HM Treasury has launched a comprehensive review of the UK's corporation tax rules on intangibles

with a view to identifying targeted reforms to support the international competitiveness of the UK.

The consultation raises the possibility that UK tax relief will once more be available for acquired

goodwill and other customer-related intangibles, and could be extended to intangible assets created

prior to April 2002 for the first time, and to goodwill attributable businesses commenced by related

parties before that date.

The review has been prompted by the recognition of the growing importance of intangibles to the

productivity of modern businesses, and the restructuring of IP ownership within multinational groups in

response to recent international tax changes driven by the OECD/G20 BEPS initiative.

There is a clear desire to examine changes which, although involving a cost to the Exchequer, would

make UK businesses more likely to invest in intangibles, and make the UK more attractive to

multinationals as a location for IP and mobile business activities - targeting high-value jobs and

functions in the UK.

We will be hosting a breakfast briefing at 9am on 21 March 2018 at our offices at 100 New Bridge

Street to discuss these important proposals in further detail. We are delighted to be joined by

representatives from HM Treasury and HM Revenue & Customs, who will be presenting on the

consultation and providing an opportunity for questions. Please click here to express your interest in

joining us.

The 2002 intangibles watershed

Under the UK's intangible fixed asset ("IFA") rules introduced in 2002, companies are generally entitled

to tax relief in respect of the cost of intangibles (including goodwill), reflecting the amortisation or

impairment of the assets in line with a company's accounts, or through claiming a fixed 4% writing

down allowance in respect of specified assets within the scope of the regime.

The IFA regime is underpinned by complex transitional rules which limit the availability of tax relief to

intangible assets that were created on or after 1 April 2002, or acquired from an unrelated party from

that date. Intangibles which were created before 1 April 2002, and which have not subsequently been

acquired by an unrelated party ("pre-FA 2002 assets") generally fall within the capital gains regime

and are not eligible for relief - although the cost of acquired patents or know-how can qualify for capital

allowances. Goodwill associated with businesses that were carried on by a company or a related party

before 1 April 2002 are treated as pre-FA 2002 assets for these purposes and are not eligible for relief.

Further restrictions were introduced in 2015 to broaden the UK corporation tax base, with goodwill and

related customer intangibles (including unregistered trademarks) associated with businesses acquired

from related or unrelated parties on or after 8 July 2015 ceasing to qualify for relief. Amortisation relief

in respect of goodwill acquired before that date and otherwise eligible for relief continues to be


International competitiveness

The restrictions on the availability of tax relief, particularly in respect of acquired goodwill since 2015,

have placed the UK at a notable competitive disadvantage from a tax perspective as compared to other

jurisdictions as a location for IP and principal company operations, driving some businesses to locate

IP and valuable functions overseas.

This issue has become particularly acute at a time when many multinationals have been considering

their restructuring options for existing IP and supply chain arrangements in response to the growing

challenges arising with the implementation of the BEPS recommendations in many jurisdictions, in

particular anti-hybrid rules, revised transfer pricing guidelines on intangibles, and the increasing scope

and risk of royalty withholding taxes.

The Government has finally acknowledged feedback from businesses that have voiced concerns about

various aspects of the UK intangibles regime that impact UK competitiveness and make the UK a less

attractive location to hold IP as compared to some other major economies.

The UK Government has announced that it will consider targeted changes in the following areas:

1. Allowing tax relief for pre-FA 2002 intangibles by bringing them into the IFA regime.

April 2002 feels like a very long time ago, but the impact of the IFA transitional rules continues to cast

a long shadow over the UK's intangibles regime, restricting the availability of relief for pre-FA 2002

assets and creating significant complexity in identifying intangibles which fall within the scope of the

regime or not in the context of transactions involving large portfolios of IP rights.

The Treasury acknowledges the anomalies which the rules create, with de-grouping charges arising in

respect of IFAs, but often not in respect of pre-FA 2002 assets, and more restrictive rules on

reinvestment relief applying on the disposal of pre-FA 2002 assets.

The Treasury says that it needs to be convinced of the economic case for bringing pre-FA 2002 assets

within the scope of the rules and that this change would represent value for money, but if they are, it

asks for views on the value at which such assets should be recognised, including net book value,

market value or some other measure. This holds out the prospect that companies will become entitled

to tax relief in respect of the cost of existing intangibles excluded from the regime.

It also asked for views on the wider impacts of such a change, including the inability to use capital

losses to shelter gains arising on the realisation of IFAs.

2. Reversing the 2015 restrictions on tax relief for acquired goodwill and customer intangibles.

The Treasury acknowledges feedback that the 2015 restrictions on the amortisation of acquired

goodwill impacts on the UK's competitiveness in attracting mobile businesses and is leading groups to

locate their assets and associated economic functions in jurisdictions which offer more generous

relief. The Treasury says that it wants to explore these concerns and seek further evidence of their


The Treasury also wants to explore ways to provide relief in a way that deals with concerns about the

cost of the relief, posing the possibility of restricting the relief by reference to the income generated by

the asset that is being amortised.

3. Modifying the elective 4% fixed rate basis of relief.

The Treasury does not appear, at this stage at least, to be convinced of the benefits of moving from the

broad approach of following the accounts, considering that this is generally the right basis of relief and

means the UK regime is broadly on a par with most major nations.

The Treasury notes that the election for a 4% writing down allowance is typically only made by

companies where the IP is not amortised or is amortised over more than 25 years. Nevertheless, the

Treasury seeks views on the way in which fixed rate relief is given under the IFA rules, including

varying the rate, and how changes could impact business decisions.

4. Modifying the de-grouping charge on transfers of IFAs in an M&A context

Intangible assets can generally be transferred between UK resident members of a group on a taxneutral

basis, in the same way as other assets. A "de-grouping charge" can potentially claw back the

tax that would otherwise have been due on a market value sale when a company subsequently leaves

the group within the period of 6 years of acquiring an asset in this manner.

The Treasury notes that whereas it has been possible since 2011 for the substantial shareholding

exemption to apply to exempt a de-grouping charge arising in respect of pre-FA 2002 assets in these

circumstances, no such exemption can apply in respect of the transfer of IFAs. Business has long

argued that this anomaly distorts M&A transactions and economic behaviour, and the Treasury

recognises that this problem would only be compounded if pre-FA 2002 assets are brought within the

IFA regime. The Treasury seeks examples of the impact of this problem and views on potential

modifications to the rules to eliminate such difficulties which could be achieved affordably.

The way forward?

The UK's enthusiastic implementation of the BEPS recommendations in recent years, and other

unilateral measures such as the diverted profits tax, has been balanced by staggered reductions in the

headline rate of UK corporation tax, with the final announced reduction to 17% due to come into force

from 1 April 2020. The appetite for further rate reductions seems to have reduced in the current political

climate, and it is therefore interesting to see other avenues being explored.

It is hard to gauge from the tone of the Treasury's consultation document the extent to which the

Government is open to making significant changes. The need to boost UK competitiveness, which is

likely to be brought into even sharper focus following Brexit, is recognised, but every idea for reform is

set against the need to represent value for money to the Exchequer, something which is difficult to


It is clear, however, that Government is in listening mode, and if the case can now be made out

convincingly by business, this represents a significant opportunity to iron out the obvious flaws and

inconsistencies in the taxation of intangibles in the UK, and to put the UK system on a much sounder

footing to compete effectively with other jurisdictions for IP and high-value functions.

The consultation closes on 11 May 2018.

Link to Consultation Document: