The World Intellectual Property Organization has recently suggested that one third of the value of the products that consumers buy is derived from intangibles such as technology and branding. With the growing importance and value of intangibles in mind, coupled with the government’s suggestion that technology will be one of the key drivers for the UK’s post-Brexit economy, earlier this year seemed like a sensible time for HMRC to undertake its first major consultation in relation to the UK corporation tax intangibles regime (“Intangibles Regime”) since its introduction in 2002 (available here). The aim of the consultation was to determine how the Intangibles Regime could be made fairer and more consistent, and generally be more competitive and workable in a global economy. The Autumn Budget announced the following two proposed changes to the Intangibles Regime:
1. De-grouping rules
No de-grouping charge will arise under the Intangibles Regime where a company leaves the group as a result of a share disposal that qualifies for the substantial shareholding exemption (“SSE”). This change should bring the Intangibles Regime de-grouping charge into line with the capital gains tax (“CGT”) de-grouping regime (following similar changes to that regime by the Finance Act 2011) and should mean that, going forward, de-grouping will result in similar treatment for intangible assets created or acquired on or after 1 April 2002 to that applicable to pre-April 2002 intangible assets and other assets within the CGT regime. This will generally be a welcome relief for groups affected by the regime, except possibly those whose “new” intangibles stand at a loss and for whom a de-grouping would (under the existing rules) trigger an allowable debit rather than a chargeable credit. The proposal should simplify many demergers (including in some cases removing the need or desirability to come within the statutory demerger regime) and corporate sales where there have been intra-group transfers of new intangible assets, and also reduce the need (in circumstances where there is to be a de-grouping) for costly and forensic examinations of whether goodwill and other intangible assets are “old” or “new”.
The draft legislation is scheduled to be released on 7 November. It will be interesting to see how the detail of the new de-grouping exemption is drafted. The announcements to date do not set out how, if at all, HMRC intends to claw back any relief given to the selling group for amortisation of acquisition costs of an intangible asset. One suggestion by the ICAEW has been that HMRC may seek to implement something similar to the interaction of capital gains tax and capital allowances where any capital allowances claimed in relation to the original cost of plant and machinery is clawed back and any increase over original cost is subject to CGT (with such gain potentially being covered by SSE).
It remains to be seen whether the new exemption will also eliminate any intangibles de-grouping charges arising on a reconstruction or demerger which is eligible for relief under section 139 TCGA. At present in such cases, the result for “old” intangibles (and other assets within the CGT regime) is that the de-grouping charge is wiped out and the company being de-grouped gets a base cost uplift in the relevant assets. In other words, in relation to old/CGT de-grouping charges, section 139 produces the same result as SSE. If the new exemption were to apply only to transfers relieved by SSE (as the Budget announcement seems to suggest), an intangibles de-grouping charge would still arise in a section 139 scenario (and, given that section 139 takes priority over SSE, this would be the case even if all the other conditions for SSE are met). This would leave a significant and anomalous difference between the treatment of old and new intangibles on reconstructions and non-statutory demergers. Hopefully, it will be apparent that this is not to be the case when the draft legislation is available on 7 November.
Hopefully, this announcement is also a sign that HMRC may be intending or willing to consider similar changes to the de-grouping rules under the loan relationships and financial instruments.
2. Restrictions on goodwill and customer-related intangibles
Relief for acquired goodwill is to be partially restored for acquisitions from April 2019 of businesses with eligible intellectual property. Although there are no further details as to what the partially reinstated relief will involve, it is hoped that this proposal will bring the Intangibles Regime back into line with the accounting treatment of goodwill and consequently into line with the tax treatment in many other countries. One potential option for HMRC would be to limit the reinstated relief to a fixed deduction similar to the current 4% fixed rate election available under the Intangibles Regime. Further details should be available on 7 November when HMRC is due to publish its Tax Information and Impact Note.
Although a welcome step in the right direction it is questionable whether these changes will actually serve to encourage investment into intangibles in the UK. In reality, it is more likely that non-tax factors will remain the primary drivers. However, these proposed changes and simplifications to the UK corporate intangibles regime should provide some simplification and remove potential concerns and costs for demergers and for M&A transactions involving or following pre-sale reorganisations.