The provisions of this paragraph exclude:
The rights within the first category include those capable of
giving rise to income within Schedule A (or which would do so if
the source was within the UK), see ICTA88/S15 (1).
This includes for example the value of trading premises acquired in a business acquisition.
When a company acquires a trade as a going concern, the tangible
and intangible assets (property, fixtures and fittings, trademarks
etc) should be recognised on the company’s balance sheet
initially at “fair value”. In drawing up accounts in
accordance with UK GAAP, the directors should apply FRS7 to reach
the “fair value” of each of the separately identifiable
assets and liabilities (see also
FRS15 “Tangible Fixed Assets” sets out the principles of accounting for the initial measurement, valuation and depreciation of tangible fixed assets, and is what an accountant would follow to ascertain an opinion on the value to assign as the fair value of a tangible fixed asset in a business acquisition.
FRS15 requires that non specialised properties should be valued on an ‘existing use’ basis. Within this category, there are a number of properties that are normally sold and valued on the basis of their trading potential (having been designed or specially adapted for such use) and these are distinguished for valuation purposes so that such potential is reflected within their existing use value. These typically include what are often referred to as leisure type properties and include hotels, bars, cinemas, fuel stations, nursing homes etc. A valuer in effect capitalises estimated potential earnings from this particular class of property in reaching his valuation (para. 56, FRS 15 describes it "by having regard to its trading potential"). The fair value of this type of tangible fixed asset (a pub or hotel for example) will include the expectation of capitalised earnings from that asset.
Where, in the business acquisition, there is then a difference between the cost paid for the business and the fair value of its separately identifiable net assets, goodwill will result in accordance with FRS10 (see also CIRD30535).
The Corporation Tax risk in a business acquisition is that the directors will fail to identify and value the assets properly in accordance with FRS7 “Fair Values in Acquisition Accounting” and FRS15. Valuing the trading premises without considering its “trading potential”, might undervalue the property. Since purchased goodwill is the balancing figure in a business acquisition (see CIRD11070), undervaluing other assets, particularly trading premises, artificially inflates the amount of purchased goodwill so that it exceeds the amount that is allowable for the purposes of Schedule 29 FA 2002.
You need to be aware of these risks in a business acquisition and coordinate your enquiries with other specialists including HMRC accountants, CT&VAT, VOA, CAR-SAV and SDLT (part of ESM directorate based in Birmingham).
As regards rights within the second category, a very wide
construction of the words ‘in relation to’ could
exclude virtually all intangible assets from Schedule 29, given
that it is usually possible to find some physical manifestation of
any intangible assets. That is clearly contrary to the structure
and purpose of the legislation.
Instead, only rights that actually derive a significant proportion of their value from tangible assets as a matter of economic analysis should be regarded as excluded from the scope of Schedule 29 by this provision, wholly or in part (see CIRD25015 as regards apportionment in such a case).
For practical purposes: