No, it’s not really goodbye. Goodwill hasn’t gone away, it’s still there all right. A company that acquires a business is still required to write down the value of the purchased goodwill in its accounts. But from 8 July 2015, it will no longer be able to deduct the amounts written off when calculating its taxable profits.
This isn’t great news. Not great news at all – it was actually hidden away towards the bottom of the list on the relevant GOV.UK webpage. I only found it easily because I’ve got into the habit of looking for those Budget measures to be effective immediately, so I can start writing my own Budget page.
So what does it all mean? And why do I find myself laughing?
What are the new rules restricting tax relief for goodwill?
Under the intangibles legislation, tax relief was available for goodwill amortisation, either in line with the accounting treatment, or at a flat 4% rate1. This treatment applied to goodwill created or acquired after 1 April 2002 (“new goodwill”). Goodwill created before that date – “old goodwill” – was excluded until such time that the business was sold to an unrelated third party2.
But from 8 July 2015, a company acquiring a business will no longer be able to claim a tax deduction as it writes down the goodwill in its accounts3. Relief may still be available when the goodwill is sold, but this is not as generous as would normally have been the case. The restriction also applies to customer related intangibles such as customer lists, as well as unregistered trademarks4.
The good news is that those companies already claiming the relief at the date the new rules came into force can continue to do so. In fact, the new restrictions will not apply if5:
- The goodwill was acquired before 8 July 2015;
- The goodwill was acquired after 8 July 2015, but under an unconditional contract entered into before that date.
A small crumb of comfort is the announcement that tax relief may still be available on a sale, depending on whether or not a loss arises. However, relief will only be available as a non-trading debit6.
The effect of turning what is clearly a business expense into a non-trading debit limits the options available for relief against the company’s profits7.
The carry forward option is not likely to be of any use if the whole trade has been sold off. Both trading losses and non-trading debits benefit from group relief. However, trading losses can be carried back for three years when a trade comes to an end – a very valuable relief indeed. As one can see from the table, a non-trading debit can’t be carried back at all.
This is exactly the same treatment that was legislated during the first Budget of 2015, when goodwill relief was being restricted on related party acquisitions. Level playing field anyone?
Why is all this baffling? “I am perplexed in the extreme.”
When the intangibles regime was introduced in 2002, we all thought that the whole point was to enable companies to claim tax relief at the same time that they were writing down the value of their intangible assets in their accounts. In short, the purpose of the new rules was to ensure that there was no mismatch between a company’s accounting profits on the one hand, and its taxable profits on the other.
And indeed, the intangibles regime was just one piece of tax legislation that set out to align the tax and accounting treatment for companies. In 1993, we had the forex legislation, the corporate debt rules followed in 1996, and in 2002, the derivatives legislation appeared at the same time as the intangibles. This was all part of an increasing recognition by the tax world of the principle that wherever possible, the tax treatment of a business should follow the accounts.
So what’s going on here? Why, all of a sudden do we have an about-turn when it comes to goodwill? This is what the Policy Paper says – which is worth quoting in full:
“This measure removes the tax relief that is available when structuring a business acquisition as a business and asset purchase so that goodwill can be recognised. This advantage is not generally available to companies who purchase the shares of the target company. The current rules allow corporation tax profits to be reduced following a merger or acquisition of business assets and can distort commercial practices and lead to manipulation and avoidance. Removing the relief brings the UK regime in line with other major economies, reduces distortion and levels the playing field for merger and acquisition transactions.”
Something about this statement doesn’t quite ring true.
I have in front of me, a selection of the various Technical and Guidance Notes that were published during the original consultation process on reforming intellectual property taxation, way back in 2000. The Technical Note which appeared in around March 2001 tells us what the wider policy behind the reforms was8:
“The Government’s objective is to ensure that UK businesses can compete effectively in the global economy. The Government has already introduced a series of reforms to the tax system to achieve this objective and to enhance the position of the UK as an attractive environment in which and from which to do business.”
So we introduced goodwill amortisation because we wanted to be competitive. We are now stopping it because other countries don’t allow it, and we want to be the same as everyone else. Even though we’d actually have an edge over these countries if we kept the tax relief.
Don’t we want to compete with the outside world anymore?
As to reducing distortions and levelling the playing field, this is what was said in the Technical Note that appeared the following November 20019:
“The Government sees the key principles for reform as:
- business competitiveness: to create the best possible location for investment by removing tax distortions and promoting productivity [emphasis added];
- fairness: ensuring that individual businesses pay their fair share of tax in relation to their commercial profits and compete on a level playing field [emphasis added].
So goodwill relief is only now being restricted, 13 years after the original legislation in order to reduce tax distortions and ensure a level playing field. This must mean that the original rules which allowed tax relief in the first place were ineffective. For it seems that far from removing any tax distortions, the original rules actually created them!
And yet it is true that a distortion was created by the Government all those years ago. For a company that acquires a business under a share sale has never been able to claim tax relief, even though the accounting treatment still requires goodwill to be written down.
One of the most famous examples of a goodwill writedown in practice is that of Vodafone when it bought the German telecoms company Mannesmann. Vodafone has a reputation for being a serial acquirer and its profit and loss account is often dented by impairment charges. But the company has never been able to claim tax relief for the Mannesmann transaction which was structured as a share sale.
But now, the distortion mentioned in the recent HMRC Policy Paper has been removed. Instead of tax relief being unavailable for one type of business acquisition, it will now be unavailable for both. Still leaves a distortion between accounting and taxable profits though.
Why am I laughing? In search of the Holy Grail
The Holy Grail. Not my phrase, but the phrase used by Jonathan Cooklin – then a Tax Partner at Freshfields – to describe the ideal scenario when a business sale could be structured so that:
- The corporate seller could claim the exemption on capital gains under the substantial shareholding rules – requiring a share sale; and
- The corporate buyer could claim tax relief on the business IP and goodwill – requiring an asset sale.
It was at the Jury’s Great Russell Hotel in London, in May 2003, the last tax conference I ever went to during my time in the City. I still have the notes, and I can see references to combining share sales with asset sales, hybrid transactions, including cases where the seller can achieve “an initial step up in tax basis of assets and then sell those assets tax free to the purchaser.”
“I wonder whether he’s done the same as we have?”
This question was directed by myself to a fellow delegate who I had been introduced to a few months previously by my then Supervisor. We shared the same interest in finding the Grail, and we believed that we’d both found it independently (we happened to work in different firms).
As some of you will remember, there was in fact a loophole in the early days of the intangibles regime, which allowed companies to claim tax relief for pre-2002 “old” goodwill. Although I didn’t discover the loophole myself, I did find a way it could be adapted to structure a business sale so that both buyer and seller could claim their respective tax benefits. And so had my fellow conference delegate who, for the purpose of this article we shall call Simon. Not his real name of course – but he does exist. Who knows he may even be surreptitiously reading these very words.
What carefree days they were! No public opinion to cater to, no journalist or politician to call you out for being immoral while still setting up their own one man company. No disclosure rules! HMRC staff used to find other ways of getting their information, usually by attending tax conferences in order to hear about the latest planning ideas, furiously scribbling away in their notebooks, hoping to catch every word.
I remember my Supervisor being very keen to promote this idea. For times were hard – our department wasn’t as profitable as it used to be and my Supervisor thought that we needed to use our initiative. Alas! We ran into the bureaucracy that one usually finds in a law firm – it took a lot of persuasion till the powers that be, finally, grudgingly, said we could give it a try.
The following week, the loophole was plugged.
All those who were already claiming relief through the loophole were allowed to keep what they’d already claimed up till the cut-off date – 20 June 2003 – but any relief that would have accrued after that date was gone forever.
Well that’s that I thought. I sent an email to Simon: “Have you heard about this? We never even got ours off the ground.” To which he replied:
“We did. Client got four days worth of tax relief.”
After all that. Only four days worth? Well, how could I not laugh after such an anticlimax?
Some thirteen years later, and with these latest rule changes, I can’t help laughing now. For ever since the reforms of 2002, I’ve been intrigued by the question of whether it really is possible to structure a business sale that allows the seller to benefit from the corporate exemption and the buyer to claim a goodwill writedown. The original idea which made use of the loophole only worked for old goodwill, so the solution I came up with was only a partial one.
And now the problem no longer exists. And so I find myself laughing a second time. But while I’m laughing at those of us in the tax world that went on this fruitless quest, I’m also laughing at the Government, and HMRC.
For why – after a lengthy consultation process lasting two years, did they introduce these rules allowing a goodwill tax deduction, only to take it away 13 years later, without consulting at all? Why was it right to introduce it then, but right to take it away now? Or was it wrong to have it in the first place and they’ve only just realised? I can’t help thinking that they might as well have left goodwill in the capital gains regime.
It’s a funny old world!
Sidenote – it seems I’m not the only one who remembers the consultation that took place all those years ago. So too does Heather Self, tax partner at law firm Pinsent Masons and member of the CBI Tax Committee.
@SatwakiChanda good summary. I took part in 2001 consultations for CIOT; Edward Troup represented LawSoc at that time!
— Heather Self (@hselftax) July 22, 2015
Final question for tax people to ponder:
Does the loss of the tax deduction for purchased goodwill have any adverse implications for the IP rollover rules?
This article can be downloaded in pdf format at Academia.edu.
- CTA 2009 ss 729-731 . ↩
- CTA 2009 s 882. ↩
- FB 2015-16 Cl 32(5) insets a new CTA 2009 s 816A. CTA 2009 s 816A(3) disallows tax deductions on a writing down basis. ↩
- See CTA 2009 s 816A(2) for the full list of items that no longer benefit from tax relief. ↩
- FB 2015-16 Cl 32(10). ↩
- CTA 2009 s 816A(4). ↩
- Trading losses: CTA 2010 ss 37, 39, 45, 99(1)(a); Non-trading debits CTA 2009 s 753, CTA 2010 s 99(1)(e). See also HMRC Manuals at CTM04050 and at CIRD13530. ↩
- Taxation of Intellectual Property, Goodwill and Other Intangible Assets: The New Regime – Technical Note by the Inland Revenue, March 2001 – paragraph 1.3 – “Wider policy.” ↩
- Taxation of Intellectual Property, Goodwill and Other Intangible Assets: Technical Note and Draft Legislation dated 27 November 2001, paragraph 3. ↩
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