Finance Bill

Written evidence submitted by the Chartered Institute of Taxation (FB 18)

Finance Bill 2015–16

Clause 32 - Intangible fixed assets: goodwill etc

Summary

1. This clause will prevent corporation tax deductions, such as amortisation [1] and impairment [2] debits, in respect of goodwill and certain other intangible assets linked to customers and customer relationships. The change will apply in respect of goodwill purchased (usually as part of a business acquisition) after 8 July 2015 (Summer Budget Day). It follows a similar change, being the removal of the corporation tax deduction for goodwill acquired by a company on the incorporation of a business, which was introduced by Finance Act 2015 and took effect from 3 December 2014.

2. We do not agree with the stated rationale for this change [3] , in that we do not agree that the relief currently distorts commercial practices (for the reasons set out below), nor that it leads to manipulation and avoidance.

3. We consider this to be a missed opportunity for consultation in an area where there is scope for reform and improvement. Further the change will introduce further complexity to the tax system and, if the government is minded to remove the relief, there are other possible approaches which would offer greater simplicity and coherence within the tax system.

Background

4. Currently a deduction (relief) is allowed for corporation tax purposes in respect of capital expenditure incurred on acquired goodwill either in accordance with amounts amortised in the accounts or, if an election is made, at a fixed rate of 4% deduction per annum. This relief was introduced in 2002 when the corporation tax regime for intangible fixed assets was introduced.

5. We understand that, generally, taxpayers make the election to take the relief as a 4% pa deduction. This is because purchased goodwill is not amortised for accounting purposes under IFRS, although it may be impaired. However, as buyers do not acquire assets with the intent of them being impaired the 4% pa election is made to secure a tax deduction.

6. Thus, the practical effect of the proposed change will be, in nearly all cases, to prevent a company which acquires goodwill as part of a business acquisition from claiming the 4% pa deduction in respect of the purchase price attributable to the goodwill.

Rationale for the change

7. The Background note in the Explanatory Notes to the Finance Bill states that this measure supports "the government’s objective to have a fair tax system for all". It continues that the measure "removes this artificial incentive to buy assets rather than shares".

8. Whilst we agree that the availability of the existing relief in respect of purchased goodwill provides, from a buyer’s perspective, some advantage in being able to do an asset acquisition (as compared to a share acquisition) as the 4% write-off for goodwill is available, our experience is that sellers rarely entertain an asset disposal where a significant amount of goodwill is involved.

9. This is because sellers invariably want to sell the shares in a company, either to take advantage of the substantial shareholdings exemption (SSE) available to corporates or to be able to claim a lower rate of capital gains tax available to individuals (business asset taper relief or entrepreneur’s relief). A sale of assets would result in the goodwill disposal being taxed, or taxed at a higher rate, whether it is pre or post 2002 goodwill.

10. Whereas the seller can achieve an immediate lower tax bill in respect of a sale of shares, a buyer can only write off the cost of the goodwill acquired over 25 years, so an overall bias in the tax system in favour of share sales rather than asset sales already exists in most cases. Thus the existing relief does not in fact currently distort commercial practices. Indeed, rather than removing an artificial incentive to buy assets rather than shares, the proposed change increases the bias towards share transactions by removing any tax relief in the buyer’s hands for goodwill.

11. We also note that the measure announced in December 2014, preventing the use of goodwill after incorporation, is expected to save around £155m per year from 2019/20 and the complete abolition of the goodwill amortisation deductions is expected to save around £300m from 2020 onwards. Thus the measure is expected to be revenue raising.

12. Raising revenue is a straightforward rationale for a proposed measure and we recognise that measures will be introduced for that reason from time to time.

13. That said, we are surprised at the expected scale of the revenue increases, given the fact that share sales are so much more common than asset sales. Following the 2002 changes which created a significant difference in the tax treatment of pre-2002 and post-2002 goodwill, we are aware that some taxpayers adopted tax planning approaches to exploit this distinction. This may have contributed to a perception that this is an area of significant risk to the exchequer. However our belief is that these planning ideas have been successively defeated or closed down. If the revenue projections are based in part on this perception they may be outdated. Further, the proposal will introduce new distinctions between pre- and post-2015 goodwill, as well as between post-2015 good will and other intellectual property assets, some of which ae close economic substitutes. Historically this is the sort of change has been an invitation to further tax planning by some taxpayers.

Simplicity

14. We think it is unfortunate that this change to the rules has been suggested without any prior consultation. We recognise and respect the Government’s right not to consult over rate rises and similar changes. However we suggest that this is a structural change to an area of declared policy where we would have welcomed the opportunity to participate in a consultation.

15. The effect of the change appears to be the creation of ‘post July 2015 acquired goodwill’ which will now sit in a category of its own, in terms of whether its treatment is income or capital, or follows the accounts or not. Goodwill will now be treated differently in the hands of a seller (where it will continue to be income) than for a buyer and also will be treated differently from any other asset in an asset sale situations, even other forms of intellectual property. A business may now have three types of goodwill related to a trade; pre- 2002 goodwill it has generated itself (which includes any goodwill it has generated itself after 1 April 2002 in that trade) which remains a capital asset; goodwill purchased into the trade between 1 April 2002 and 7 July 2015 which is within the intangible asset regime and can be amortised; and goodwill purchased on or after 8 July 2015 which is within the intangible asset regime but is not amortisable.

16. As mentioned above, purchased goodwill is not amortised for accounting purposes under IFRS, although it may be impaired. The proposal to remove the corporation tax relief (usually claimed as a 4% deduction for tax purposes with no corresponding amortisation appearing in the accounts) eliminates the difference between accounting and tax initially on the acquisition, but also denies any tax relief for any goodwill impairment which is subsequently recognised in the accounts.

17. An alternative approach would have been to simply remove the right to adopt a fixed 4% amortisation allowance and to have the tax treatment follow the accounts, thus permitting tax relief for impairment. This would have simplified the system and increased alignment with the accounts and would be expected to have a similar revenue raising effect to the measure enacted, given that goodwill is not acquired with an expectation of a write-down.

18. A further approach would be to return all goodwill (pre and post 2002) to capital treatment. This would, we assume, also have raised revenue, although this would still prevent any tax relief on an impairment.

19. The route chosen is a new tax rule which is more complex than the other possible approaches mentioned above and is not obviously superior to any of them. This leaves stakeholders very unclear about the reasons for the change.

Further reform

20. In addition, in terms of overall structure of the tax system, it is difficult to understand the rationale behind making this change in isolation. There are a number of aspects of the intangible assets regime that could, and we suggest should, be considered for reform. These include:

20.1. Abolishing the distinction between pre-2002 and post-2002 intangibles for all future transactions. The distinction between pre-2002 and post 2002 intangibles arose on the introduction of the intangible asset regime in FA 2002. Currently pre-2002 intangibles continue to be treated as capital assets and disposals of them are taxed under the rules dealing with corporation tax on capital gains. Disposals of post-2002 intangibles fall within the intangible assets regime and thus any gains or losses are taken into account as income (or debits). We suggest that a welcome reform would be for the disposal of all intangibles going forward to come within the intangible assets regime.

20.2. Extending the exemption from a de-grouping charge when an asset is sold inside a company and the corporate disposal qualifies for SSE to also apply for intangible assets. The general rule is that if an asset is transferred from one group company to another group company, this occurs on a no gain/no loss basis for tax purposes and no charge to tax arises. However if the transferee company leaves the group within six years of the intra-group transfer, there is a deemed disposal and there is a charge to tax on any gain that arises (the de-grouping charge). In 2011 an exemption was introduced for capital assets within the charge to corporation tax on capital gains, but was not extended to intangible assets, which were subject to similar rules and a de-grouping charge under the intangible assets regime. No specific reason was given at the time, other than that the intangible assets regime and corporation tax on capital gains were dealt with by different departments in HMRC. We suggest that the two regimes should be aligned.

20.3. The argument for alignment is strengthened by the issue being further complicated by the fact that goodwill accruing in a trade after 1 April 2002 is deemed to be a pre-2002 asset as long as the trade was carried on at 1 April 2002; the longer the elapse of time since this date, the more likely it is that uncertainty will arise as to whether the trade was being carried out at that point, or whether the trade has changed so much it must be regarded as a different trade.

21. This is a missed opportunity for consultation in an area where there is scope for reform and improvement.

Appendix: The Chartered Institute of Taxation

The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.

The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.

The CIOT’s 17,000 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.

September 2015