B7.1 Introduction
I FAs ar e r ecognised as income as t hey ar e debited / credited in determining the company’s profit or loss. The r ules ar e similar t o t he loan r elat ionship r ules.
Par a 1 Sch 29 FA 2002
B7.2 Intangible fixed assets
The t er m “I nt angible Fixed Asset ” has t he same meaning as it has f or account ing pur poses. I n par t icular it includes intellectual property which means any patent, r egist er ed trademark, design or copyright et c. I t also includes goodwill, again as def ined f or account ing pur poses.
I FAs include f ungible asset s. A f ungible asset is def ined as an asset which can be dealt in wit hout ident if ying t he par t icular asset s involved. An example would be a milk quot a in t he dair y f ar ming indust r y. Fungible asset s of t he same kind (eg successive acquisit ions of milk quot as) held by t he same per son in t he same indust r y ar e t r eat ed as indist inguishable par t s of a single asset.
Cer t ain asset s ar e ex pr essly excluded f r om t he pr ovisions of Sch 29. W her e an asset is excluded an opt ion or ot her r ight t o acquir e or dispose of such an asset is also excluded
Par a 72 Sch 29 FA 2002
Asset s ent ir ely ex cluded ar e r ight s over t angible asset s; oil licences; f inancial asset s; r ight s in companies, t r ust s et c; and asset s held f or non commer cial pur poses et c.
Par a 73-77 Sch 29 FA 2002
Asset s ex cluded ex cept as r egar ds r oyalt ies ar e; asset s held f or a lif e assur ance business; asset s held f or any mut ual t r ade or business; f ilm and sound r ecor dings; and comput er sof t war e t r eat ed as par t of cost of r elat ed har dwar e.
Par a 78-81 Sch 29 FA 2002
Asset s excluded f r om t he pr ovisions of Sch 29 t o t he ex t ent specif ied ar e;
r esear ch and development expendit ur e; and capit al ex pendit ur e on comput er sof t war e.
Par a 82-83 Sch 29 FA 2002
B7.3 Trade and non-trade IFAs Par a 30-34
Sch 29 FA 2002
I t is impor t ant t o classif y I FAs accor ding t o whet her t hey r elat e t o a t r ade, a pr oper t y business, or ar e non-t r ade.
Trading debits and credits f or m par t of DI as t hey ar e accr ued t o t he pr of it and loss account .
Debit s and cr edit s r elat ing t o a pr oper t y business ar e t r eat ed as par t of t he ex pense/ income of t hat pr oper t y business.
Non-trade debits and credits are pooled. I f t he non-t r ade cr edit s ex ceed non-t r ade debit s t hen t her e is a gain char geable under DVI.
I f non-t r ade debit s ex ceed non-t r ade cr edit s t hen t her e is a non-trade loss on IFAs. Cer t ain r elief s ar e available f or t his loss.
B7.4 Relief for non-trade loss on IFAs Par a 35
Sch 29 FA 2002
A claim can be made t o set t he whole or part of t he loss against t he company’s total profits f or t hat per iod. Ther e is a two year time limit f or t his claim.
A claim can be made t o use t he loss under t he group relief pr ovisions which we will look at lat er .
To t he ext ent t hat t he loss has not been used in a cur r ent year claim or sur r ender ed as gr oup r elief it will be carried forward as a non-t r ade debit t o t he next account ing per iod.
B7.5 Impact on tax computations
Royalty payments ar e allowed under DI or DVI on an accruals basis.
Patent and copyright royalties ar e paid gr oss bet ween UK companies.
Remember t hat all f igur es t hat appear in t he t ax comput at ion must be gr oss f igur es.
Royalty receipts ar e t ax ed on an accruals basis under DI or DVI.
Goodwill (which was pr eviously par t of t he capit al gains t ax r egime) will now only give r ise t o income gains or losses. Goodwill has ceased to be a qualifying asset for capital gains tax rollover. However , a form of rollover relief is available. The r ules apply t o goodwill bought or created after 1 April 2002.
For goodwill pur chased and ot her I FA asset s acquir ed or cr eat ed af t er 1 Apr il 2002 t he company is allowed a deduction for the amortisation or impairment charged in t he account s. Alt er nat ively t hey can claim a straight line deduction of 4% on cost. I nt er nat ional Account ing St andar d No 38 (I AS 38) does not allow a company t o amor t ise goodwill. Goodwill will be st at ed in t he balance sheet at f air value and subj ect t o an impair ment r eview.
Par a 10 & 11 Sch 29 FA 2002
W hen a company f ir st adopt s I AS 38 it may be r equir ed t o incr ease t he car r ying value of goodwill. Schedule 29 ensur es t hat t he wr it e up is a t axable cr edit , limit ed t o t he amount of r elief alr eady given. Any impair ment f r om wr it t en up cost will be deduct ible.
Par a 116A - 116B, 116F
Sch 29 FA 2002
Realisat ions of asset s r esult in income gains or losses, r ollover r elief may be available.
65 I nt angible Fixed Asset s
A r ealisat ion is def ined as any t r ansact ion r esult ing in, in accor dance wit h gener ally accept ed account ing pr act ice,
(i) t he asset ceasing t o be r ecognised in t he company' s balance sheet ; or (ii) a r educt ion in t he account ing value of t he asset , usually wher e only par t
of t he asset is sold or ot her wise r ealised.
“Tr ansact ion” is def ined as including any event giving r ise t o a gain r ecognised f or account ing pur poses.
Pr oceeds of r ealisat ion ar e t hose r ecgonised f or account s pur poses less incident al cost s of r ealisat ion.
W her e an asset has been wr it t en down f or t ax t he gain is t he dif f er ence bet ween t he pr oceeds and t he TW DV. I f no amount s have been wr it t en of f f or t ax t hen t he f ull cost may be br ought in.
I n t he case of a par t r ealisat ion The amount deduct ed is adj ust ed pr o r at a t o t he account ing value at t r ibut able t o t he r ealisat ion and t he account ing value bef or e r ealisat ion.
B7.6 Rollover relief for IFAs Par a 37
Sch 29 FA 2002
I f an I FA is sold t hen any gain ar ising will be an income gain.
Illustration 1
A Lt d pur chased goodwill on 1 May 2005 f or £ 250,000 and sold it f or £ 300,000 on 31 December 2005. The company amor t ised t he goodwill at 10% per annum.
I t s year end is 30 J une.
The amor t isat ion char ged f or t he 8-mont h per iod f or which t he company owned t he goodwill (1 May t o 31 December 2005) will be:
£ 250,000 x 10% x 8/ 12 = £ 16,667 The wr it t en down value of t he goodwill is:
£
Cost 250,000
Less: amor t isat ion t o dat e (16,667) 233,333
The sale t akes place in t he account ing per iod ended 30 J une 2006 and t he income gain will be:
£
Pr oceeds of sale 300,000
Less: W DV (233,333)
I ncome gain 66,667
W her e a company r einvest s t he pr oceeds of sale in ot her goodwill (or ot her I FA) it can claim r ollover r elief . The pr oceeds need t o be r einvest ed in t he per iod 12 months before to 36 months after t he sale of t he old I FA. To get full relief t he whole of the proceeds need to be reinvested.
Par as 39-41 Sch 29 FA 2002
Illustration 2
Cont inuing t he ex ample of Company A Lt d. The company buys r eplacement goodwill f or £ 400,000. All pr oceeds have been r einvest ed so r ollover r elief will be available in f ull.
The amount r olled over will be:
£
Pr oceeds r einvest ed 300,000
Less: cost of old I FA (250,000)
50,000
Not e t hat we do not t ake account of t he amount s wr it t en of f t he cost in t his calculat ion.
£
I ncome gain 66,667 Amount r olled over (50,000)
16,667
Following t he claim, t he company will st ill show a cr edit in it s P&L of £ 16,667 r epr esent ing a r ever sal of t he wr it e-of f .
The cost of t he new goodwill going f or war d will be:
£
Cost of new I FA 400,000
Less: income gain r olled over (50,000) 350,000
I f only part of the proceeds are reinvested, t he amount available f or rollover is t he amount by which the amount reinvested exceeds the cost of the old asset.
Par a 41(3) Sch 29 FA 2002
Illustration 3
I f A Lt d above decides t o r einvest only £ 270,000, as t his is less t han t he pr oceeds r eceived, r elief will only be available f or :
£
Amount r einvest ed 270,000
67 I nt angible Fixed Asset s
Less: cost of old asset (250,000)
20,000
The gain f or t he year will be:
£
I ncome gain 66,667
Amount r olled over (20,000) 46,667
The cost of t he new asset going f or war d will be:
£
Cost of new I FA 270,000
Less: income gain r olled over (20,000) 250,000
Special r ules apply wher e t he asset sold was cr eat ed bef or e 1 Apr il 2002. I FAs t hat exist ed bef or e t his dat e st ay wit hin t he capit al gains t ax r egime however t hey do not stay within the capital gains tax rollover relief rules.
On disposal t he asset will give r ise t o a capit al gain, f r om 1 Apr il 2002 t his gain can only be r olled over under t he r ules set down in t he FA 2002.
This is achieved by making cer t ain amendment s t o t he r ollover pr ovisions t hat we looked at above.
Par a 130 Sch 29 FA 2002
The net pr oceeds r eceived (i.e. pr oceeds less incident al cost of disposal) ar e compar ed t o cost . Cost is def ined as net pr oceeds less t he char geable gain as calculat ed f or capit al gains t ax in ot her wor ds we include indexat ion allowance wher e applicable.
Illustration 4
X Lt d sells goodwill it has held since December 1990 f or £ 300,000 paying solicit or s f ees of £ 30,000 in r elat ion t o t he sale. The goodwill or iginally cost
£ 55,000. I A is 20%. X Lt d is consider ing t he f ollowing invest ment s in a new I FA:
a) £ 280,000 b) £ 220,000 The gain ar ising will be:
£
Pr oceeds 300,000
Less: expenses (30,000)
Net pr oceeds 270,000
Less: Cost (55,000)
215,000
I A £ 55,000 x 20% (11,000)
Char geable gain £ 204,000
Under opt ion a) t her e will be f ull r einvest ment as t he new asset cost s £ 280,000 which is mor e t han t he net pr oceeds f or t he old asset of £ 270,000.
The gain t hat can be r olled over is £ 204,000 giving a base cost f or t he new asset of £ 280,000 - £ 204,000 = £ 76,000.
Under opt ion b) t her e will be par t ial r einvest ment . The new asset cost £ 220,000 which is less t han t he net pr oceeds r eceived of £ 270,000.
The gain t hat can be r olled over will be £ 220,000 - £ 66,000 = £ 154,000. This gives t he same r esult t o t hat which would have ar isen under t he CGT r ules wher eby net pr oceeds not r einvest ed r emain char geable.
The base cost of t he new asset will be £ 220,000 - 154,000 = £ 66,000.
B7.7 Groups Par as 46-54
Sch 29 FA 2002
For I FA pur poses, gr oups ar e essent ially t he same as t hose def ined f or capital gains pur poses. W e ex amine t his def init ion in a lat er chapt er .
Tr ansf er s of I FAs wit hin a gr oup ar e tax neutral, pr ovided t hat t he asset is a char geable I FA bef or e and af t er t he t r ansf er .
Rollover is allowed on a group wide basis pr ovided t hat t he company t hat buys t he new asset is wit hin t he same gr oup at t he t ime of pur chase and is not a dual r esident invest ment company. I n addit ion t he new asset must be bought f r om out side t he gr oup.
Relief is also available wher e a company buys a cont r olling int er est in anot her company which holds I FAs. For t he pur poses of a r ollover claim t he pur chasing company is t r eat ed as buying t he under lying I FA at t he lower of :
Par a 57 Sch 29 FA 2002
• t ax wr it t en down value;
• cost of t he cont r olling int er est .
The pur chasing company can make a r ollover claim pr ovided it and t he company wit h t he under lying I FA sign t he claim. As a r esult t he TWDV of t he under lying asset will be wr it t en down t o t he ext ent of t he claim.
B7.8 Companies leaving a group Par a 58
Sch 29 FA 2002
W her e a company leaves a group within six years of an IFA transfer and st ill holds t he I FA, it is t r eat ed as having t he sold and purchased the IFA at market value on the date of the transfer. The r esult ing debit or cr edit will be t r eat ed as arising immediately before the transferee leaves the group.
I nt angible Fixed Asset s 69
W her e a degr ouping char ge ar ises t he company about t o leave t he gr oup t oget her wit h anot her gr oup member can jointly elect to treat the degrouping charge or any part of it as arising in that other group company. The gain will be t r eat ed as a non-t r ade cr edit ar ising in t hat ot her company immediat ely bef or e t he f ir st company leaves t he gr oup.
Payment s wit hin t he gr oup in r elat ion t o r ollover or degr ouping char ges ar e not t axable so long as t hey do not exceed t he amount of t he r elief .
Not e: I t would be advisable t o look at t hese sect ions of t his chapt er again once you have complet ed all of t he chapt er s dealing wit h gr oups of companies.
B7.9 Related Parties
Par a 92-99 Sch 29
FA 2002
Ther e ar e r ules r elat ing t o t r ansact ions wit h r elat ed par t ies. The def init ion of a r elat ed Par t y is similar t o t hat used f or t r ansf er pr icing.
A r elat ed par t y can be a company, individual or ot her sor t of per son. Par t ies ar e r elat ed when:
• bot h par t ies ar e companies and one cont r ols t he ot her or has a maj or int er est in t he ot her ;
• bot h par t ies ar e companies and anot her per son cont r ols bot h of t hem (t his does not apply wher e bot h ar e cont r olled by a gover nment or an int er nat ional or ganisat ion);
• wher e t he company is a “close company”, a per son is r elat ed if t hey ar e a par t icipat or of t he company, or a par t icipat or in anot her company t hat has cont r ol of , or a maj or int er est in t he company; or
• (f or account ing per iods beginning af t er 19 J une 2003) bot h par t ies ar e companies and t hey ar e member s of t he same 75 per cent gr oup.
Tr ansact ion bet ween r elat ed par t ies must t ake place at mar ket value. Par a 92 Royalt ies t o r elat ed par t ies ar e deduct ed on a paid basis if not paid wit hin 12
mont hs of t he paying company’s per iod of account .
Par a 94
Rollover r elief cannot be claimed on t r ansact ions wit h r elat ed par t ies. Par a 93 Tr ansact ions wit h r elat ed par t ies cannot cr eat e new asset s f or t he pur poses of
Sch 29 FA 2002. A pr e 1 Apr il 2002 I FA bought f r om a r elat ed par t y will st ay wit hin t he capit al gains t ax r ules.
Par a 118
B7.10 Commencement of the rules for IFAs
The legislat ion applies t o int angible f ixed asset s bought or cr eat ed f r om 1 Apr il 2002 onwar ds.
An asset bought or created partly before and partly after 1 Apr il 2002 is treated as two assets. The ex pendit ur e on t he pur chase or cr eat ion of t he asset is appor t ioned on a j ust and r easonable basis.
I nt er nally gener at ed goodwill is t r eat ed as cr eat ed under t he old r ules if t he company car r ied on t he business bef or e 1 Apr il 2002.
The t r ansit ional r ules r elat ing t o r ollover r elief on asset s t hat st ay wit hin t he capit al gains t ax r ules ar e set out above.
71 I nt angible Fixed Asset s