK corporation tax that hold (or have held) intangible fixed assets. These are defined, in the first instance, in line with accounting standards, although the assets are not required to be capitalised in the company’s accounts for the rules to apply.

Qualifying intangible assets include:

• Intellectual property (IP) including patents, trademarks, designs, and copyrights;
• Licences and options in respect of IP;
• Royalties; and
• Goodwill (but excluding goodwill arising on consolidation).

Assets specifically excluded in the legislation include:

• IFAs created or acquired before 1 April 2002;
• Any rights over tangible assets (including land);
• Financial assets and assets held for non-commercial purposes;
• Certain IFAs representing qualifying expenditure for the purposes of the UK’s creative sector tax reliefs;
• Assets previously treated as tangible assets where capital allowances have been claimed in the past; and
• Certain assets acquired from related parties (albeit these rules are complex and dependent upon the date of acquisition and specific advice should be sought).

How relief is given for IFAs

Amortisation

The starting position is that corporation tax relief matches the amortisation of intangible fixed assets as recognised in the company’s accounts, although this basic rule is subject to restrictions

It is possible to make an election so that tax relief is given at 4% of cost per annum on a straight-line basis, which may be beneficial where the assets are not being amortised or have a useful life of greater than 25 years.

Goodwill and customer related intangibles

The tax treatment of goodwill and other customer related intangibles (such as customer lists) is restricted and will depend upon the date of acquisition.

Very broadly, the amortisation of goodwill and other customer related intangibles will not be eligible for corporation tax relief where these assets were acquired after 7 July 2015.

However, where goodwill and other customer related intangibles were acquired together with specific ‘qualifying IP’ (being certain patents, registered designs, copyright, design rights and plant breeders rights) as part of a business acquisition on or after 1 April 2019, corporation tax relief can be available at 6.5% of cost per annum, but subject to a cap of six times the value of the qualifying IP acquired.

As the restriction of corporation tax relief only relates to IFAs falling within the definition of goodwill and other customer related intangibles, and is also dependent on the date of acquisition, specific advice should be sought.

Disposals of IFAs

The disposal of IFAs that fall within the rules can give rise to income gains or losses, depending on the extent to which the proceeds received is greater than or less than the tax carrying value of the disposed assets.

Where the disposing company reinvests the proceeds from the sale into a replacement IFA within a prescribed period, it may be possible to defer some of the income gain by making a rollover relief claim. The effect of a claim is to reduce the tax cost of the replacement assets which reduces the amount of deductible amortisation over its lifespan.

IFAs and groups

Transfers of intangible fixed assets between group companies can be undertaken on a tax neutral basis, provided both the transferor and transferee are within the charge to UK corporation tax and they are both members of the same 75% tax group for IFA purposes.

When a company leaves the group within six years of a tax-neutral transfer a degrouping charge may arise, calculated by reference to the IFA’s market value at the date of transfer. While the degrouping charge initially arises to the transferee, is it possible to elect for the charge to arise to another group company. But there are a number of exceptions to such a degrouping charge, including where a company leaves a group as a result of a share disposal to which the Substantial Shareholding Exemption applies.

Rollover relief can also be claimed in instances where one company disposes of an IFA and the replacement asset is acquired by a group company and may also be claimed in respect of degrouping charges.

How we can help

We can advise on the impact of the intangible fixed assets rules ahead of any significant acquisition or disposal, or in relation to the purchase or sale of a business. We can also advise you on the potential benefits of making one of the claims or elections mentioned above, or on the interaction between accounting treatment and tax implications.

For more information on the tax regime for intangible fixed assets, please contact your usual Saffery partner or speak to Sean Watts.

This article is based on law and HMRC practice at 1 September 2024.