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Meaning of an intangible asset

Core Tax Annual: Corporation Tax: 2017/18

Authors: Pete Miller , Satwaki Chanda , and Donald Drysdale

Law Stated At: 1 January 2018

Focus

For corporation tax purposes, the intangible fixed assets regime adopts the accountancy meaning of ‘intangible asset’. This means that the definition changes on transition from old UK GAAP to new UK GAAP. Note that the accounting treatment adopted can be crucial in determining whether an asset is an intangible fixed asset.

Accountancy definition

12.5

For tax purposes, ‘intangible asset’ is given the same meaning as it has for accounting purposes, and includes an internally generated intangible asset (CTA 2009, s 712(1)). See Chapter 26 regarding changes to UK GAAP.

Under old UK GAAP, FRS 10 Goodwill and intangible assets defines intangible assets as:

‘Non-financial fixed assets that do not have a physical substance but are identifiable and are controlled by the entity through custody or legal rights. An asset is identifiable if it is capable of being disposed of or settled separately, without disposing of a business of the reporting entity.’

Under new UK GAAP, the definition of ‘intangible asset’ for accounting purposes under FRS 102, Section 18 Intangible assets other than goodwill is:

‘An identifiable non-monetary asset without physical substance. Such an asset is identifiable when:

  •  
  • (a) it is separable, ie capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability; or
  • (b) it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.’

This definition differs from that in FRS 12 in that an asset need not be separable from the business in order to be recognised as an intangible asset under new UK GAAP. Consequently, either on transition to new UK GAAP or on subsequent business combinations, more intangible assets may be recognised under FRS 102 than would have been recognised under FRS 10.

CA 2006, s 396, and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, SI 2008/410, include intangible fixed assets under the following sub-headings:

  • development costs;
  • concessions, patents, licences, trademarks and similar rights and assets; and
  • goodwill.

The assets may only be included in the balance sheet if they were acquired for valuable consideration or, with the exception of goodwill, were created by the company itself.

For example, a company may include intangible assets under the following headings within intangible assets:

  • patents, trademarks and other product rights;
  • brand names;
  • goodwill;
  • publishing copyrights, rights and titles;
  • newspaper titles;
  • programmes, film rights and scores;
  • databases;
  • know-how agreements;
  • development costs;
  • betting office licences;
  • trade value of retail outlets; and
  • exhibition rights and other similar intangible assets.

For tax purposes, intangible assets specifically include intellectual property (CTA 2009, s 712(2)), which includes UK and overseas patents, trademarks, registered designs, copyright or design rights, plant breeders’ rights, together with rights under Plant Varieties Act 1997, s 7, and the overseas equivalent. Assets owned outright and by licence are included, as are assets that are not protected by a legal right but which have an industrial, commercial or other economic value. Options or rights to acquire or dispose of an intangible asset are also included (CTA 2009, s 712(3)).

The intangible fixed assets regime applies to goodwill, and for this purpose ‘goodwill’ is given the same meaning as it has for accounting purposes, and includes internally generated goodwill (CTA 2009, s 715).

Under old UK GAAP, FRS 10 defines purchased goodwill as:

‘The difference between the cost of an acquired entity and the aggregate of the fair values of that entity’s identifiable assets and liabilities. Positive goodwill arises when the acquisition cost exceeds the aggregate fair values of the identifiable assets and liabilities. Negative goodwill arises when the aggregate fair values of the identifiable assets and liabilities of the entity exceed the acquisition cost.’

Under new UK GAAP, the definition of ‘goodwill’ for accounting purposes under FRS 102 is:

‘Future economic benefits arising from assets that are not capable of being individually identified and separately recognised.’

For the purposes of the intangible fixed assets regime, ‘goodwill’ includes internally generated goodwill – not merely purchased goodwill. Goodwill is treated as created in the course of carrying on the business in question (CTA 2009, s 715; FA 2009, s 70).

For further discussion of the constituent parts of goodwill, see HMRC Capital Gains Manual (at CG68000 onwards) and Balloon Promotions Ltd v HMRC [2006] SpC 524.

Note that the accounting treatment adopted can be crucial in determining whether an asset is an intangible fixed asset. A company which is the controlling partner in a general partnership may include in its financial statements its proportional share of the partnership’s assets, including intangible fixed assets, but in Armajaro Holdings Ltd [2013] UKFTT 571 (TC) the First-tier Tribunal held that this did not apply in the case of a limited liability partnership (LLP).

Excluded assets

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For tax purposes, assets wholly excluded from the intangible fixed assets regime comprise rights over land or tangible moveable property, oil licences, financial assets, assets representing production expenditure on films, shares in a company, trust and partnership rights and powers and assets neither held for a business nor a commercial purpose (CTA 2009, ss 803–809). ‘Financial asset’ is given the same meaning as it has for accounting purposes (CTA 2009, s 806(2)). See Chapter 26 regarding changes to UK GAAP.

Under old UK GAAP, FRS 13 Derivatives and other financial instruments: disclosures defines ‘financial asset’ as:

‘cash, a contractual right to receive cash or another financial asset from another entity, a contractual right to exchange financial instruments with another entity under conditions that are potentially favourable or an equity instrument of another entity.’

Under new UK GAAP, FRS 102 defines ‘financial asset’ as:

‘Any asset that is:

  •  
  • (a) cash;
  • (b) an equity instrument of another entity;
  • (c) a contractual right:
    • (i) to receive cash or another financial asset from another entity, or
    • (ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or
  • (d) a contract that will or may be settled in the entity’s own equity instruments and:
    • (i) under which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or
    • (ii) that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose the entity’s own equity instruments do not include instruments that are themselves contracts for the future receipt or delivery of the entity’s own equity instruments.’

Assets excluded in certain situations

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Apart from royalties, all assets owned by a life assurance business or any mutual trade or business are excluded from the definition of intangibles (CTA 2009, ss 810, 902). Expenditure on films, sound recording and computer software expenditure (when accounted for with the hardware) is also excluded, apart from expenditure on royalties (CTA 2009, ss 810–813). If the computer software is bought separately, the company may elect for the software to be removed from the intangible fixed assets regime (CTA 2009, ss 815, 816; see 3.14).

Royalties and licences granted over pre-FA 2002 assets from related parties are themselves treated as pre-FA 2002 assets (CTA 2009, s 896).

Research and development expenditure

12.8

Research and development (R&D) expenditure incurred by companies has its own tax regime (see Chapter 14). The proceeds from the sale of R&D (but not the corresponding costs) are included within the intangible fixed assets regime (CTA 2009, s 814).