UK tax amortisation of IP
Speed Read
The UK does not, at present, permit tax amortisation of ‘old’ (i.e. pre-April 2002) IP assets. The UK Government proposes to remove this restriction in relation to IP transferred within a group to a UK company after 1 July 2020. This change may be of material benefit to some groups considering an IP transfer to the UK.
Introduction
The UK allows tax amortisation of most types of IP.
At present, the rules only apply to relevant IP assets created or acquired from an unrelated party on or after 1 April 2002. For many groups, the need to distinguish between pre and post 1 April 2002 IP is of no particular relevance. However, for long standing businesses material problems can arise in establishing the date on which its IP was first created or acquired.
The UK Government has announced changes that largely remove the distinction between IP assets created or acquired before or after that date where the assets are currently held outside of the UK. The new rules have yet to be finalised, although they are anticipated to be implemented in the form set out in draft legislation (the UK Finance Bill 2019-21).
Under the proposed rules (and with effect from 1 July 2020) most relevant IP assets currently held outside of the UK will benefit from tax amortisation when those assets are brought or transferred to a related UK entity. For any group with ‘old’ (i.e. pre-April 2002) IP, this change may materially increase the benefit of transferring IP to the UK.
This note briefly describes how the UK tax amortisation rules operate.
What types of IP benefit from amortisation?
The rules generally apply to assets that would be treated as "intangible assets" for accounting purposes and specifically apply to:
- patents, registered trademarks, registered designs, copyrights and design rights (and similar non-UK rights);
- other information or techniques having industrial, commercial or other economic value; and
- licences or other rights concerning any of the above.
The rules exclude a number of assets but most of the exclusions are fully understandable in that they include non-business assets, rights relating to land and property, financial assets and shares and other rights in companies.
Of greater relevance is the exclusion of:
- certain expenditure on films, TV, theatre productions or video gaming and certain sound recordings;
- expenditure on software that falls to be treated as part of the costs of related hardware for accounting purposes; and
- expenditure on R&D.
Goodwill, customer-related intangibles and unregistered trademarks or other signs are also generally excluded except where acquired as part of a business purchase that includes other IP.
For amortisation purposes, at what value will a UK buyer be treated as acquiring the relevant IP when acquiring from a related non-UK company?
Where relevant IP is transferred from a non-UK company to a related UK company, it will generally be treated as having been acquired at the greater of:
- market value; and
- where the UK’s transfer pricing provisions apply, the arms’ length (i.e. transfer pricing) value.
What is the rate of UK tax amortisation?
The general position is that tax amortisation follows the accounting amortisation. Alternatively, a company can, for UK tax purposes, elect to write down the cost of an IP asset at a fixed 4% rate. This can enable the cost of the IP to be amortised for tax purposes even when it is not amortised in the accounts (for example, because it is considered to have an indefinite economic life).
As noted above, the ability to claim tax amortisation in relation to goodwill, customer-related intangibles and unregistered trademarks or other signs is very limited. However, where such tax amortisation is available, it applies at a fixed rate of 6.5%.
