CIRD13080 - Core computational rules: taxable credits: ‘negative goodwill’ referable to intangible assets

CTA09/PART8/S724

Accountancy background

As explained in CIRD12735, where a company acquiring a business accounts for the assets and liabilities of that business (see CIRD30120), the aggregate of the ‘fair values’ attributable to the identifiable assets and liabilities of the business may well differ from the total price paid for the business. Where the aggregate of the fair values is less than the total price paid for the business the difference is accounted for as goodwill.

More rarely, the aggregate of the fair values may exceed the total price paid for the business. This situation may arise for example where a business is acquired at a bargain price. The excess is accounted for as ‘negative goodwill’. This appears on the asset side of the balance sheet of a company as a negative figure, immediately after any positive goodwill. Negative goodwill will normally be written off by being credited to the Profit and Loss account at a rate corresponding to the rate of depreciation of the identifiable assets of the business (or as they are sold).

In placing a fair value on the identifiable intangible assets of a business it is not normally possible to attribute a value to those assets that serve to create or increase negative goodwill. But the limited class of identifiable assets that have a ‘readily ascertainable market value’ are excluded from this restriction. An intangible asset has a readily ascertainable market value only if it is one of a homogeneous type dealt in on an active market.

Circumstances relevant to Part 8

Negative goodwill is not an asset and it is therefore not an intangible asset within Part 8. But the use of fair values for accounting purposes as the base cost of assets within Part 8 (CIRD12730) makes it necessary in very limited circumstances, to regard sums released to profits that represent amounts written off negative goodwill, as taxable credits within Part 8.

This is where the creation of negative goodwill is referable to the attribution of a fair value to an intangible asset. Tax relief under Part 8 will eventually be obtained for the full amount of the fair value of the asset. But, because the creation of negative goodwill is referable to the attribution of a fair value to that asset, part of that fair value represents a sum that is not matched by any part of the consideration paid for the business. It is therefore necessary in these circumstances to tax the release of the negative goodwill to ensure that the tax relief given does not represent consideration only notionally paid out.

In practice, however, this situation will be capable of arising only rarely because most intangible assets cannot as a matter of accountancy practice give rise to negative goodwill.

Furthermore, even in the exceptional case where both negative goodwill is recognised and the business acquired includes intangible assets which can give rise to negative goodwill (that is where they have readily ascertainable market value), it is likely in practice that the inclusion of such assets in the sale will not have led to the overall bargain price. The vendor will have known the value of those assets and would have been able to dispose of them separately if the price offered for the business as a whole did not reflect their true worth.

Calculation of taxable credits

The extent to which the accounting gains (sums credited to profits in a company’s accounts) in respect of negative goodwill are attributable to intangible assets within Part 8 is to be established by a just and reasonable apportionment of those gains. For the reasons given above it will normally be clear that none of those gains can be attributed to intangible assets.

In the exceptional case, the accounting exercise necessary to attribute fair values to the assets acquired, together with any information available on how the parties arrived at the overall consideration for the business, should indicate whether, and if so to what extent, the shortfall between the overall consideration and the fair values of the identifiable assets is attributable to intangible assets with a readily ascertainable market value (rather than assets whose value is more problematical).

In cases of doubt or difficulty inspectors should seek the assistance of Revenue accountants.

Where valuation of intangible assets is an issue see CIRD10240.