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02 November 2015

No more Corporation Tax relief for purchased goodwill

In his Summer Budget, the Chancellor announced that previous changes to block tax relief for goodwill on incorporation had been extended to cover all purchased goodwill.

Last December, in his Autumn Statement, George Osborne brought in a change affecting businesses that incorporated and moved the trade over to a limited company, by blocking the availability of Entrepreneurs Relief on the sale of goodwill to their new company by a business owner, and also by removing the tax relief for the amortisation of the purchase of ‘connected’ goodwill by the company.

The reasoning behind the change is that the government felt that this created unfairness in the tax system and that it acted as an unintended tax incentive to incorporate for small businesses.

So what has changed now? Well, from 8 July 2015 the block on Corporation Tax relief on the amortisation of goodwill has now been extended to apply to all purchased goodwill, not just goodwill purchased from a connected person/entity.

As a result it now applies to companies that purchase other businesses from unconnected third parties, as they will no longer be able to claim a tax deduction for the goodwill element of the purchase consideration.

This comes as a major blow to any company that wishes to acquire another business.

Prior to the change, the tax relief generally followed the accounting treatment. Therefore if your company purchased another business where part of the price paid was attributed to goodwill, and it chose to write off (amortise) this goodwill over a 5 year period, then Corporation Tax relief could be claimed on this amortisation. This enabled a company to claim tax relief on purchased goodwill.

So how will this work under the new rules? The new rules mean that no tax relief can be claimed on the amortisation charge in the accounts and therefore the full cost of purchased goodwill will be carried forward until the goodwill is sold, at which time it can be offset against the sale proceeds for the goodwill for tax purposes.

However, if the goodwill is sold at a loss there is a further restriction which means that the loss cannot be set against trading profits in the year of sale, and can only be utilised against non-trade income, such as rental profits or interest received for example.

Those companies that purchased (unconnected) goodwill prior to 8 July 2015 will still be entitled to claim tax relief on the amortisation of goodwill going forwards – the change only affects goodwill purchased on or after 8 July 2015.

For further advice on this matter please contact me.

 

Key Facts:

  1. Corporation Tax relief blocked for amortisation of goodwill on/after 8 July 2015
  2. This applies to all purchased goodwill and therefore affects business acquisitions
  3. This follows the block to tax relief for goodwill on incorporation from 3 December 2014
  4. Tax relief for the cost of purchased goodwill will now only be available once it’s sold on
  5. If goodwill sold on at a loss the loss can only be offset against non-trade income

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