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The Corporate Intangibles Tax Regime (CITR) governs the taxation of intangible fixed assets (IFAs), such as intellectual property rights, patents, trademarks, and goodwill, held by companies. This article provides a brief overview of the key legislative changes since the introduction of the CITR and common errors observed by HMRC in applying the rules.
Key Legislative Changes to the CITR
Introduction of the IFA Regime (April 1st 2002): Before April 1st 2002, companies were not eligible for relief for the amortisation or impairment of Intangible Fixed Assets (IFAs). Tax relief was only recognised under the capital gains regime when the asset was sold. However, the IFA regime was introduced in the Finance Act 2002 and was later rewritten into Part 8 of the Corporation Tax Act (CTA) 2009. This regime provides tax relief to companies through relievable debits and applies to IFAs created or acquired from an unrelated party on or after April 1st 2002, with certain exclusions in place.
Restrictions on Relevant Assets (December 3rd 2014): The Finance Act 2015 imposed constraints on ‘relevant assets’ obtained from a related individual or a firm in which a member was related to the company. These limitations were applicable to the acquisition of relevant assets between December 3rd 2014, and July 7th 2015. Relief is restricted by disallowing annual debt relief under Part 8 for relevant assets acquired during that period. Instead, relief is allowed when the asset is realised, although credits are still chargeable.
Extension of Restrictions to Goodwill and Relevant Assets (July 8th 2015): The Finance (No 2) Act 2015 has extended the limitations imposed on goodwill and relevant assets obtained from any party on or after July 8th 2015, which were initially put in place on December 3rd 2014. This information is pertinent to business and academic settings, and it is crucial to adhere to the formal language and tone expected in such environments. It is essential to maintain the original meaning of the text while ensuring that the vocabulary and grammar are appropriate to convey a sense of professionalism and expertise.
New Rules for Relevant Assets (April 1st 2019): Finance Act 2019 introduced new rules for relevant assets, including goodwill, acquired from April 1st 2019. In accordance with Chapter 15A CTA 2009, certain assets are eligible for tax relief. To qualify for a fixed-rate deduction of 6.5%, said assets must have been acquired on or after April 1st, 2019, as part of a business acquisition that included qualifying intellectual property (QIP). It is imperative to note that these assets must meet the abovementioned criteria to be considered for tax relief.
Further Changes to the Regime (July 1st 2020): Finance Act 2020 introduced further changes to the regime, broadly relating to the 2002 rules and allowing more assets to be brought within Part 8.
Common Errors Observed by HMRC
Valuation: The HM Revenue and Customs (HMRC) has observed cases in which inflated values have been assigned to intangible assets acquired from related parties or apportioned to intangible assets and goodwill in the context of a business acquisition. To ensure compliance with accounting standards and regulations, it is recommended that companies obtain at least one professional independent valuation of all assets, ensuring that the appropriate assets are valued on the correct basis. This will help to avoid potential errors or inaccuracies that could impact the company’s financial statements and overall financial health. In addition, by taking a proactive approach to asset valuation, companies can demonstrate their commitment to transparency and accuracy in financial reporting.
Date of acquisition: In the context of legislative changes, it is imperative for a business to accurately and unambiguously determine the date of acquisition of its assets. This holds particular significance when the acquisition date falls within a timeframe affected by the aforementioned legislative changes. It is, therefore, essential to exercise caution and diligence when identifying these dates.
Asset identification: Asset identification requires a thorough analysis considering various definitions and exceptions. To achieve this, it is essential to seek legal advice to identify legal and intellectual property rights properly. Additionally, consulting statutes and HMRC guidance can provide valuable insights to support the identification process. Undertaking these measures will ensure a comprehensive and accurate identification of assets.
No business acquisition: For the purposes of Part 8, it is not appropriate to acknowledge the concept of goodwill if the company has not acquired the business in question. This stipulation is important to consider when assessing the financial standing and obligations of the company and must be taken into account accordingly.
Documentary evidence: When transferring assets or businesses between related parties, a lack of documentary evidence can make compliance checks more challenging and time-consuming. HMRC expects related parties to adhere to the arm’s length principle and document all transactions and agreements as if they were dealing with an unrelated third party to avoid complications. Maintaining records for a minimum of six years from the end of the financial year is crucial. Non-compliance with these rules can lead to penalties of up to £3,000.
Conclusion: The Corporate Intangibles Tax Regime has undergone several significant legislative changes since its introduction in 2002, aiming to align the tax treatment of intangible assets with their accounting treatment and promote innovation. However, the complexity of the rules has increased by the incorrect application, leading to common errors observed by HMRC. To ensure compliance with the CITR, companies should be aware of these errors and take the necessary steps to properly value, identify, and document intangible assets and business acquisitions. If you need help regaring tax compliance, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.