The government has fiddled with the tax rules for goodwill so often companies and their advisors often don’t know where they stand. Exactly when can you claim relief for acquiring or creating goodwill?
Recap – relief lost for goodwill
Rule changes made in December 2014 and July 2015 saw tax relief for companies on the cost of goodwill attacked twice. The first change blocked relief for goodwill where it was internally generated, i.e. built up by the business rather than purchased from someone else, but only if it was transferred (sold) to the company by someone related to it. The second change scrapped all relief for goodwill with effect from 8 July 2015.
Relief still available
Companies that purchased or created goodwill between 1 April 2002 and 8 July 2015 were entitled to continue to claim relief under the old rules until the value of the goodwill in question was entirely written off. Relief is allowed for the amount shown as an amortisation cost in the company’s accounts or, as an alternative, 4% of the cost per year on a straight-line basis.
Tip. If your company created or purchased goodwill between 1 April 2002 and 8 July 2015, but hasn’t yet claimed a deduction, a claim can be made for any subsequent year within the usual time limits.
A change of heart
The loss of CT relief for goodwill was widely condemned and smacked of HMRC paranoia over tax avoidance rather than sensible fiscal policy. Therefore, following outside pressure it wasn’t long before CT relief for goodwill was back on the table. Following a consultation in early 2018, a measure was is included in the Finance Act 2019 to bring back a limited form of relief.
The latest relief
The relief is in the form of a fixed rate writing down allowance for goodwill (and other customer-related intangible assets) created or acquired by companies on or after 1 April 2019. Originally, following HMRC’s consultation, the proposal was to reinstate the old amortisation/4% relief. However, it finally settled on a fixed rate annual allowance of 6.5% of the cost, which will apply subject to conditions.
Conditions and small print
The relief is only be available where the asset is acquired as part of the purchase of a business which includes other qualifying intellectual property (IP) such as patents, registered designs, copyright, design rights and plant breeders’ rights. The relief is capped at six times the expenditure incurred on the qualifying IP assets.
Old and new
The relief applies to goodwill acquired on or after 1 April 2019. Therefore, if you’re claiming relief for goodwill acquired under the pre-2014 and 2015 changes, you can continue to do so. But if you weren’t entitled to relief, this won’t change because of the 2019 rules.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.