20 July 2015
The Summer Budget heralded further reductions in the rate of corporation tax – down to 18% by 2020. That was the good news for companies.
Buried deep in the Budget papers issued by HM Treasury was an unexpected announcement that withdraws corporation tax relief for all goodwill that is purchased on or after 8 July 2015. Tax relief for goodwill purchased or acquired before that date, or in the case of unconditional contracts entered into before that date, will continue to be able to claim corporation tax relief on the amortisation of goodwill (or at 4% on a straight line basis if so elected).
The new rule covers not only purchased goodwill, but also customer lists, unregistered trade-marks, and licences for intangibles. It also covers intangibles that are created.
The effect of this change is to reverse legislation that was introduced in 2002 as part of the then Government’s policy which was to try to align tax with accounting.
Relief may still be available when the goodwill is sold, but this is not as generous as would normally have been the case. Loss relief will no longer be available as a trading deduction/ business expense. It will instead be claimable as a “non-trade debit”.
Thus, in future, the buyer of a business is going to be less inclined to want to buy goodwill as a result of the withdrawal of this relief, and may, depending upon the circumstances be looking to acquire the shares of an existing target company. This change will generally have no impact on a vendor’s tax position: however, the change in law will affect the purchaser’s likely business model and will add to the complexity of the warranties and indemnities that the vendor will be forced to give as regards the past history of the target business.
For further information or to discuss your specific circumstances please contact David Cohen, below, or contact your usual UHY adviser at your nearest location. Alternatively, you can complete our online contact form.