Goodwill tax reform welcomed.

The government’s plan to reform the law on the taxation of goodwill and intangibles has received a cautious welcome. But there are doubts about whether the provision for tax relief on the purchase of intangibles will be widely used, given that it can impose an upfront tax charge on the seller, writes Peter Bartram.

Bill Dodwell, tax partner at Andersen, says: “Under the new rules, sellers will have to pay tax as a revenue item on their sales and, typically, the tax that the seller pays is immediate, while the relief that the buyer gains is spread out.”

This happens because if sale proceeds from an intangible asset exceed the written down value, amortisation allowances already claimed can be recaptured, and profits in excess of the original cost are taxed as income.

For sellers, this can be worse from a tax viewpoint than some present situations, for example, where they sell a tangible asset with goodwill in it that isn’t separately valued.

Even so, there are one if not two cheers for the fact that the government is making some attempt to sort out the chaotic and antiquated rules on taxing intangibles. It doesn’t make any sense that the rules are different if you’re buying, say, a patent, or the rights to a film or management know-how.

Although the Inland Revenue has published draft legislation, it’s still open to representations. It’s calling for comments on a technical note* that was published alongside the budget by the end of May.

One reform generally welcomed is that the rate of amortisation on intangibles used in the accounts can be followed for tax purposes, as long as it is reasonable. This will mean FDs will need to pay more attention to the way intangibles are written off.

Overall, the revised government proposals – the first didn’t include goodwill – are expected to result in a small loss of tax revenue.

Dodwell cautions: “I don’t think we should get carried away in thinking this is a gigantic great give-away for companies. Yes, there is a modernisation of the law which is good, but you are not going to get mega-rich on it.”

* Taxation of intellectual property, goodwill and other intangible assets: the new regime.