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We are sharing this update from ACCA, our professional body, for the interest of clients and contacts. The content is (c) ACCA

How to avoid the five areas which produce the most mistakes

ACCA brings the following guidance from HMRC on the intangible assets regime.

Since its introduction on 1 April 2002, the intangibles regime has been subject to several legislative changes. The number of changes and complexity of the rules means that HMRC has seen an increase in the incorrect application of the rules by some customers.

HMRC’s purpose is to collect the right amount of tax at the right time and we know the vast majority of our customers want to pay the right tax. We want to help our customers get things right, but we will also take remedial action where we observe mistakes including any boundary pushing and avoidance.

We want to make you aware of some of the most common mistakes and ask for your help to keep a watching eye for these and to help your clients to get things right.

The legislation is now at Part 8 CTA 2009, and you can find HMRC’s guidance in the Corporate Intangibles Research and Development Manual at gov.uk.

Here are some of the areas where we see the most errors:

 

1. Asset identification

With varying definitions and exceptions along with the broad scope of legal and intellectual property rights, it’s important to undertake a detailed analysis to support asset identification.

This could include:

  • obtaining legal advice to properly identify legal and intellectual property rights, which will help to ensure the rules are applied appropriately to each of the identifiable assets
  • consulting statute and HMRC guidance to determine whether, or to what extent, each asset qualifies for relief.

 

2. No business acquisition

A fundamental principle of Part 8 CTA 2009 is that purchased goodwill can only be recognised in accordance with accounting principles, ie where a business has been acquired. You should not recognise goodwill for Part 8 purposes if the company has not acquired a business.

 

3. Date of acquisition

It is important to correctly identify the date that any intangible fixed assets (IFAs) were acquired so that the correct tax treatment can be applied – especially when the acquisition falls close to the date of one of the regime’s legislative changes (see below). Companies should keep contemporaneous documents to evidence the date of acquisition.

Key dates

Acquisitions within the scope of Part 8’s commencement provisions:

  • originally, the intangibles regime applied only to IFAs created or acquired on or after 1 April 2002 (subject to specific exclusions)
  • acquisitions of IFAs on or after 1 July 2020 are now within the scope of Part 8’s commencement provisions (subject to specific exclusions), but there are restrictions to relief where pre-FA 2002 assets are acquired from a related party.

Acquisitions of ‘relevant assets’, including goodwill:

  • for acquisitions between 3 December 2014 and 7 July 2015, relief is restricted when a company acquires relevant assets from a related individual, or a firm where one of the members is related to the company, including a ‘related party incorporation’ (except insofar as the ‘third party acquisition’ condition is met)
  • relief is restricted by preventing annual debit relief under Part 8, and any loss upon realisation will be a non-trading debit (credits are still chargeable)
  • for acquisitions between 8 July 2015 and 31 March 2019, relief is restricted for all acquisitions of relevant assets
  • for acquisitions on or after 1 April 2019, annual debit relief for the cost (or part of the cost) of relevant assets may be available under Chapter 15A CTA09, but only where a business is acquired, along with Qualifying IP.

Qualifying IP is narrowly defined and does not include, for example, registered or unregistered trademarks. This means that not all business acquisitions will qualify for relief under Chapter 15A.

Relief is capped at six times the cost of any QIP acquired and is given at a fixed rate of 6.5% per annum.

Relief continues to be restricted where the relevant assets are acquired from a related party individual or firm (except insofar as the ‘third-party acquisition’ condition is met). Relief is also restricted for any ‘pre-FA 2019 assets’ held by a company.

 

4. Valuation

HMRC has observed cases with inflated values given to intangible assets acquired from related parties or apportioned to intangible assets and goodwill where there has been a business acquisition.

HMRC has its own qualified valuation specialists to check valuations on asset acquisitions, and we recommend that companies obtain at least one professional independent valuation of all assets, ensuring that the correct assets are valued on the correct basis, particularly if the acquisition is from a related party.

 

5. Documentary evidence

Compliance checks are made longer and more difficult where there is a lack of documentary evidence relating to asset or business transfers, especially if it’s between related parties.

HMRC would expect related parties to document transactions and agreements as if they were with an unrelated third party.

Records should be kept for six years from the end of the financial year to which they relate.

For more information on any of this, or if you need any help, you should follow the links in this article to the detailed guidance.

 

Further resources

Technical factsheet: intangible fixed assets regime