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HMRC internal manual

Corporate Intangibles Research and Development Manual

Intangible assets: FA15 and F2A15 rules for goodwill and relevant assets: FA15 rules for goodwill and relevant assets acquired on incorporation from a related party or after 3 December 2014 – background to FA15 changes

FA15/S26 {#}

Background to the FA15 changes

‘Incorporation’ is the term that is frequently used to describe the transfer of a business from an individual, or partnership, to a company where the individual(s) retains an interest in the company.

Because there is a transfer of the business from one legal entity to another, e.g. from an individual to the individual’s company, the company may recognise purchased goodwill and other relevant intangible assets on the acquisition of the business.  Purchased goodwill is normally recognised when consideration is paid for a business and the amount of the consideration exceeds the net fair value of the assets and liabilities acquired.  For a further explanation of the different types of goodwill see CIRD11070.

Prior to 3 December 2014, and subject to the FA02 rule (see CIRD11500 onwards), the company could obtain corporation tax deductions by setting the accounting or fixed rate debits against its profits.  These deductions were available even though there may have been little or no economic change in ownership.  For example; the individuals who previously carried on the business retains a participating interest in the company going forward.

These tax deductions are not available to the businesses that don’t incorporate.  For example:

•   Businesses who incorporate can recognise the goodwill that was internally-generated by the acquired business, as purchased goodwill, whereas those that don’t incorporate can’t;

•   start-up businesses that have always been operated within a company cannot recognise the value of their internally-generated assets and so cannot claim a tax deduction.

FA15/S26 introduced changes to CTA09/Part 8 that removed the unfair tax advantage that was previously available on incorporation of a business.

Points to note

The FA15 rules introduced on 3 December 2014 do not affect third party business acquisitions.  However, subsequent changes introduced by F2A15 on 8 July 2015 extend the rules to all business acquisitions, including those from unrelated parties, but only in respect of acquisitions occurring on or after 8 July 2015.  The practical effect of the FA15 and the subsequent F2A15 change is that:

  • For all acquisitions that took place before 3 December 2014 amortisation etc. relief continues to be available after 3 December 2014 provided the goodwill etc. was acquired before that date.
  • Incorporations of related party business will not be entitled to amortisation etc. relief for goodwill etc. acquired on or after 3 December 2014.
  • All acquisitions that take place on or after 8 July 2015, including acquisitions from non-related parties, cannot claim amortisation relief for goodwill etc. acquired on or after 8 July 2015.

The new rules only apply to transfers of goodwill and assets typically associated with goodwill (including unregistered trade marks).  The new rules do not affect transfers of other types of intellectual property.

For incorporations of related party businesses occurring between 3 December 2014 and 7 July 2015 there are special rules to apportion expediture on relevant assets where there are previous third party acquisition costs at the date of the transfer (see CIRD 44450).

Tax-neutral transfers of assets that are subject to the rules that existed before 8 July 2015 can continue to claim relief under those rules even if the tax-neutral transfer occurred after this date.

For more details on the changes introduced from 8 July 2015 see CIRD44100 onwards.