Intangible Tax Treatment – CTA 2009
Disposal of patent rights and reinvestment
– Intragroup transfer of patent rights is treated as “tax neutral” so no profit or loss arises
– On eventual disposal of subsidiary, a degrouping charge arises
– Need to know the calculation of degrouping charge
– The degrouping charge can be reallocated to Holdco by a joint election; main advantage being to make use of rollover relief to defer part of the charge
– If Holdco buys another IFA (directly or indirectly) 1 year before or 3 yrs after, then a rollover relief is available
– Need to know the calculation of the rollover relief available & impact of rollover relief on the TWDV of Holdco
Degrouping charges IP
Patents rights acquired after 2002, they fall into the intangible fixed assets legislation. The transfer of the patent rights from a UK co to a wholly-owned UK resident subsidiary is therefore treated as “tax neutral” and so no profit or loss for tax purposes arises in UK holdco.
- The object of the degrouping rules is to prevent assets from being smuggled out of a group tax free, under the protection of a corporate wrapper;
- Degrouping charges – which can include a loss – arise when a company leaves a group, taking with it IP acquired from fellow group members within the previous 6 years;
- On exit, there is a notional sale and buyback of the asset for market value, deemed to have taken place immediately before the relevant intra-group transaction, but recorded in the last accounting period;
- As a notional seller, the company incurs a gain or loss calculated by the difference between the market value and tax written down value;
- This is set off against adjustments to the company’s writedowns previously based on the tax written down value inherited on the initial intra-group transaction. The new writedowns are based on a market value acquisition cost and economic life of the asset at the time of the intra-group transaction – this reflects the fact that the tax neutral status of this transaction is being revoked;
- The degrouping charge is ALWAYS borne in the first instance, by the company leaving the group. The net degrouping charge can be surrendered to fellow group members by a joint election.
IP rollover relief – reinvestment in intangible fixed assets
- The replacement asset must be purchased no more than three years after the old asset was sold, although it is also possible to purchase the replacement asset one year before the disposal of the old one.
- [Computation of the amount of rollover relief available]
- [Stating the impact of rollover relief on the UK Holdco’s patent rights]
Payment of patent royalties
- As a general rule, UK companies are required to deduct the basic rate of Income Tax (currently 20%) from certain payments to individuals and non-UK resident companies. This includes the payment of patent royalties. However associated company in an EU member state, the royalty payments can be made without deduction of tax as a result of the EU Interest and Royalties Directive.
- Withheld tax is paid to HMRC within 14 days after the end of the quarter in which the royalty payment is made.
1.Before 1 April 2002 (before IFA regime): follow capital gains treatment ie no amortisation but on disposal taxed on proceeds less cost less indexation allowance as chargeable gains. If “accounting treatment” involved amortisation then annual adjustments are made to remove such amortisation.
2.Between 1 April 2002 – 8 July 2015 – IFA regime applies ie the tax relief was available for goodwill amortisation, either in line with the accounting treatment, or at a flat 4% rate. If disposed gain/loss of proceeds less tax base will form part of trading income/loss.
3.After 8 July 2015, No amortisation or impairments. The restriction also applies to customer related intangibles such as customer lists, as well as unregistered trademarks, knowhow. On eventual sale, proceeds less cost is treated as non-trading debit/credit.
The disposal of goodwill that was acquired before 8 July 2015 will continue to be treated as it always ie a trade credit or debit in accordance with IFA regime.