ATXP6 UK
Syllabus A4. Corporation Tax A4c. Taxable total profits

A4eii. Intangible fixed assets

Syllabus A4eii)

Recognise the alternative tax treatments of intangible assets and conclude on the best treatment for a given company
and
Advise on the tax consequences of a transfer of intangible assets

What is an intangible fixed asset?

An intangible fixed asset are assets that cannot be touched, for example goodwill, patents, copyrights and intellectual property.

Companies may purchase these IFAs and incur further expenditure on them.

As these are capital assets, they can be transferred within a 75% gains group at no gain/no loss.

They get tax relief on these purchases by deducting amortisation of the assets from trading profit, as amortisation is an allowable expense when calculating tax adjusted trading profit.

Alternative tax treatment of IFAs

As intangible fixed assets normally have very long lives, they are amortised over very long periods. In this case, companies may elect for the IFA to be subject to a fixed rate allowance of 4% per annum straight line. 

The election must be made within two years from the end of the accounting period in which the IFA is acquired. 

On disposal of an intangible fixed asset, a company will calculate a profit of loss on the sale. 
This will be the sale proceeds less the net book value (purchase price – amortisation until date). A profit will increase taxable total profits and a loss will decrease taxable total profits.

Illustration

Bobble  Ltd  acquires  goodwill  during  its  nine  month  accounting  period  to 31 December 2016 for a cost of £100,000 and does not propose to amortise it, it wants to use the alternative tax treatment.  The company has trading profits of £250,000 in this period. Bobble Ltd. wants to sell the goodwill for £95,000 on 1 January 2019.

  • What is the allowable deduction for tax purposes for the cost of the goodwill in the nine months to 31 December 2016?

  • What will the tax adjusted trading profits be after this deduction?

  • When must Bobble Ltd. make this election?

  • What profit/loss will arise on the sale of the goodwill?

Solution

  • Amortisation using the alternative treatment

    01 April 2016 – 31 December 2016 

    9/12 * £100,000 * 4% = £3,000

  • Tax adjusted trading profit for 9 months ended 31 December 2016

    Trading profit £250,000
    Less:
    Amortisation (£3,000)
    Tax adjusted trading profit £247,000

  • The election must be made within 2 years from the end of the accounting period in which the goodwill was acquired. Therefore, it must be made by 31 December 2018.

  • Disposal of the goodwill

    Total amortisation until date:

    9 months to 31/12/16 £3,000
    12 months to 31/12/17 £4,000 (£100,000 *4%)
    12 months to 31/12/18 £4,000 (£100,000 *4%)

    Total £11,000

    Net book value of goodwill:

    Cost £100,000
    Amortisation until date (£11,000)
    Net book value £89,000

    Profit on disposal:

    S.P. £95,000
    NBV (£89,000)
    Profit £6,000

    This £6,000 will be added to the taxable total profits and increase the C.T. Payable.