Extract from an article by Adrian Rudd (of PricewaterhouseCoopers, Tax Adviser's representative on Technical Committee) summarising the Institute's response to an important proposal by the Inland Revenue affecting companies. It is related to the reforms of the taxation treatment of intellectual property, goodwill and other intangible assets. (This article was published in the October 2000 issue of Tax Adviser.) The Institute welcomed the review of the taxation of intellectual property and goodwill, and was pleased that serious consideration is being given to the tax treatment of intellectual property following the accounting treatment. It is, however, a pre-requisite that the Inland Revenue has sufficient confidence in accounting standards, so that it will not be consider it necessary to introduce the kind of detailed regulations that were introduced in connection with exchange gains and losses.
The Institute believes that listed companies would be unwilling to see earnings per share (EPS) depressed, and the Revenue therefore should not be unduly concerned about the risk of losing tax as a result of companies using excessively prudent amortisation rates.
In the case of unlisted companies, the need to satisfy the requirements of creditors will, in practice, deter many companies from adopting excessively prudent amortisation policies. In particular, creditors will be looking carefully at the profit cover for interest payments. In any event, the total amount of corporation tax at stake as far as unlisted companies are concerned is small as a percentage of the total corporation tax take.
The Institute believes that significant benefits will only accrue from this reform if companies can simply rely on their accounting method, without having to have regard to further detailed rules.
Goodwill and intellectual property
The Institute pointed out that goodwill is different from intellectual property in that it arises typically on the purchase of a business as a going concern, where the overall price paid exceeds the value of the net assets as shown on the completion balance sheet. The purchase price might have been calculated as a multiple of maintainable earnings, whereas the balance sheet values will be based on the valuation of each asset or category of asset. No income, fees or royalties arise from goodwill, only the trading profits of the business. Goodwill is not licensed out, in contrast to intellectual property. Therefore, the tax treatment of goodwill need not be exactly the same as the tax treatment of intellectual property.
However, in practice there is a spectrum of intangible assets between traditional goodwill as described above and intellectual property such as patents and copyrights. It may well be difficult to draw a meaningful line to divide this wide spectrum of assets into two different categories for tax purposes. This will particularly be the case where there is an assets acquisition, comprising a bundle of intangible assets including both goodwill and intellectual property. If the tax treatment of goodwill differs from that for intellectual property, lengthy discussions on the allocation of proceeds will inevitably ensue. The Institute therefore believes it would be preferable for the amortisation of all such assets to follow the accounts, rather than having separate treatment for goodwill.
Nevertheless, even if the tax treatment of goodwill follows the accounting treatment, it will still be regarded as a capital asset for book purposes. The tax treatment will not be ‘income’ but will be amortisation, based on book depreciation rather than capital allowances. The Institute therefore sees no reason in principle why goodwill should not remain a qualifying asset for rollover relief, in the same way that fixed plant and industrial buildings qualify.
Deduction of tax at source
The Institute believes that the system of deduction of tax at source is outdated. The main effect of a withholding tax is to alter the behaviour of investors with the result that profitable activities are located out of the UK. Indeed, the government appears to have accepted this in its response to the proposal in the Savings Directive for tax to be deducted at source from interest payments.
The Institute favours a reporting regime for both interest and royalties, rather than a withholding tax regime. Any abuse could be adequately dealt with through the transfer pricing legislation and the CFC legislation.
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