Policy paper

Corporation Tax: intangible fixed assets - related party step-up schemes

Published 22 November 2017

Who is likely to be affected

Companies liable to Corporation Tax disposing of intangible fixed assets for consideration other than cash, and companies entering into licensing arrangements with related parties in relation to intangible fixed assets.

General description of the measure

This measure clarifies the tax treatment of a disposal of a company’s intangible fixed assets involving non-cash consideration.

The measure also amends the rules in relation to licences in respect of intangible fixed assets granted by or to a company where the other party to the licence is a related party.

Policy objective

The measure will address avoidance involving net book value accounting, including licensing arrangements between related parties.

Net book value accounting occurs where consideration for a disposal is accounted for at ‘cost’ (the book value of the asset disposed of) rather than the actual value of what has been received and/or disposed of. This type of accounting is used by related parties in ‘step-up’ avoidance schemes to achieve an asymmetrical tax treatment in the transaction price. In the case of licensing arrangements, there is a ‘step-up’ in the transaction value between the amount recognised by the licensor and the amount recognised by the licencee. The licensor accounts for the disposal at the lower net book value whilst the licencee recognises the higher commercial value, or ‘step-up’ value, of the asset acquired.

This measure counters step-up avoidance by ensuring all non-cash disposals and related party licensing arrangements are taxed fairly and consistently and in line with cash transactions.

Background to the measure

This measure was announced at Autumn Budget 2017.

Detailed proposal

Operative date

The measure will have effect for all transactions made on or after 22 November 2017.

Current law

Current law in relation to transfers of intangible fixed assets between related parties is contained in Chapter 13 of Part 8 Corporation Tax Act 2009 (CTA 2009).

Current law in relation to realisations of intangible fixed assets is contained in Chapter 4 of Part 8 of CTA 2009. These two Chapters broadly expect the profit or loss on the disposal of an intangible fixed asset to be computed by reference to the proceeds of realisation for accounting purposes. In a cash transaction this would generally be the amount actually received, subject to any arms-length or market value adjustment.

The market value rule requires that where an intangible fixed asset is transferred between related parties the amount recognised is equivalent to the amount of cash that would be received if the transaction was at market value. The transfer pricing legislation in Chapter 1 of Part 4 of Taxation (International and Other Provisions) Act 2010 (TIOPA) will generally take priority over the market value but is similar in effect in applying the arms-length principle to a transaction.

Legislation was introduced by section 42 Finance (No. 2) Act 2015 (amending section 846 of CTA 2009) to counter step-up scheme avoidance in relation to transfers of intangible fixed assets.

Proposed revisions

Legislation will be introduced in Finance Bill 2017-18 to ensure that the market value rule can apply to an intangible fixed asset licence granted between related parties. This extends the provisions introduced by section 42 of Finance (No.2) Act 2015 that countered step-up scheme avoidance involving net book value accounting transfers.

A licence does not involve a transfer of the underlying asset. The asset that is subject to the licence will be retained by the licensor. The proposed revision ensures that a licence granted between related parties will also be subject to the market value rule as it applies to transfers. A company making a disposal by way of a grant of a licence to a related party will be prevented from recognising less than the market value of the licence. This will ensure the correct tax is paid on the grant of a licence to a related party. And for licensees who are granted a licence by a related party the market value rule will also prevent the company recognising a tax cost higher than the market value of the licence. Amendments to the market value rule will therefore prevent manipulation of the transaction price in relation to related party licences to avoid unfair tax advantages.

The proposed revisions will also confirm that the proceeds of realisation for accounting purposes within Chapter 4 of Part 8 of CTA 2009 should recognise the market value of any non-cash consideration (non-cash consideration includes anything received other than cash, typically such arrangements include consideration paid in other assets such as shares). This clarification applies to all disposals, not just licensing arrangements, and ensures transactions other than cash are treated similarly to a cash transaction.

Summary of impacts

Exchequer impact (£m)

2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023
+15	+45	+45	+45	+45	+45

These figures are set out in Table 2.1 of Autumn Budget 2017 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Budget 2017.

Economic impact

The measure is not expected to have any significant macroeconomic impacts.

The costing reflects a behavioural response by the population impacted by this measure.

Impact on individuals, households and families

The measure is not expected to impact on individuals or households as it affects only the taxation of companies.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

The measure is expected to have no impact on equalities.

Impact on business including civil society organisations

This measure clarifies or amends the law on transactions involving intangible fixed assets where payment is made not wholly in cash or in relation to a licence granted between related parties. This measure is expected to have a negligible one-off cost to businesses. They will need to familiarise themselves with changes to the law on transactions involving intangible fixed assets where payment is made not wholly in cash, or in relation to a license granted between related parties. There are no expected on-going costs.

The measure is expected to have no impact on civil society organisations.

Operational impact (£m) (HM Revenue and Customs (HMRC) or other)

It is not expected that implementing this change will incur any additional costs for HMRC..

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected from tax returns.

Further advice

If you have any questions about this change, please contact John Williams on Telephone: 03000 530434 or email: john.r.williams@hmrc.gsi.gov.uk.