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HMRC internal manual

Corporate Intangibles Research and Development Manual

HM Revenue & Customs
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Intangible assets: avoidance: structural defences and their limitations

Accountancy foundation and exclusion of existing assets

Two important structural elements of the rules in FA02/SCH29, which inhibit attempts to exploit the legislation, are discussed below.

Accountancy foundation

Although there are a number of points of divergence between the legislation and the treatment in companies’ commercial accounts, the accounting figures nevertheless form the basis for the tax result. This limits (though it does not counter altogether) the ability of companies to engineer tax deductions for losses without substantial commercial foundation. Companies will generally be unable to depress their taxable profits without similarly depressing the commercial results they show in their published accounts - to investors, creditors and the capital markets more generally.

The position is buttressed by the provisions in Schedule 29 which:

  • require the accounting figures adopted for tax to be those which conform with GAAP (CIRD30020),
  • enable regard to be had to consolidated group accounts where there is a divergence between the treatment of intangible assets in a company’s own accounts and in the accounts of a group of which it is a member (see CIRD30080),

On the other hand sometimes circumstances will arise where a company:

  • is relatively unconcerned about the effect on other users of its accounts of, say, the very rapid write-off of acquired intangibles, and
  • can justify that treatment as a matter of GAAP (in its own accounts and in any consolidated group accounts which reflect its results).

Exclusion of existing assets

As described in CIRD11500 goodwill and other intangible assets in existence prior to 1 April 2002 generally remain outside the rules in Schedule 29 while they remain within the same economic family. In the early days of the legislation therefore nearly all assets (‘existing assets’) will be outside Schedule 29 and the practical impact of the legislation will only be felt as assets change hands and new ones are developed (for example the goodwill of a business built up from scratch after 31 March 2002).

The opportunities for exploitation will therefore be limited at first to:

  • those, initially few, assets within the legislation, and
  • attempts to bring existing assets into the legislation without leaving their existing economic family.

This may make it possible to address emerging weaknesses in the legislation before the Exchequer losses are substantial and therefore underlines the importance of freely sharing information and suspicions with colleagues in Business Tax (Technical), as mentioned in CIRD48010.