Revenue Note for Guidance

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Revenue Note for Guidance

291A Intangible assets

Summary

The Finance Act 2009 introduced a new scheme of tax relief for expenditure incurred by a company on intangible assets after 7 May 2009.

Under the scheme, relief in the form of capital allowances against trading income is given on capital expenditure incurred by companies on the provision of intangible assets for the purposes of a trade. The scheme applies to a broad range of intangible assets – either externally acquired or internally developed – which are recognised as such under generally accepted accounting practice and which are listed in the new section.

Allowances provided under the scheme reflect the standard accounting treatment of intangible assets and is based on the amount charged to the Profit and Loss account, or Income Statement of the company for the accounting period in respect of the amortisation, impairment or depreciation of the specified intangible asset. However, companies can opt instead for a fixed write-down period of 15 years at a rate of 7 per cent per annum or 14 years and 2 per cent in the final year.

Where the specified intangible asset(s) is disposed of on or after 23 October 2014, there is no claw-back of allowances where an intangible asset is disposed of more than 10 years after the beginning of the accounting period in which the asset was first provided for the trade, provided that the disposal does not result in a connected company claiming allowances in respect of capital expenditure on the asset in excess of the tax written down value of the asset at the time of transfer (i.e. the amount of allowances in respect of which capital allowances have not been claimed)2.

Certain restrictions apply to ensure that the scheme operates effectively. Activities which consist of managing, developing or exploiting specified intangible assets and carried on by a company as part of a trade are to be treated as a separate trade (referred to as a “relevant trade”). This is so that allowances may only be offset against income from such activities and not against any other profits. Also, for claims made in respect of expenditure incurred by a company on or after 11th October 2017, the aggregate amount of capital allowances and deductions for interest in respect of expenditure on intangible assets cannot exceed 80% of relevant income for that period excluding such allowances and interest. However, any excess allowances and interest is available for carry forward to succeeding accounting periods.

A similar cap of 80% applied in respect of claims for capital allowances and related interest deductions made for accounting periods commencing before 1 January 2015. The cap was increased to 100% for claims made in respect of accounting periods commencing on or after 1 January 2015, and is reduced to 80% for claims made in respect of expenditure incurred by a company on or after 11th October 2017.

The scheme does not apply to capital expenditure on specified intangible assets to the extent that this expenditure is in excess of an arm’s length amount payable between independent parties. Provision is made to enable an authorised officer to consult with an expert in this regard if necessary.

Relief is also not available in respect of any expenditure not laid out wholly and exclusively for bona fide commercial reasons and that was incurred as part of a tax avoidance arrangement.

Finally, the scheme does not apply to capital expenditure incurred by a company on specified intangible assets for which any relief or deduction may be given under the Tax Acts other than by virtue of this section.

In the case of transfers of specified intangible assets between group companies, the acquiring company will be able to claim capital allowances on the assets acquired where both it and the transferring company jointly elect not to avail of capital gains tax relief provisions under section 617. A similar facility will apply in the case of assets transferring under a company reconstruction or amalgamation under the provisions of section 615. In such situations it is important to note that it will not be possible to claim both CGT relief and capital allowances under this section.

Details

(1) Subsection (1) of this section defines “authorised officer”, “intangible asset”, “specified intangible asset” and “profit and loss account” for the purpose of the section. The section applies to intangible assets which-

  • are recognised as intangible assets under generally accepted accounting practice, and
  • are listed as specified intangible assets in the section.

(2) Capital expenditure incurred by a company on the provision of specified intangible assets for the purposes of a trade shall be treated as expenditure on machinery plant for the purposes of Chapter 2 and Chapter 4 of Part 9. This ensures that the normal rules in regard to wear and tear allowances, balancing allowances and charges for expenditure on machinery or plant will also apply for capital expenditure on specified intangible assets, subject to the specific provisions of this section.

(3) An allowance provided under this section for an accounting period shall be a percentage of the actual cost of the asset based on a formula-

A

× 100


B

where-

  • A is the amount, computed in accordance with generally accepted accounting practice, charged to the profit and loss account of the company for the accounting period in respect of the amortisation, impairment or depreciation of the specified intangible asset [Provision is also made for apportionment where the accounting period for tax purposes and the company’s period of account are not the same], and
  • B is the actual cost of the asset or, if greater, the value of the asset on which the amortisation, impairment or depreciation charge is computed.

(4)(a) Notwithstanding subsection (3), a company may make an election to opt for a fixed write-down period of 15 years at the rate of 7% per annum and 2% in the final year in respect of capital expenditure incurred on the specified intangible asset.

(4)(b) An election under subsection (4)(a) must be made on the corporation tax return for the accounting period in which the expenditure on the specified intangible asset was first incurred by the company and such election will apply to all capital expenditure incurred on the asset.

(5)(a) Activities (referred to as “relevant activities”) which consist of the managing, developing or exploiting of a specified intangible asset which are carried on by a company as part of a trade, including activities comprising the sale of goods or services deriving the greater part of their value from specified intangible assets, such activities are to be treated as a separate trade (“relevant trade”) and profits from such activities are to assessed separately. This ensures that capital allowances are only available for offset against income from the relevant trade and not any other income.

(5)(b) Subsection (5)(b) makes provision for any apportionment to ensure that excessive income is not attributed to the relevant trade referred to in paragraph (a). Where the relevant activities are carried on in a separate company there should be no difficulty in ascertaining the profits from such activities. However, where the managing, developing or exploiting of a specified intangible asset is carried on as part of a wider business, an apportionment of receipts and expenses will be necessary to ensure that the correct amount of income is attributable to the deemed separate trade. Such apportionment is to be done on a just and reasonable basis. The amount of income attributed to the relevant trade should not exceed the amount that would be attributed to a distinct and separate company engaged in the relevant activities if it were independent of, and dealing at arm’s length with, the company availing of relief under the scheme.

(5)(c) Where a company’s trading activities wholly consists of relevant activities then the trade will be treated as a “relevant trade”.

(6)(a) The aggregate amount of capital allowances and interest incurred in connection with the provision of a specified intangible asset for an accounting period shall not exceed 80% of the trading income of the relevant (i.e. separate) trade for that period excluding such allowances and interest. This means, in effect, that a minimum 20% of income from the relevant trade is left in charge for an accounting period and that a loss cannot be created by such allowances or interest expense. Where the deductible amounts exceed relevant trading income the excess will continue to be carried forward for offset against trading income of the relevant trade in subsequent periods. In applying this restriction, capital allowances for expenditure on the provision of specified intangible assets are restricted before interest on related borrowings is restricted. The 80% cap applies to claims made in respect of capital expenditure incurred by a company on or after 11 October 2017.

(6)(b) Paragraph (b)(i) provides that where it is not possible to utilise all the capital allowances available for an accounting period, the excess allowances will be carried forward and added to any allowances which are available for offset against trading income of the relevant trade for the next succeeding accounting period and so on for each succeeding accounting period. Similarly, paragraph (b)(ii) provides that any excess interest expense arising in an accounting period will be carried forward and added to any interest deductible against trading income of the trade for the next succeeding accounting period and so on for each succeeding accounting period.

(6)(c) In computing the trading income from the relevant trade no account shall be taken of any income which is disregarded for the purposes of the Tax Acts.

(7)(a) The section shall not apply to capital expenditure incurred by a company on specified intangible assets for which any relief or deduction may be given under the Tax Acts other than by virtue of this section.

(7)(b) The section shall not apply to capital expenditure on a specified intangible asset to the extent that it is in excess of an arm’s length amount payable in a transaction between independent persons.

(7)(c) The section shall not apply to capital expenditure on the specified intangible asset which is not laid out wholly and exclusively for bona fide commercial reasons and was incurred as part of a tax avoidance scheme.

(8)(a) Subsection (8)(a) permits an authorised officer to consult with an expert where in his/her opinion that person may be of assistance in ascertaining the extent to which expenditure is incurred on a specified intangible asset or in valuing such an asset where it is acquired from a connected person (within the meaning of section 10).

(8)(b) Subsection (8)(b) oobliges the authorised officer to notify the company of the identity of the expert they intend to consult and the information they intend to disclose to that person and permits the company, within a 30 day period, to prevent such disclosure where it demonstrates that disclosure of such information could prejudice the company’s trade.

(9) Subsection (9) deals with (i) intra-group transfers of specified intangible assets subject to capital gains tax (CGT”) relief under section 617 and (ii) transfers of a business under a scheme of reconstruction or amalgamation where the transfer is subject to CGT relief under section 615. The subsection ensures that in such situations it will not be possible to claim both CGT relief and capital allowances under this section. Where the transfer is subject to CGT relief, no capital allowance will be available for specified intangible assets acquired. However, if companies wish to obtain capital allowances, they can elect not to avail of CGT relief, in which case the acquiring company will be entitled to claim an allowance for capital expenditure on the specified intangible assets acquired while the transferring company will be subject to capital gains tax on the transfer of those assets.

(9)(a) In particular, subsection (9)(a) provides that allowances under the section shall not be made available for expenditure incurred by a company on the acquisition of a specified intangible asset from-

  • another company as part of the transfer of the whole or part of a business under a scheme of reconstruction or amalgamation where the transfer is subject to CGT relief under section 615, or
  • another company within the same group where the transfer of that asset is subject toCGT group relief under section 617.

Under section 615 or 617, the transferee company is treated as having acquired the asset for a consideration of such an amount that neither a gain nor a loss accrues to the transferring company on the transfer of the asset. Where either of these sections applies, no allowance may be claimed under this section in respect of the specified intangible asset(s) acquired by the transferee company.

(9)(b) Notwithstanding subsection (9)(a), capital allowances under this section will be made available to a company which acquires an asset from-

  • another company as part of the transfer of the whole or part of a business under a scheme of reconstruction or amalgamation, or
  • another company within the same group,

where the transferor and transferee companies make an election under section 615(4) or 617(4) as appropriate not to avail of CGT relief in respect of the transfer.

(10) Any claims under this section must be made within 12 months from the end of the accounting period in which the capital expenditure giving rise to the claim is incurred.

Relevant Date: Finance Act 2017

2Where a disposal occurs before 23 October 2014, the non-application of a balancing charge is subject to the condition that the event may not result in a connected company claiming allowances under section 291A.