CIRD40610 - Intangible assets: groups:
degrouping: examples of degrouping computation
FA02/SCH29/PARA58 (3) and PARA60 (3)
Example 1
Facts
Assume an intangible asset with an estimated ten year life,
is purchased by group company A for £10,000 and tax deductions
for amortisation are allowed to it following the accounts for
accounting periods (APs) 1-3 of £1000 per AP. At the beginning
of AP4 the asset is transferred to group company B for its book
value of £7000 (though it has a market value of £9000 at
the time). B continues to write down the asset in APs 4 and 5 by
£1000 per AP and obtains tax deductions accordingly, on the
basis of the tax-neutral treatment described in
CIRD40300. B leaves the group at the
end of AP 5.
Computation when B leaves group
- B is deemed to have realised and
reacquired the asset for £9000; that gives rise to a taxable
credit of £2000, representing the excess of the market value
at the time of the transfer (£9000) over the tax written down
value at that time (£7000).
- B’s amortisation deduction for AP4
is adjusted to reflect an acquisition cost of £9000, not
£7000. So, applying the rules described in
CIRD12755 onwards, the deduction due
for AP4 is:
- £1000 x £9000 / £7000 =
£1286.
- The extra deduction for that period of
£286 (£1286 - £1000) and the taxable credit of
£2000 are netted off and brought to account in AP5 as if they
had arisen immediately before B left the group.
- The deductible debit for AP5 itself is
£1286 (£7714 / £6000 x £1000).
- The tax written down value when B leaves
the group is therefore £6428.
Example 2
Facts
Assume that at the beginning of AP1 company A transfers its
business as a going concern to company B for its book value. The
business is successful and its market value is more than its book
value. The difference (say £10000) is the value of its
goodwill (which cannot appear on A’s balance sheet because it
is internally generated).
Company B leaves the group at the end of AP3.
Computation when B leaves group
- B is deemed to have realised and
reacquired the asset for £10000; that gives rise to a taxable
credit of £10000 (as B inherits A’s nil acquisition
cost).
- B obtains deductions for sums written off
the asset as if it had been capitalised in the accounts at its
market value on acquisition (£10000), see
CIRD12780.
- If, for example, it is assumed that the
goodwill has a ten-year life (reflecting the judgement that by
which time other businesses will have succeeded in eroding its
competitive edge) then deductible debits for amortisation of the
asset will be £1000 per annum.
- On that assumption the adjustment under
the degrouping rules for AP3 will be the taxable credit of
£10000 less amortisation debits referable to AP1 and AP2 of
£1000 per period, giving a net taxable credit of
£8000.
- An amortisation debit of £1000 is
also given for AP3.
- The tax written down value of the asset
when B leaves the group is therefore £7000.
Classification of adjustment in CT computation
In this case the adjustment would be treated as a receipt of
B’s trade (see
CIRD40520).
