REV BN 23: Corporate Intangible Assets

Who is likely to be affected?

1. Companies (and their related parties) acquiring or disposing of intangible fixed assets.

General description of the measure

2. A number of amendments to the corporate intangible assets legislation in Schedule 29 to the Finance Act 2002 (“Schedule 29”) are being introduced. These comprise:

  • an amendment of the related party rules to ensure that they achieve their intended effect;
  • amendment of the market value rules to ensure that:
    • other tax provisions, concerned with company distributions and employmentincome, work as intended; and
    • the market value rules and capital gains tax gifts relief rules interact correctly; and
  • the addition of a further class of asset (payment entitlement under the single payment scheme for farmers) to those which are not eligible to be replacement assets for the purposes of capital gains rollover relief (or hold-over relief in the case of depreciating assets) when acquired by companies.

3. In addition, the power in section 86 of the Finance Act 1993, which permits further classes to be added by way of Treasury order to the list of assets which can qualify for capital gains rollover relief is being amended. The amendment will ensure that if any further classes are added, then any necessary consequential amendments to Schedule 29 may be made under this power.

Operative date

4. The first two changes detailed above (affecting the related party and market value rules) apply with effect from Budget Day – see paragraphs 6 and 8 below. The third change (concerning payment entitlement under the single payment scheme) will apply to acquisitions of payment entitlement on or after 22 March 2005. The amendment described in paragraph 3 above will apply to orders made on or
after the passing of the Finance Act 2005.

Current law and proposed revisions

Related party rules

5. In broad terms, relief under Schedule 29 is available for intangible fixed assets created on or after 1 April 2002 when the Schedule came into force, or (if created earlier) transferred between unrelated parties on or after that date. Thus assets created before 1 April 2002 and transferred between ‘related parties’ on or after this date are normally excluded. These excluded assets are termed ‘existing assets’.

6. This measure stops a recently disclosed avoidance scheme that exploits a loophole in the related party rules. It amends the related party rules to ensure that a participator (or associate of a participator) in a company that controls, or has a major interest in, another close company will be a related party of the second company. This change will take effect in relation to transfers of assets, and to debits or credits
to be brought into account, on or after Budget Day. For the purpose of bringing into account debits and credits under Schedule 29 on or after Budget Day, the amended rules are deemed to have been part of the Schedule as originally enacted.

Market value rules

7. The ‘market value’ rules ensure that, in many circumstances, transfers of intangible assets between related parties are deemed to take place at market value rather than the price agreed between the parties. This applies for all purposes of “the Taxes Acts” (as defined in paragraph 142 of Schedule 29) as regards both the transferor and the transferee. The purpose of these rules is to prevent related
parties from gaining a tax advantage by agreeing an artificially high or low price for an intangible asset.

8. For transfers of assets made on or after Budget Day this measure ensures the market value rule works as intended by limiting its effect in two circumstances:

  • where an intangible asset is transferred from a company to a related party at under-value or to a company from a related party at over-value, the measure will ensure that Schedule 29 will not prevent taxable distribution or employment income from arising; and
  • where capital gains tax gifts relief is claimed on an intangible asset gifted to a related party company, the measure will ensure that the company’s acquisition cost for the purposes of Schedule 29 is the market value less the amount of the held-over gain.

Payment entitlement under the single payment scheme

9. A new class of assets, consisting of payment entitlement under the single payment scheme for farmers, will shortly be added to the classes of qualifying assets listed in section 155 of the Taxation of Chargeable Gains Act 1992 (‘TCGA’)1. A consequential change to Schedule 29 is needed as a result of this addition. The change ensures that companies cannot claim relief under section 152, 153 or 154 TCGA (rollover and hold-over relief) where the new asset (within the meaning given by section 152) falls within the new class. This is because in the hands of companies these assets will be within Schedule 29 and not within the charge to corporation tax on capital gains.

10. The amendment to Section 86 of the Finance Act 1993 is concerned with possible future additions by Treasury order to the classes of assets listed in section 155 TCGA. The amendment will obviate the need for further consequential changes to be made to Schedule 29 by primary legislation. Instead such consequential changes may be made by the Treasury order concerned.

Further advice

11. If you have any questions about this change, please contact Richard Hopwood on 020 7147 2589. Information about Budget measures is available on the Inland Revenue website.

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