March 2023
In this month’s article in his ‘Keep It Simple’ series, Neil Da Costa tackles a topic that students
find challenging – intangible assets for companies.
There are four main aspects to this subject: patents and trademarks; goodwill; capital gains; and rollover relief.
Patents and copyrights
The patents and trademarks relate to the company’s trading activity, so HMRC allow the tax treatment to follow the accounting treatment. This means that the amortisation (depreciation) is an allowable expense in computing taxable profits. Alternatively, the company can make an election to claim a writing down allowance of 4% straight line each year. This is beneficial if the amortisation is less than 4% a year.
Simple example: Patent Plc
Patent Plc has been providing 8% amortisation on its patents that all relate the company’s trade.
Patent Plc can make an election within two years from the end of the accounting period in which the asset is acquired to claim a 4% WDA each year.
Patent Plc buys a patent for £100,000. Should Patent Plc make the election to claim the 4% WDA?
Solution to Patent Plc
Patent Plc will provide amortisation of £100,000 x 8% = £8,000 which is an allowable expense for tax purposes.
Alternatively, Patent Plc can make an election to claim the WDA of £100,000 x 4% = £4,000 instead of the £8,000 which is not beneficial so Patent Plc should not make the 4% election.
Goodwill
Generally, any amortisation/ impairment of goodwill is disallowed in computing taxable profits. In addition, the company is not permitted to claim the 4% WDA on goodwill.
Capital gains or losses on intangible assets including goodwill
If the company makes a capital gain on an intangible asset, it is treated as extra trading profits.
On the other hand, if a capital loss arises, it is treated as an expense for non-trading loan relationships and increases the deficit arising.
The NTLR deficit is treated in a similar manner to a trading loss and can be offset against total profits in the current year, carried back against NTLR income in the previous 12 months or carried forward against future total profits to get tax relief in the future.
Rollover Relief
If a company makes a gain on an intangible asset and reinvests in a replacement intangible within one year before to three years after the disposal of the original asset, then rollover relief can be claimed.
If all the sale proceeds are reinvested, then the full amount can be postponed.
This will result in the trading profits being deferred as gains on intangibles are treated as extra trading profits.
The amount deferred is reduced by the deduction already claimed from trading profits.
Simple example: Patent Plc (all sale proceeds reinvested)
Patent Plc has been providing 8% amortisation on its patents which all relate the company’s trade.
Patent Plc buys a patent for £100,000 and claims the 8% amortisation so the tax written down value (TWDV) is £92,000.
Patent Plc sells the patent for £120,000 and buys a new patent for £150,000.
Solution to Patent Plc (all sale proceeds reinvested)
The gain on the old patent is computed based on the difference between the sale proceeds and the TWDV (£120,000 – £92,000) = £28,000.
The amount deferred will be based on the difference between the sale proceeds and the original cost (£120,000 – £100,000) = £20,000.
This £20,000 will be deducted from the cost of the new patent to reduce the base cost to £150,000 £20,000 = £130,000.
£8,000 cannot be deferred because Patent Plc has already claimed this as a deduction from its trading profits so will be extra taxable trading profits when the original patent is sold.
Simple example: Patent Plc (partial sale proceeds reinvested) Patent Plc has been providing 8% amortisation on its patents which all relate the company’s trade.
Patent Plc buys a patent for £100,000 and claims the 8% amortisation so the tax written down value (TWDV) is £92,000.
Patent Plc sells the patent for £120,000 and buys a new patent for just £110,000.
Solution to Patent Plc (partial sale proceeds reinvested)
The gain on the old patent is computed based on the difference between the sale proceeds and the TWDV (£120,000 – £92,000) = £28,000.
The amount deferred will be based on the difference between the sale proceeds and the original cost (£120,000 – £100,000) = £20,000.
This £20,000 is now reduced by the sale proceeds not reinvested of £10,000 which means that just £10,000 will be deferred. This will be deducted from the cost of the new patent to reduce the base cost to £110,000 – £10,000 = £100,000.
In addition to the £8,000 deduction from trading profits already claimed, £10,000 cannot be deferred as these sale proceeds were retained by the company and not reinvested so the total extra trading profits will be (£8,000 + £10,000) = £18,000.
• Neil Da Costa is a Senior Tax Lecturer with Kaplan in London. He is the author of Advanced Tax Condensed, which summarises the entire syllabus using memory joggers
