David O’Keeffe explains why the government is reviewing the corporate intangible fixed assets regime, and what might come out of this review.
The Intangible Fixed Assets (IFA) regime was introduced with effect from 1 April 2002 (legislation now in: CTA 2009, Part 8). At the time it represented a significant change to the way that IFAs were taxed in the UK, consolidating the various historical rules into one piece of legislation whilst changing it from a (broadly) capital gains based system to an income based one, for corporates only.
There have been some changes to the regime over the last 15 years, mostly to deal with tax avoidance and perceived unfairness. The government is now consulting on the possibility of making some more significant changes to the regime.
Although this consultation is billed as a comprehensive review, it really only considers changes in five areas:
- Retaining the pre-FA02 rule
- Goodwill and customer related intangibles
- De-grouping rules
- Fixed rate deduction option (4% per annum)
- Economic benefits of the changes
When the current IFA rules were introduced in 2002 the legislation included grandfathering provisions to deal with pre-existing assets. These grandfathering provisions meant that assets in existence before 1 April 2002 remained in the ‘old’ capital gains-based regime. Such assets would move to the ‘new’ regime only when they were acquired from an unrelated third party.
The problem with this open-ended grandfathering provision is that a great many pre-2002 assets still remain in the old regime, never having met the conditions for transfer to the current regime. This means that there are two parallel regimes in operation, a situation that has added a degree of complexity to the taxation of IFAs.
It appears that the government is keen to end this distinction, but it is worried about the potential cost. Whilst that is understandable I really think that the time has come to bite the bullet and remove this distinction as soon as possible. The need to track the status of intangible assets and consider two different taxing regimes is an unnecessary complexity.
Goodwill and related assets
In 2015 the IFA regime was amended to deny relief to ‘relevant assets’, a category that included goodwill and related assets. One of the intentions behind this change was to minimise distortions by removing a perceived incentive to structure acquisitions as a trade and asset (including goodwill) deal. This would then lead to a tax deduction for the goodwill cost.
The government wants to understand what difficulties businesses have faced as a result of this restriction and whether it makes the UK less competitive.
The de-grouping charge
Intra-group transfers have always been tax neutral under this regime. The tax history of the asset is transferred with it to the new owner in the group. To counter the possibility this raises for tax avoidance, there are detailed de-grouping provisions that impose an exit charge on the company if it leaves the group within six years, whilst still holding the transferred assets.
Whilst the concept of a de-grouping charge is fairly sound, the problem is that the capital gains treatment applicable to other assets (including pre-2002 assets) has diverged as a result of the revised rules for the substantial shareholding exemption.
The government is considering the prospect of modifying the de-grouping charge to mitigate this imbalance. The importance of this possible change is enhanced by the prospect of pre-2002 assets being brought within the current regime. This would increase the number of assets potentially subject to the de-grouping charge.
The fixed rate deduction
In essence, the IFA regime is one in which the tax follows the accounts. If an item is recognised as income or expense in the accounts then it is income or expense for tax purposes. However, companies can elect to receive a fixed rate deduction at 4% per annum, writing off the cost of an intangible asset using the straight line method over 25 years. This is helpful for companies with an intangible asset that is not amortised, or has a useful life in excess of 25 years.
Representations have been made that the 4% rate is too low when compared to some other jurisdictions. Whilst feeling that the UK regime is competitive overall – with the mix of accounts based deduction and the 4% fixed rate – the government is interested to understand the circumstances in which companies elect for the fixed rate. It is also seeking opinions as to whether the low fixed rate is actually deterring foreign direct investment.
The government is keen to understand the potential economic benefits of the possible changes to the IFA regime. There will almost certainly be a cost to the exchequer and the government wants to be sure it will be good value for money. This is clearly sensible but I am a little concerned by the suggestion that tax relief might be restricted by reference to the income generated from the asset. Whilst I can see that it has certain logic, my initial thought is that this is likely to introduce more complexity.
This is a welcome – and possibly overdue – consultation on this important legislation. However, it is likely that this will be a long process, as the questions are indicative of early stage fact and opinion gathering rather than considering the detail of possible changes.
About David O'Keeffe
I am an independent specialist adviser on the taxation of innovation, advising companies and other advisers on R&D tax relief, Patent Box and Creative Industry reliefs.
I have been involved with the UK’s R&D tax relief regimes since the initial consultations on the introduction of the SME relief. In that time, I have developed an enviable level of knowledge of R&D tax relief both from a technical and a practical perspective. I established KPMG’s specialist R&D tax relief team and was a founder member of KPMG International’s Global R&D Tax Incentives Group and was a member of the Steering Group, with direct responsibility for the EMEA region.
I have provided input and consultation to many organisations and trade bodies. I was the only R&D tax specialist to have input to Sir James Dyson’s influential 2010 report "Ingenious Britain: Making the UK the leading high tech exporter in Europe" which is seen as the catalyst for reform of the UK’s R&D Tax Relief regimes. I have been a member of HMRC’s R&D Consultative Committee, a group with representatives from Government (HMRC, HMT and BIS) as well as industry, advisers and professional bodies, since its inception. I sit on CIOT’s CT technical Sub-Committee and chair the R&D Working Group of that sub-committee.
I was involved with the consultation process leading to the introduction in 2013 of the UK’s patent box regime. Since then I have helped his clients assess the merits of making a patent box election and then, where appropriate, to claim the benefit of the relief. More recently, I have actively contributed to the consultations around the design of the changes to the UK’s patent box to make it compliant with the OECD’s nexus requirements.
Formerly a Tax Partner with KPMG LLP (UK), I retired in 2011 to establish Aiglon Consulting.