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HMRC internal manual

# Intangible assets: FA15 and F2A15 rules for goodwill and relevant assets: FA15 realisations - apportionment of debit in respect of relevant asset where there are previous third party acquisition costs

## CTA09/PART 8/S849C {#} (3)

### Calculation of accounting or fixed rate debits

As explained at CIRD44450, the FA15 rules are only intended to restrict when relief is given for internally-generated assets acquired from a related party.  The objective is to defer debit relief for related party acquisitions until a time when the asset is realised, not disallow the costs completely. When there is a realisation of a relevant asset that includes previous third party acquisition costs, CTA09/S849C therefore requires that two debits are brought into account; a trading debit and a non-trading debit.

The calculation of the two debits arising on realisation cannot be a straightforward apportionment between the trading debit and non-trading debit because the calculation has to take account of the debits previously disallowed. The realisation computation needs to relieve those debits that have been subject to a restriction.  This is achieved in two steps as explained below:

## CTA09/PART 8/S849C (4)

### Step 1 – calculate the trading debit on realisation

The calculation of the trading debit starts by considering the amount of the debit (D) that would have been relieved under CTA09/PART 8 if the restriction in CTA09/S849C did not apply.  As is explained in CIRD44500, this means that all the other rules within CTA09/PART 8 must be applied before calculating D.

Once the debit (D) has been calculated the CTA09/S849C restriction is applied to it.  This is achieved by applying the appropriate multiplier (AM).  AM is determined by the formula:

AM = RAVTPA/CEA

NB: AM may have been already calculated in a previous accounting period.  If not calculated already (because the asset is realised in the same period it was acquired) see CIRD44300 for further details of how to calculate AM.

### Example

The company disposes of a relevant asset.  The cost of the asset was £280,000 including third party acquisition costs of £70,000.  AM is therefore 0.25.

The relevant asset was to have been written off over 5 years but at the end of year 3 it is sold for £80,000.  On disposal the accounting value is £140,000 (year 1 amortisation for 6 months was £28,000 with further amortisation in years 2 and 3 of £56,000pa).

The tax debits under CTA09/PART 8/Chapter 3 have been restricted for years 1-3 by the AM (0.25) to £7,000, £14,000 and £14,000 respectively.  The actual Tax Written-Down Value (TWDV) at the end of year 3 is £245,000 but the notional TWDV, absent any restrictions, is £140,000.

The unrestricted debit on disposal (D) is therefore £60,000 (notional TWDV £140,000 less sale proceeds £80,000).  This is restricted by CTA09/S849C by the AM (0.25) to give the allowable trading debit.

£60,000 (D) x 0.25 (AM) = £15,000

## CTA09/PART 8/S849C (5)

### Step 2 - calculate non-trading debit on realisation

The non-trading debit includes the balance of the accounting loss that arises on realisation but also needs to include the amortisation debits disallowed in previous accounting periods.  The allowable non-trading debit on realisation should therefore be the actual tax loss on realisation less the amount relieved as a trading debit.

This is expressed using the formula:

D – TD = NTD

### Example

Continuing the example from above, the total tax loss (D) on realisation is:

£245,000 (actual TWDV) – sale proceeds £80,000 = £165,000

The trading debit (TD) to be allowed on realisation as calculated at step 1 is £15,000. So using the formula D – TD =NTD the non-trading debit is:

£165,000 (D) - £15,000 (TD) = £150,000 (NTD)

Example 1 at CIRD44650 summarises the relief due over the life of the asset for the example above.  Example 2 includes a similar example where tax cost has been adjusted.