My company owns intellectual property or goodwill. How can I gain tax relief on this?
Most companies own a variety of fixed assets on which capital allowances are claimed, and many of you will have seen Ben Allman’s recent insight on the capital allowances which can be claimed on specialized buildings. Are you also aware of the substantial tax advantages which apply to intellectual property?
Below are some examples, however, they are not comprehensive, and if you feel any of these reliefs may apply to you it would be worthwhile having a free initial consultation with us.
Different rules apply depending on when and how this goodwill was acquired. Relief can only be obtained for purchased goodwill, rather than goodwill obtained through relationship-building within your own company. This is because it is difficult to give a precise value for internally-generated goodwill; whereas purchased goodwill has a defined value, ie the excess of the purchase price over the net assets on the balance sheet.
For example, if you have purchased a business since April 2019, and as part of this purchase have acquired goodwill and/or other customer-related intangibles, tax relief may be obtained at a rate of 6.5% per annum, up to either the higher of the value of the purchased goodwill or 6 times the value of qualifying intellectual property.
This could lead to substantial tax savings where a purchased company has, as many do, value well in excess of its balance sheet, although the rules relating to which intellectual property qualifies are complex . This could also be a consideration for negotiations on sale of your business, as it will be valuable to a corporate purchaser.
Amortisation (equivalent to depreciation) or impairment of intellectual property is generally treated as an allowable expense in the corporation tax computation (although there are certain exceptions). This means relief is given over the time the intellectual property is used for. Profits or losses on disposal are treated as income or expenses respectively.
There is an option to make an election to claim fixed rate relief at a rate of up to 6.5% instead of simply following the accounting treatment. This is more advantageous for long-lived intellectual property as it accelerates the rate at which relief can be obtained.
Research and development
The creation of intellectual property may involve significant investments of both staff time and other costs which lead to overall advances in science and technology. Where this work involves the resolution of uncertainties, it would be possible to claim research and development tax relief. The benefits and specific application of this relief have been discussed in detail in previous insights, but it is worth noting that a claim could lead to tax savings of up to 24.7% of qualifying expenditure.
There is an additional relief for patents, which is worth considering in more detail. The impact of this relief is to tax profits from exploitation of patents at a rate of 10% rather than the main rate of corporation tax. This currently gives relief at a rate of 19% of these profits, but this is anticipated to increase to up to 25% from 2023.
The workings of this relief are extremely complicated, however to give a brief oversight, the proportion of profits that can be claimed is calculated in four stages:
- Profits are allocated to either a patent box stream or a non-patent box stream. This requires careful record-keeping to ensure it is possible to allocate these profits.
- Reduce this by firstly an element of normal profit, and then an element of profits relating to the brand to obtain the proportion of profits which relate to the exploitation of intellectual property
- Apply a fraction to the remaining profits relating to the proportion of relevant research and development expenditure carried out by the company itself. If the company has completed reports in order to claim the expenditure as qualifying research and development expenditure, this information may well be readily attainable. If not, this will need to be traced back for a minimum of 3 years to separate out the costs which led to the patent.
This has the potential to lead to tax savings of up to 15% of the relevant profits when the new corporation tax regime commences, which could be substantial.
The patent box is quite broad in its scope, and covers goods sold which include either a patented part or a patented process, rather than simply products which are patented in their entirety. This does not involve any restrictions for the elements of the product which are not patented, and they are entitled to full relief under the calculations above.