Tax relief for goodwill returns….......well for some situations at least. It was quite a surprise when amortisation relief was stopped for all purchased goodwill from 8 July 2015. This significantly reduced the attractiveness of trade and asset sales to business purchasers because they would no longer face the prospect of an annual corporation tax deduction in respect of goodwill write-downs. It also covered other customer related assets such as customer information, unregistered trademarks and related licences, although not patents, registered trademarks or designs, copyrights and know-how which continued to be eligible for tax relief based on the amortised charge each year.
The Government have looked again though at this and have now decided to offer a measure of tax relief for goodwill acquired after 1 April 2019 where the acquisition also involves intellectual property. It was recognised that the goodwill restriction was having a profound effect on the acquisition of IP-intensive businesses, which are frequently valued at a significant premium to their underlying individual asset values – often due to asset synergies or valuation methods. The Government further accepted that to wholly deny relief for goodwill in these situations is not consistent with the wider approach to provide relief for the cost of IP assets.
So under the new rules a fixed deduction will be allowed of 6.5% each year of the cost of the goodwill acquired, but there will be a cap placed on the deduction equal to 6 times the value of the intellectual property assets acquired at the same time. Still, despite the cap this is good news and will make asset purchases more attractive to a purchaser than share acquisitions, where goodwill and IP assets are being acquired. It will therefore be worth clearly setting out the price of such assets in the sale and purchase agreement. Furthermore, this change will be another reason for a company to register any intellectual property as part of its pre-sale planning.
Note: the tax relief restriction will continue to apply in relation to internally -generated goodwill acquired from a related party.