Technical Note - Reform of the taxation of intellectual property, goodwill and other intangible assets
ACCA's response to this document issued by the Inland Revenue is set out below. Copies of the technical note can be obtained from the Inland Revenue's website: www.inlandrevenue.gov.uk
We thank you for the opportunity to comment and will be pleased to participate in any future consultation.
Our comments follow the same order as the consultation document:
Chapter 2
We are concerned that there will be a confusing array of rules appearing out of the debate in this chapter. While we agree with the Government's view, expressed in paragraphs 2.7 to 2.9, that there should be reform which allows relief for all forms of intangible properties we consider that the reforms should not result in any expenditure which currently enjoys relief as capital or revenue to be excluded. We would wish to see any property right on which a business has expended money in order to either facilitate the business or enhance or secure its future to qualify for relief within a short time frame. One asset we have in mind here is franchise agreements and aborted acquisition costs.We consider that there should be a consistent tax treatment for the intangible properties rather than reliance upon a modified or unmodified accounting treatment . There can then be little reason for time consuming arguments on the reasons behind a business selecting one rate of depreciation over another. It would also mean that the company accounts would not loose any integrity in their being driven by the "tax rules".
The simplest solution may be, as suggested at 2.19, a single fixed rate of amortisation but by category rather than across the board. We suggest a more generous level of tax amortisation is made available than that of the average accounting treatment as tax depreciation seeks to offer relief for funds actually expended rather than matching revenue with expenditure.
In answer to 2.20 we consider our suggestion at 2.19 would help minimise the compliance burden. It will not require extensive underlying records to justify an accounting treatment nor ordinarily lead to significant disputes arising between the taxpayer and Inland Revenue.
Chapter 3
Abolishing the capital revenue divideWe do not consider this would be the great panacea anticipated as the main problems of tax nothings will only partly be solved. The real problem is that there is no tax relief for certain types of bona fide business expenditure. This issue needs to be addressed as a main problem area of its own right. We consider the pursuance of an alignment between accounting and tax treatment may be missing the mark.
Groups of companies
Many of the tax avoidance issues would not arise if there is no move to align the tax and accounting treatments. As stated above we are not convinced that this is the best approach and may lead to more complexity and conflict.
3.19 We have commented above that the alignment of tax and accounting rules may not be the way forward. We would certainly be even more concerned with a hybrid between accounting and tax.
3.20 The main nothings we wish to see relievable are purchased intangible assets such as franchise expenditure and aborted acquisition costs, the latter may not be a focus for this technical note but should be considered.
3.21 We can agree that an exit charge for companies going non-resident may be necessary. Other safeguards will not be necessary if there are tax specific rules.
Chapter 4 - Transition
Paragraphs 4.14 and 4.15If the tax treatment remains independent of the accounting treatment then many of the perceived concerns will not exist. The main problem may then be how to treat assets if the legislation has a "normal" lead time before being introduced however, if it were introduced from the date of a parliamentary announcement then again many other problems would also disappear. This problem will be further reduced if existing assets were included.
Chapter 5
Paragraphs 5.14 and 5.16We consider there is no immediate need to clarify the UK source rules for royalties.
We consider the present rules for patents and copyright is too onerous. Consideration should be given to simplification perhaps by way of a system of averaging.
Chapter 6
Paragraph 6.21We agree the deduction rules are outdated and lead to an unnecessary tax burden. We consider the adoption of the OECD definition could be the way forward.
Paragraph 6.22
We consider that there should be no deduction requirement unless tax is at risk. We wonder however, whether there will be a lack of will to pursue this course due to the cash-flow constraints for the exchequer.
Paragraph 6.23
It would help cashflow and reduce bearuracy, for the business, if payments could be made gross. It would not necessarily be a step forward if the payer were then held to account for the underdeducted tax.
We wonder if it might be possible to take a leaf out of the European Commission's Eighth Vat Directive reform proposals, in 1998, which were dependent upon Government Revenue Departments being more responsible for tax deduction collection. The envisaged system was EU focused and too complex but may provide another avenue for thought and would mean greater simplicity for the tax payer.