Details have been published on the plans to extend SSE de-grouping relief to post-2002 intangibles and to re-instate goodwill deductions.
Following the Budget announcements on 29 October, details have now been released on the legislative mechanics for preventing a de-grouping charge when post-2002 intangibles leave a group as a result of a share sale that qualifies for the substantial shareholdings exemption (SSE). The mechanics are different to those that apply for pre-2002 assets and do not result in a rebasing of the assets to market value. Details of the proposals to reinstate goodwill relief for acquisitions after 1 April 2019 have also been released, with more information provided on the extent to which goodwill will be regarded as related to eligible IP. We understand HMRC will hold a short consultation on these areas.
New de-grouping relief
For post-2002 intangibles, the general de-grouping rule deems an asset to be disposed and reacquired at its market value when a company leaves a group following an intragroup acquisition of the asset. For de-grouping events occurring on or after 7 November 2018, this rule will be disapplied when the de-grouping arises as a result of the company ceasing to be a member of the group because of a disposal of shares that would qualify for the SSE, provided the share disposal is not part of an arrangement under which the acquirer will dispose of any of those shares to another person. That means that in such cases, neither a de-grouping charge nor a basis step-up will arise in the de-grouped entity.
This is in contrast to the rules for pre-2002 assets, where a market value disposal and reacquisition is still deemed to occur, and hence a step-up does arise, but the de-grouping gain is exempted by the SSE.
Despite this change, de-grouping charges may still arise on post-2002 intangibles in connection with demergers effected via capital reductions or members’ voluntary liquidations.
Reinstatement of goodwill relief
The Government has confirmed that it intends to reinstate relief for acquired goodwill that has a strong connection to acquired intellectual property (IP) which would itself qualify for relief, partially reversing the blanket restriction that was introduced in 2015. The Government’s proposal is a relatively simple cap: relief will be allowed for the cost of acquired goodwill up to the fair value of the eligible IP in the acquired business.
For these purposes, it is proposed that the definition of eligible IP will broadly correspond with the existing definition of IP in the intangible fixed assets rules but will be subject to review. That definition includes patents, trademarks, registered designs, copyrights, design rights, plant breeders’ rights, information or techniques having industrial, commercial or other economic value, and licences and other rights over the above. This is a narrower definition than the accounting definition of an intangible asset.There is no intention to reinstate relief for customer-related intangibles. There is also no intention to reinstate relief for internally generated goodwill acquired in a related party incorporation.
The scope of the proposed relief is unchanged, taking the form of deductions for accounting amortisation or impairment debits, with the option to elect for 4 percent fixed rate relief.
The Government’s intention is that the new relief will apply for acquisitions of goodwill occurring on or after 1 April 2019. Companies which have acquired goodwill in recent years will find this disappointing.
Wider intangibles reform
The above changes are the output of a wider review of the taxation of intangibles which was conducted earlier in 2018. Other areas covered by that review included the distinction between pre-2002 and post-2002 intangibles and the fixed rate amortisation election. The Government has confirmed that no changes are planned in these areas.