CIRD48320 - Intangible assets: avoidance: intangible assets exchanged for other assets recognised at net book value (step-up schemes)

Background

Prior to 8 July 2015, CTA09/PART8/S846(1) disapplied the market value rule (CTA09/S845) in relation to transfers of intangible fixed assets, between related parties, where the transfer pricing legislation (TIOPA2010/PART4) applies (see CIRD45040).  HMRC received notification of an avoidance scheme under DOTAS (Disclosure of tax avoidance schemes) that exploited this rule.  The transaction normally involves an accounting step-up in value.  The scheme is described below.

Accounting step-up

The purported consequence of the disclosed scheme is that a customer may fail to recognise the full value of the proceeds of realisation in the disposing company.  The other party may also claim relief on the full value of the intangible asset in the acquiring company. 

The scheme works something like this:

  • Company A exchanges one asset, typically an internally-generated intangible asset that has no accounting book value, for shares or an equity interest in Company B.
  • Company A accounts for the shares/equity interest at cost. ‘Cost’ in this scheme is either the net book value of the exchanged intangible asset (probably nil), or the par value of the shares, rather than the fair value of the consideration.
  • Company A does not recognise a gain on the disposal of the intangible asset - because accounting for the shares received as consideration equal to the net book value of the asset disposed results in no gain.
  • Company A claims that the proceeds of realisation to be recognised for the purpose of CTA09/PART8/CHAPTER4 is nil or the par value of the shares.
  • Company B however recognises the fair value of the intangible asset acquired.

Thus, the arrangements purport to create a ‘step up’ in value.  Company A’s gain on the disposal is based on proceeds of either nil or the notional par value of the shares.  Company B claims relief under CTA09/PART8 on the fair value of the intangible asset acquired.

Points to note: 

  • The arrangements could involve parties that may not be related.
  • The arrangements could involve a partnership.
  • The arrangements could involve a licence.
  • Company B may be outside the charge to Corporation Tax e.g. because it is non-resident.  Although there may be no UK tax mis-match, the UK company (i.e. Company A) has failed to account for the appropriate value of the intangible asset on disposal.


To help counter such schemes an amendment to CTA09/S846 was made by F(2)A15/S42 (see CIRD48330). This legislation was amended by FA26/S47 so is only relevant to transfers occurring between 8 July 2015 and 31 December 2025.

The new rules introduced by FA26/S47 will continue to counter these avoidance schemes. For cross-border transactions the value will be determined using the arm’s length principle , and the market value rule will apply in other cases. See CIRD45038 and CIRD45040.

Deciding which tax provisions will apply to the arrangements will depend on the transactional analysis.

If you encounter this scheme you will need to liaise with:

  • an advisory accountant on the accounting matters
  • a transfer pricing specialist
  • Shares and Assets Valuation
  • Business, Assets and International