Analysis – Talking about intangibles again.

Last year, we had the Revenue’s technical note on the taxation of intellectual property. Now we have the second installment (published on 23 June) and it is even more exciting.

Last year, the Revenue looked at treating patents, copyrights and similar assets on the accounts basis: no capital allowances, just accept the amortisation in the profit and loss account. Now it is prepared to look more widely: the accounts basis might be applied to goodwill and other intangibles as well as intellectual property.

In principle this is good. It would make tax simpler, and would reduce the extent to which tax distorts commercial decisions. But as the technical note points out, there are difficult issues to consider. None of the proposals are guaranteed to become law.

The Revenue is concerned about accelerated amortisation of intangibles.

Companies might write off assets as quickly as possible for the sake of early tax relief. The Revenue therefore wants to consider set rates of amortisation. But if it is worried about the tax yield, it should not forget most corporation tax is paid by the largest groups. It dare not depress its profits, because of the effect on share prices.

The Revenue may also be concerned about fairness between companies, but they should not forget that all companies are subject to the need to prepare true and fair accounts, there is always some discretion in accounting policies and different rates of amortisation only create timing differences.

The Revenue would in any case have no good reason to reduce a high amortisation rate used by one company (A) in the interests of fairness: it would be just as appropriate to increase a low rate used by another company (B).

B would have been free to increase its rate anyway, unless A’s higher rate was outside the limits of true and fair. In that case A’s rate should be challenged on those grounds.

The Revenue does not want to allow tax relief for goodwill on consolidation.

But why should goodwill from the purchase of a company not qualify, while goodwill from the purchase of a trade will? One of the government’s policy objectives is that the tax system should not influence the ways in which businesses are structured. There should therefore be no tax discrimination between holding several trades in several subsidiaries and holding all of them in one company.

However, if goodwill on consolidation were to qualify, we would have to consider taxing groups rather than the companies.

There are some tricky interactions with the proposed new deferral relief for gains on substantial shareholdings. If the proposals on intangibles go ahead, rollover relief for gains on goodwill would disappear. Tax planners would then look for surrogates for rollover, using the deferral relief.

We must be aware of a mass of oppressive anti-avoidance legislation which, while blocking that, would make the reliefs unworkable.

Finally, there are international issues. One is the potential for related companies to charge others for intangibles at prices designed to get profits out of the UK tax net. The Revenue wonders whether new rules are needed, in addition to existing transfer pricing rules.

I do not see the need for additional safeguards. The transfer pricing rules should be enough. Adding special rules for intangibles would go against the grain of the transfer pricing rules, which look at the whole relationship including intangibles.

If intangibles were dealt with separately, would they be torn out of the commercial relationship to be considered for transfer pricing purposes (which would lead to some funny results) or would any profit adjustment for intangibles be deducted from a more general transfer pricing adjustment?

The Revenue says ‘the price paid (for intangibles) ought to reflect the wealth-generating capacity which the acquirer expects to realise in the UK’. This reflects a tax authorities’ view of the world, carved up into jurisdictions with taxing rights. That is different from a commercial view of the world in which national boundaries are irrelevant.

It may be that new ways of thinking about the tax issues are required, in order that tax systems do not impede commerce. The Revenue is thinking radically, but it may need to go further. Meanwhile, read the technical note at and have your say.

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