I am considering purchasing a business that I think I can get for a very good price. A significant part of the purchase price relates to the goodwill of the company. I have read recently that tax relief is now available on the acquisition of goodwill. How does this work?
Finance Bill 2009 introduced a new scheme for capital allowances for expenditure incurred on the acquisition of intangible assets. The relief applies to expenditure incurred by a company after May 7 2009.
The definition of intangible assets for tax purposes will have the same meaning as intangible assets as defined under generally accepted accounting practice. The new Section 291A in the tax legislation defines specified intangible assets as some of the following: patents, trademarks, brand names, copyright, know-how, licenses in respect of intangible assets and goodwill to the extent that it is attributable to any of the above.
A company that incurs capital expenditure on any of the above intangible assets is entitled to capital allowances as if those assets were plant and machinery and are provided for the purposes of the trade. However, the rate of annual allowances differs to the standard rate of 12.5 per cent. Allowances are granted based on the amount charged to the profit and loss account of the company in respect of the amortisation or depreciation of the asset.
Alternatively, the company can elect to write down the allowances over 15 years at 7 per cent per annum and 2 per cent in the final year. A clawback of allowances will occur if the asset is sold within the 15 year period.
The amount of allowances and related interest expense granted per annum is capped at 80 per cent of the trading income from the relevant trade; the relevant trade being the trade of managing, developing or exploiting the specified intangible asset. The interest relates to any interest incurred in connection with the provision of that asset. Any allowances or interest which are not allowed due to this restriction can be carried forward and offset against relevant trading income in the following years.
The new allowances will not apply if the expenditure incurred in respect of the acquisition of the asset exceeds the amount which would have been paid in a transaction between independent parties acting at arm’s length. The Revenue are entitled to consult an expert if they feel it is necessary to determine the independent value of the asset.
Similarly, the acquisition must be made wholly and exclusively for bona fide commercial reasons and not as part of a scheme for which the main purpose is the reduction or avoidance of tax.
It is important to note that the current scheme for granting allowances on the acquisition of computer software is not affected by the new legislation. However, the definition of specified intangible assets under Section 291A includes patent rights and know-how and as such, the existing reliefs for allowances applicable to those assets under Section 755 and Section 768 will no longer apply. Companies that currently claim relief under these sections can opt for the relief to continue for a further two years.
