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HMRC internal manual

Corporate Intangibles Research and Development Manual

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Core computational rules: taxable credits: ‘negative goodwill’ referable to intangible assets

CTA09/PART8/S724

Accountancy background

As explained in CIRD12735, where a company acquiring a business accounts for the assets and liabilities of that business (see CIRD30120), the aggregate of the ‘fair values’ attributable to the identifiable assets and liabilities of the business may well differ from the total price paid for the business. Where the aggregate of the fair values is less than the total price paid for the business the difference is accounted for as goodwill.

More rarely, the aggregate of the fair values may exceed the total price paid for the business. This situation may arise for example where a business is acquired at a bargain price. The excess is accounted for as ‘negative goodwill’. Under UK GAAP, negative goodwill appears on the asset side of the balance sheet of a company as a negative figure, immediately after any positive goodwill, and is normally written off by being credited to the Profit and Loss account at a rate corresponding to the rate of depreciation of the identifiable non-monetary assets of the business (or as they are sold). Under IAS, negative goodwill is recognised immediately in the Profit and Loss account at the acquisition date.

Circumstances relevant to Part 8

Negative goodwill is not an asset and it is therefore not an intangible asset within Part 8. But the use of fair values for accounting purposes as the base cost of assets within Part 8 (CIRD12730) makes it necessary in very limited circumstances, to regard sums released to profits that represent amounts written off negative goodwill, as taxable credits within Part 8.

This is where the creation of negative goodwill is referable to the attribution of a fair value to an intangible asset. Tax relief under Part 8 will eventually be obtained for the full amount of the fair value of the asset. But, because the creation of negative goodwill is referable to the attribution of a fair value to that asset, part of that fair value represents a sum that is not matched by any part of the consideration paid for the business. It is therefore necessary in these circumstances to tax the release of the negative goodwill to ensure that the tax relief given does not represent consideration only notionally paid out.

Calculation of taxable credits

The extent to which the accounting gains (sums credited to profits in a company’s accounts) in respect of negative goodwill are attributable to intangible assets within Part 8 is to be established by a just and reasonable apportionment of those gains.

The accounting exercise necessary to attribute fair values to the assets acquired, together with any information available on how the parties arrived at the overall consideration for the business, should indicate whether, and if so to what extent, the shortfall between the overall consideration and the fair values of the identifiable assets is attributable to intangible assets.

In cases of doubt or difficulty HMRC officers should seek the assistance of HMRC compliance accountants.

Where valuation of intangible assets is an issue see CIRD10240.