UK: New Tax Relief for IP and Goodwill

New tax reliefs introduced by the Finance Act 2002, which came into effect on 1 April 2002, are now available to companies (but not individuals or partnerships) for expenditure on "fixed intangible assets" and goodwill.

Intellectual property (IP) such as patents, trademarks, plant breeder’s rights, copyrights, registered designs, and design rights (whether in the UK or elsewhere) are for accounting purposes treated as ‘fixed intangible assets’. ‘Fixed assets’ are those assets acquired or created by a company for use on a continuing basis in the course of a company’s business. Expenditure on the acquisition, creation and development of fixed intangible assets by a biotech company can often be a substantial proportion of the company’s total expenditure. Further, the value apportioned to goodwill in a biotech business purchase can be significant, for example, where a small biotech company developing a promising new product, is purchased by a pharmaceutical company, primarily for the IP and associated goodwill of that product.

The new tax relief applies to:

• Patents
• Trademarks
• Plant Breeder’s rights
• Goodwill
• Know-how

Licences and options to acquire or dispose of such fixed intangible assets are also eligible for relief, for example, where a pharmaceutical company is granted an option over IP belonging to a biotech company, which is in the early stages of the product pipeline. Often the option holder has the choice to exercise the option once the product satisfies critical development milestones. Regardless of whether the option holder exercises the option and acquires the IP, or allows the option to lapse if the product fails to meet the critical milestones, tax relief will be available on expenditure connected with that option.

Any information or technique not protected by IP rights, but which has industrial, commercial or other economic value, such as practical know-how in respect of a patent, will also be eligible.

Tax relief for expenditure on the acquisition, creation and development of fixed intangible assets will generally be available to companies, on the basis of the amount of expenditure treated as an expense in its accounts. Under the new rules, an election can be made for the company to obtain relief at 4 per cent of the cost of the fixed intangible assets for each accounting period. This may be attractive for assets which have either a long or indefinite lifetime, such as trademarks associated with a successful drug and its generic successor. As an alternative, royalties paid for the use of fixed intangible assets, such as licence fees for the use of a patent, are also eligible for relief. It may also be possible to elect to take computer software outside the new rules, for example, software involved in the operation of PCR machines, so that faster relief can be obtained under the generous capital allowances rules (which may give a relief for 100% of the expense in the year of purchase).

The new rules provide ‘rollover tax relief ’ on the sale of IP, goodwill and other intangible assets. The taxable amount which arises on the sale of such assets can be ‘rolled-over’ into new fixed intangible assets. Essentially, this means that the tax would be deferred, and therefore not payable, until the company later sells, or makes some other disposal of the new asset. For example, the taxable amount arising on the assignment of a patent and the associated trademarks and goodwill of a developed product, (product A), which is then ‘rolled-over’ into the development costs of buying in and maintaining a patent and trademark of another product in an earlier stage in the development life cycle, (product B), will not be payable until the company disposes of the patent and trademark for product B. Roll-over relief also applies to the amount which arises on the sale of shares in a company which holds assets qualifying for this relief.

The rollover relief can operate on a group basis i.e. the income realised by one company in a group can be ‘rolled-over’ into a new asset acquired by another member of the group. However, included in the conditions for the new relief, is a requirement that investment in the new asset must be made within a four year period (one year before the disposal and three years afterwards). Anti-avoidance provisions in the new rules prevent assets acquired prior to the introduction of the new rules from being transferred out of a company to another company, and then being transferred back to the original company, accompanied with a claim for tax relief.

Abigail Day is the tax editor of the Sweet & Maxwell Encyclopaedia of Information Technology Law