Currently, when a company acquires goodwill or customer related intangibles from an unrelated party, it can claim a Corporation Tax deduction for amortisation recognised in its profit and loss account. Alternatively, the company can elect for a fixed deduction of 4% a year.
If, on disposal, the company makes a loss, this usually forms part of the company’s trading profit or loss for the year.
Legislation will be introduced to withdraw relief for all goodwill and customer related intangibles acquired on or after 8 July 2015 (except where the acquisition is pursuant to an unconditional obligation entered into before that date).
If a loss arises on the disposal of assets falling into these new rules, it will be treated as a non-trade expense. This means that if the cost cannot be set off against other profits in the year of disposal, it will not be available to set off against trading profits in subsequent years.
Intangibles acquired before 8 July 2015 will continue to be treated under the old rules, so a corporation tax deduction will continue to be available for amortisation, and any loss on disposal will be treated as part of the company’s trading profit or loss for the year of disposal.The purpose of this new provision is to remove the tax relief available when a business acquisition is structured as an asset purchase so that goodwill can be recognised. This will bring the rules for business asset purchases into line with those for companies who purchase only the shares of the target company.
These provisions almost put companies back to the position they were in prior to the introduction of the intangibles rules in 2002, except that indexation is not available when goodwill is disposed of at a profit.
As a result, companies may have three types of goodwill on their balance sheet: pre-2002 goodwill that is dealt with under capital gains tax principles; goodwill acquired before 8 July 2015 in respect of which amortisation can be deducted for corporation tax purposes; and “new” goodwill which is dealt with under the intangibles rules but for which amortisation is not deductible for corporation tax purposes.
A corporation tax deduction will continue to be available for amortisation on other types of intangible asset.