Finance Bill

Further written evidence submitted by the Chartered Institute of Taxation (CIOT) (FB 75)

Finance Bill 2015-16

Clause 32 - Intangible fixed assets: goodwill etc

1. This is a supplemental briefing note on this clause (which will prevent corporation tax deductions, such as amortisation and impairment debits, in respect of goodwill and certain other intangible assets linked to customers and customer relationships) and should be read in conjunction with our earlier briefing note.

2. Our earlier briefing note focussed on taxpayers who are required to use International Financial Reporting Standards (IFRS) under which purchased goodwill is not amortised for accounting purposes, although it may be impaired.

3. For taxpayers (generally smaller companies) who do not use IFRS, UK accounting standard FRS 102 requires amortisation of goodwill over its useful life. If it is not possible to make a reliable estimate of the useful life of the goodwill, then it is amortised over five years. Smaller companies still, that use Financial Reporting Standards for Smaller Entities (FRSSE), would amortise goodwill over a specified maximum useful life of 20 years.

4. As a result these companies will have a deduction (relief) for corporation tax purposes in respect of capital expenditure incurred on acquired goodwill in accordance with amounts amortised in their accounts; this will be higher than the 4% pa available to taxpayers using IFRS who generally make an election for the annual deduction, as explained in our earlier briefing note.

5. In practical terms the views expressed and conclusions reached in our earlier note are the same for smaller companies as for taxpayers using IFRS, but the precise technical rationale is slightly different, hence we are submitting this supplemental briefing.

6. It might be thought that the greater tax relief available to smaller companies means that there is bias away from share sales in favour of asset sales. However, the experience of our members in practice is that, as for larger companies, share sales are invariably preferred for the reasons set out in our earlier briefing note (availability of SSE and entrepreneur’s relief). In practice, the availability of relief in respect of purchased goodwill (even at the higher rates) does not distort commercial practices in favour of assets sales. For these smaller companies, the proposed change will still have the result of increasing the bias towards share transactions, by removing any tax relief in the buyer’s hands for goodwill.

7. To the extent that the relief for goodwill was considered over-generous to smaller companies, this has been dealt with by the FA 2015 provisions denying relief for goodwill arising on incorporations. The need for further change in this area is open to challenge and risks being seen as particularly detrimental to smaller businesses.

8. For these smaller companies the proposal to abolish the corporation tax relief means that the tax treatment becomes different from the accounting treatment of goodwill for companies using FRS or FRSSE, adding complexity for them.

9. The alternative approach we suggest in our earlier briefing note of simply removing the right to adopt a fixed 4% amortisation allowance and to have the tax treatment follow the accounts in all cases would retain the annual relief available for smaller companies who are amortising goodwill under FRS or FRSSE. We think that this is unlikely to have a material impact on the revenue raised by the measure, as we would expect that the larger company position would be more influential. Further, as suggested, this would simplify the system and increase alignment with the accounts in all cases.

10. As previously stated, 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.

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.

October 2015