Chapter 15 Intangible fixed assets Flashcards
15.1 Introduction
IFAs created or acquired before 1 April 2002 are not normally within the IFA regime, they are treated as capital assets and subject to CT on capital gains on disposal.
For IFAs since 1 April 2002, all debits and credits in the company’s accounts are treated as income and not capital. The tax treatment follows the accounting treatment, such that all income and expenses in the accounts relating to IFAs are taxable or deductible.
15.2 IFAs
An IFA is an intangible asset acquired or created by a company for use on a continuing basis in business. They include intellectual property and goodwill.
15.3 Credits and debits
IFA credits include, receipts from royalties, revaluation of an IFA and profit on realization.
Debits include royalty payments, loss on realization and amortisation.
15.4 Tax Relief – general rules
Credits and debits are brought into account for tax purposes when they are recognized usually under GAAP. The amount brought into tax also follows the accounts. Patent royalties are paid net of basic rate tax by companies to individuals. Copyright royalties are paid gross. All figures in the tax computation need to be the gross figures.
The company is allowed a deduction for the amortisation or impairment of an IFA charged in the accounts. Alternatively they can claim a straight-line deduction of 4% on cost.
15.5 Tax Relief – Goodwill
April 2002 and 7 July 2015 – the asset is treated as any other IFA. The company can claim amortisation in the accounts or a 4% straight line deduction
8 July 2015 and 31 March 2019 – no tax relief available for the amortisation or impairment of relevant assets.
From 1 April 2019 – relief available provided the asset is acquired as part of the acquisition of a business in which the company also acquires intellectual property. The deduction is 6.5% per annum, but the maximum cost on which the deduction is based is six times the value of the qualifying intellectual property acquired.
Where no tax relief is available for the amortisation, then any debits on the disposal on or after 8 July 2015 are treated as non-trading debits. Any credits are treated as trade profits or non-trading gains.
Qualifying IP includes patents, registered designs and copyright or design rights.
15.6 Trade and non-trade IFAs
Expenses (debits) and income (credits) in the P+L relating to trade related IFAs are put in the trading profits calculation. If they relate to property, they are added to property income.
Expenses and income related to non-trading IFAs are pooled. If the income exceeds expenses, there is a non-trading gain, if expenses are more than income, there is a non-trading loss on IFA.
15.7 Relief for Non-trading loss on IFAs
The company has two years from the end of the loss-making accounting period to make this claim. If the loss has not been fully used in the current year, it will be carried forward into the next accounting period.
Carry forward pre 1 April 2017 losses – they can only be offset against non-trading IFA credits of the following year. If a net loss arises in the later year, this is offset against total profits.
Carry forward post 1 April 2017 losses – the company can claim for them to be offset against total profits, in part of full.
15.8 Realization of IFAs
A realization id defined as any transaction resulting in:
• the asset ceasing to be recognized in the company’s balance sheet, or
• a reduction in the accounting value of the asset, usually where part of the asset is sold or otherwise realized
Transaction is defined as including any event giving rise to a gain recognized for accounting purposes. Proceeds of realization are those recognized for accounts purposes less incidental costs. If IFA is not disposed for cash, use the market value of the consideration.
Where tax relief has been given on the cost of the asset, the income gain is the difference between the proceeds and the TWDV.
15.9 Rollover Relief for IFAs
If an IFA is sold then any gain will be an income gain. The gain will be made up of the true profit and a claw back of amortisation previously given. If the IFA is sold at a profit there has been no reduction in value of the asset, so the amortisation expense must be reversed.
Calculating rollover relief – proceeds need to be reinvested in the period of 12 months before and 36 months after the sale of the IFA. The amount of rollover relief is the difference between the proceeds reinvested and the cost of the old IFA.
Effect – the cost of the new IFA will be reduced for tax purposes. This impacts the deductible amortisation in future years. So we are just deferring the gain.
