The Budget included a measure clarifying the corporation tax treatment of the disposal of intangible fixed assets, designed to tackle ‘step up’ tax avoidance schemes by bringing the rules for all non-cash disposals and related party licensing arrangements in line with cash transactions
HMRC said the measure will address tax avoidance involving net book value accounting, including licensing arrangements between related parties.
The change is effective immediately on all transactions on or after 22 November, and is estimated to bring in an additional £45m of tax annually. Overall it will raise £300m by the end of the parliament with £15m in the current tax year alone.
Net book value accounting, where consideration for a disposal is accounted for at cost rather than the actual value, is used by related parties in ‘step-up’ avoidance schemes to achieve an asymmetrical tax treatment in the transaction price.
In the case of licensing arrangements, there is a ‘step-up’ in the transaction value between the amount recognised by the licensor and the amount recognised by the licencee. The licensor accounts for the disposal at the lower net book value whilst the licencee recognises the higher commercial value, or ‘step-up’ value, of the asset acquired.
Legislation will be introduced in Finance Bill 2017-18 to ensure that the market value rule can apply to an intangible fixed asset licence granted between related parties. This extends the provisions introduced by section 42 of Finance (No.2) Act 2015 that countered step-up scheme avoidance involving net book value accounting transfers.
A licence does not involve a transfer of the underlying asset. The asset that is subject to the licence will be retained by the licensor. The proposed revision ensures that a licence granted between related parties will also be subject to the market value rule as it applies to transfers.
A company making a disposal by way of a grant of a licence to a related party will be prevented from recognising less than the market value of the licence. For licensees who are granted a licence by a related party, the market value rule will also prevent the company recognising a tax cost higher than the market value of the licence. Amendments to the market value rule will therefore prevent manipulation of the transaction price in relation to related party licences to avoid unfair tax advantages.
The proposed revisions will also confirm that the proceeds of realisation for accounting purposes within Chapter 4 of Part 8 of CTA 2009 should recognise the market value of any non-cash consideration. This clarification applies to all disposals, not just licensing arrangements, and ensures transactions other than cash are treated similarly to a cash transaction.
Policy paper Corporation Tax: intangible fixed assets - related party step-up schemes is here
Report by Pat Sweet