Autumn Budget 2017: Intangible fixed assets – related party step-up schemes

The realisation of intangible fixed assets (IFAs), contained in Ch 4, Part 8, CTA 2009, broadly expects the profit and loss on the disposal of the IFA to be computed by reference to the proceeds of realisation for accounting purposes. In an arm’s length cash transaction this would normally be the amount received subject to an arm’s length or market value adjustment.

For non-cash transactions involving the transfer of IFAs between related parties, the amount recognised on disposal should be equivalent to the cash that would be received in a market value transaction.

Net book accounting, where consideration for a disposal is accounted for at ‘cost’ (the book value of the disposed asset) rather than market value, was adopted to reduce a lower value in the books of the disposing party but a higher amount in the acquirer’s books. Such “Step-up” transactions were subject to transfer pricing rules but legislation was introduced by section 42, Finance (No. 2) Act 2015 to specifically counter such arrangements, ensuring that market value applied. These rules however did not apply to an IFA licence granted between related parties.

With effect for transactions undertaken on or after 22 November 2017, legislation will be amended to ensure that the market value rule can also apply to an IFA licence granted between related parties. The proposed revisions will confirm that the proceeds of realisation for accounting purposes within the legislation, in relation to any disposal, should recognise the market value of any non-cash consideration.

These changes counter step-up avoidance by ensuring that disposals of all IFAs including related party licensing are recognised and taxed at market value and in line with cash considerations. They will have particular impact on group companies which hold IFAs. The government will consult in 2018 on the IFA regime so this is clearly on their radar and subject to further reform.