…clear thinking

1. …clear thinking

2. Intangibles part two Storyboard for

3. By completing this module you will be able to: Explain the commencement rules Allocate proceeds of transactions between different types of asset Understand the tax consequences of transactions within groups and between related parties Compute the ‘roll over’ relief for replacement intangible assets At the end, you can visit useful Internet sites on a “Web Ride” Lecturer: Pete Miller Learning time: approx. 20 min How to use this learning module? - Click on "Help" in the Table of Contents (TOC) Intangibles part two Graphic: [presenter or standard graphic]

4. Corporation Tax regime for “intangible fixed assets” from 1 Apr 2002 Only applies to intangible fixed assets that were Created by a company on or after 1 Apr 2002 Acquired by a company from an unrelated party on or after 1 Apr 2002 Acquired by a company from a related party on or after 1 Apr 2002, where the related party satisfied one of the previous two conditions Commencement rules Graphic: [calendar showing 1 April 2002]

5. Detailed rules at s880 et seq. Corporation Tax Act 2009 Generally, assets treated as being created or acquired when expenditure incurred on creating or acquiring it Which means, when it is recognised for accounting purposes Where part of expenditure incurred before 1 Apr 2002 and part after, treat as two separate assets Determining if asset is pre or post 1 Apr 2002 Graphic: [photo finish of horses at winning post]

6. Goodwill is treated as being created before 1 Apr 2002 if the business was carried on before that date by the company or by a related party Example 1: PeteCo started trading in 1992. The trade was transferred to a subsidiary, MillerCo, in 2004. Since the companies are related parties, MillerCo acquired the goodwill from a related party that had carried on the trade before 1 Apr 2002, so the goodwill is outside the corporate intangibles regime Example 2: Viv started trading in 1997. The trade was incorporated into VivCo in 2005. Since Viv, as the shareholder, is a related party to VivCo, VivCo acquired the goodwill from a related party that had carried on the trade before 1 Apr 2002, so the goodwill is outside the corporate intangibles regime Commencement - goodwill Graphic: [Image from film Good Will Hunting]

7. Very broadly drawn but essentially 4 categories (s834 et seq. CTA 2009) If both parties are companies, they are related parties if one controls the other or has a major interest in the other If both parties are companies, they are related parties if both are under common control If both parties are companies, they are related parties if they are in the same group If the company is close, any participator or associate of a participator is a related party Major interest: if the person and one other person control the company and they have at least 40% each Related parties Graphic: [a large family photo]

8. Real life transactions are not only about the intangible assets, so what do you do in a mixed assets deal? The vendor allocates the proceeds on a just and reasonable basis (s856 CTA 2009) This is the same as for most other assets, e.g. s52(4) Taxation of Chargeable Gains Act 1992, s562 Capital Allowances Act 2001 Applies regardless of allocations in contracts or separate contracts for each asset The purchaser accounts for intangible fixed assets on the basis of generally accepted accounting practice Or on a just and reasonable basis if generally accepted accounting practice is not used Also applies regardless of allocations in contracts or separate contracts for each asset Mixed transactions Graphic: [a food mixer]

9. Cole Plc acquires a trade from a third party for £15m. The assets comprise: Plant and machinery, fair valued at £3m Patents, fair valued at £1.5m A factory, fair valued at £2.5m, and Goodwill, which must be £8m. Assuming the fair values conform to UK GAAP, then the £1.5m for patents and £8m for goodwill are the effective numbers for tax purposes. But the purchaser might have different numbers, on a just and reasonable basis! Example: Mixed transactions

10. A company (the principal company) and its 75% subsidiaries (s765 et seq. CTA 2009) And their 75% subsidiaries, and so on So long as they are 51% effective subsidiaries Can only be a member of one group Identical to s170 TCGA, which should be very familiar What is a group? Graphic: [ company family tree diagram ]

11. Always treated as tax neutral if the asset is a chargeable intangible asset for both companies (s775 CTA 2009) i.e. if they both are UK resident or have UK permanent establishments Tax neutral means (s776 CTA 2009) No acquisition or realisation Transferee treated as having held asset whenever transferor held it and as having done anything the transferor did Group transactions Graphic: [spirit level]

12. Cole Plc is the principal company of a group. It has many subsidiaries, including PeteCo Ltd, a UK resident company, and VivCo GmbH, resident in Austria. Example 1: Cole Plc transfers a chargeable intangible asset to PeteCo. This is tax neutral, as the asset is a chargeable intangible asset for both companies. Example 2: Cole Plc transfers a chargeable intangible asset to VivCo. This is not tax neutral, as the asset is not a chargeable intangible asset for both companies; it cannot be a chargeable intangible asset for VivCo, which is not a UK resident company. So Cole Plc is treated as making a realisation, at market value of the asset. Examples: Group transactions

13. Related party transactions are treated as being at market value, for all purposes of the Taxes Acts As long as the asset is a chargeable intangible asset of the transferor, transferee or both, Subject to exceptions: Groups and other tax neutral provisions Transfers that generate an Income Tax charge on earnings or distributions Transfers already adjusted under transfer pricing rules Special rules for assets of exempt permanent establishments Related party transactions Graphic: [a market]

14. Pete owns PeteCo and MillerCo, so they are under common control and related parties. He is also a director of both companies. Example 1: PeteCo transfers an intangible asset to MillerCo: this is a related party transaction and market value is imposed. Example 2: MillerCo transfers an intangible asset to Pete: this is a related party transaction, but it is also a transfer of an asset to both a shareholder and an employee, so there should be an Income Tax charge: The company is treated as realising the asset at market value But the Income Tax charge (whether as employment income or distribution) is computed on the basis of what was actually paid. Examples: Related party transactions

15. Similar to capital gains roll-over relief, but not identical (s754 et seq. CTA 2009) Applies when a company realises an intangible asset and acquires another Applies when a company realises an intangible asset and reacquires it Applies when a company realises an intangible asset and another group company acquires another intangible asset (s777 CTA 2009) Applies when a company realises an intangible asset and acquires a company that holds chargeable intangible assets (s778 CTA 2009) Roll-over Relief Graphic: [a cylindrical bale of straw]

16. Old asset must be a chargeable intangible asset throughout period of ownership: Time apportionment as long as asset was a chargeable intangible asset for a substantial part of period of ownership N.B. No requirement for asset to have been used in a trade (cf. capital gains rules) New asset must be acquired in period from 12 months before disposal to 3 years after, or later if HMRC permit Proceeds of realisation must exceed original cost Relief is amount by which proceeds exceed original cost Conditions for roll-over relief Graphic: [person working on a computer]

17. Asset acquired for £800k, written down to £680k, sold for £2,050k. Prima facie credit is £1,370k, i.e. £2,050k proceeds - £680k tax value. New asset acquired for £3,000k. Relief is amount by which proceeds exceed original cost. Relief is £2,050k - £800k = £1,250k. Taxable credit £120k = £1,370k - £1,250k relief (= claw back of amortisation and impairment allowances already given). Tax cost of new asset is cost less relief, i.e. £3,000k - £1,250k = £1,750k. Example: Roll-over 1

18. Asset acquired for £800k, written down to £680k, sold for £2,050k. Prima facie credit is £1,370k, i.e. £2,050k proceeds - £680k tax value. New asset acquired for £1,800k. Relief is amount by which amount reinvested exceeds original cost. Relief is £1,800k - £800k = £1,000k. Taxable credit £370k = £1,370k - £1,000 relief. Tax cost of new asset is cost less relief, i.e. £1,800k - £1,000k = £800k. Example: Roll-over 2

19. Asset acquired for £800k, written down to £680k, sold for £2,050k. Prima facie credit is £1,370k, i.e. £2,050k proceeds - £680k tax value. New asset acquired for £800k. Relief is amount by which amount reinvested exceeds original cost. Proceeds do not exceed original cost, so no relief. Taxable credit £1,370k unrelieved. Tax cost of new asset remains at £800k. Example: Roll-over 3

20. The key things to remember from this module are: The tax rules for corporate intangibles, which broadly apply to assets created or acquired on or after 1 Apr 2002 The rules for allocating proceeds in mixed transactions, depending on whether we are looking at the buyer or the seller Transactions between related parties are generally at market value, but are tax neutral within a group There is a roll-over relief available Summary Graphic: [standard summary graphic]

21. Web Ride

22. …clear thinking

23. Please select the correct answer(s) and then click on “Submit” The key date for the commencement of the intangibles regime is 1 Apr 2000 1 Jan 2002 1 Apr 2004 1 Apr 2002 Question 1

24. Please select the correct answer(s) and then click on “Submit” What value are transactions between related parties usually at? The value for which the assets were transferred The original cost The current market value The tax written down value Question 2

25. Please select the correct answer(s) and then click on “Submit” A company sells an intangible fixed asset, generating a taxable credit. For which items may roll-over relief be available if the company acquires them from an unrelated party? The goodwill of a trade A patent A new subsidiary with intangible fixed assets A new factory Question 3

26. Now you have finished this module and acquired basic knowledge on Intangibles part two If you answered all the questions in the Quiz correctly, you can print out your personal certificate by clicking on the link Thank you for your attention! Finish Graphic: [standard finish graphic]