In the nature of a rule like that in paragraph 111 it is not possible to provide a comprehensive catalogue of the circumstances where it may be in point, but the examples below illustrate the sort of manipulation at which the provision is aimed.
It may be possible to depress artificially the value of
intangibles held by a company by having it enter into commercially
unfavourable arrangements with related parties (who need not be
outside the UK tax net for this purpose).
For example, a company, having acquired goodwill as part of a
business, could enter into a binding and fairly long-term contract
with a fellow UK group member to be supplied with services required
for the business at an excessive price. That would depress the
profits of the business and so call into question the value of the
goodwill (which is simply the difference between what was paid for
the business and the total of the value of each of its identifiable
assets minus its liabilities). That in turn could trigger an
impairment review (see
CIRD30550), leading to a substantial
write-down in the goodwill.
Similar devices to depress the market value of intangibles
prior to their disposal to a related party might also be
possible.
The mirror image of these devices could equally be used to
inflate the market value of the asset at acquisition, though the
opportunities are more limited by the inflation also of the
potential income charge on a related party vendor. But
possibilities remain.
For example, an asset may be acquired by a partnership
business from a third party and then sold to a related company at a
price which reflects a transaction with another related company
inflating the value of the asset (for example a licensing agreement
in respect of a patent providing for very high rates of
royalty).
Intangible assets acquired after commencement are within
Schedule 29 and therefore qualify for tax deductions based on the
sums written off assets in the accounts. An important exception to
this provision is that assets acquired from related parties who
held them prior to 1 April 2002 do not come within Schedule 29, (
CIRD11500). One attempt to side-step
this rule would be to pass the asset after commencement through a
third person unrelated to either the original transferor or the
company seeking the tax deductions. Another might be to break
temporarily the relationship between otherwise related parties by
artificial means. There is likely to be a strong case in these
circumstances that these are arrangements a main object of which is
to obtain tax deduction which would not otherwise be due.
A slightly more sophisticated manifestation of this
‘churning’ of pre-commencement assets might involve the
post-commencement creation of substitute assets offshore. If such
assets are subsequently transferred into the UK group, there is
again likely to be a strong case that the transfer is part of
arrangements a main object of which is to obtain a debit which
would not otherwise have been due.
Multinational groups are in a position to influence and manipulate the value of specific intangible assets. In this context, the anti-avoidance rule is most likely to be in point where deductions for sums written off intangible assets are relievable against profits fully exposed to CT but either:
Whilst the transfer pricing rules will usually be the first port of call in respect of cross-border arrangements, valuation provisions are not always an adequate counter for avoidance. The anti- avoidance rule in paragraph 111 also needs to be considered where significant amounts of tax are at stake, and particularly where the value of what is being bought or sold cannot be reliably established by cogent evidence. It is possible for assets to be structured, and transactions designed, to exploit difficulties in applying open market valuation provisions.
