16 May 2019 by Russell Cockburn
Questions still remain about the implementation of corporate tax relief
In his October 2019 Budget statement the Chancellor announced something of a surprise when he indicated that he intended to reinstate corporate tax relief for purchased goodwill with effect from 1st April 2019.
Although this proposal had been the subject of some consultation towards the end of 2018, there seemed to have been little progress so the announcement was to some extent rather unexpected.
Whilst the reinstated relief will not be as flexible or even perhaps as 'generous' as that which was abolished in July 2015 the change has been broadly welcomed as dealing with a gap in the current corporate tax reliefs system that ought arguably never to have been created in the first place.
After all the removal of relief for purchased goodwill in July 2015 was something of a knee-jerk reaction to claims for relief on goodwill on incorporations by some businesses transferring their activities to limited companies. At that time many practitioners argued that this avoidance device could probably have been dealt without introducing an outright withdrawal of the relief to the detriment of many other more genuinely intentioned businesses who had not been using the technique for tax avoidance purposes.
The new rules introduce what might be called a restricted and constrained form of relief where 'relevant assets' are purchased on or after 1st April 2019 with the acquisition of a business when that acquisition includes 'qualifying intellectual property' for use in the course of a company’s trade or other business activities. Contrary to the expectations which had been stimulated by the original consultation process the relief now includes customer information or customer related intangibles, intellectual property related to customer information, unregistered trademarks and licenses and other rights in respect of such assets. So this relief still includes intellectual property rights such as patents, know-how, registered designs, (but not registered trademarks) and copyrights.
Under these new rules a company acquiring 'relevant assets' as described above will be able to write down these rights at a fixed amortisation rate of 6.5% per annum. There can however be a restriction to this relief where the amount of a company’s expenditure on these assets multiplied by six is less than the total expenditure. Thus the objective of this restriction is to limit the tax relief to a multiple of six times the company’s expenditure on qualifying intellectual property assets. The percentage can be changed by government regulation at a later date if it so chooses. It is therefore important to note that no relief is to be available if the assets are not acquired as part of a business acquisition.
It has long been HMRC’s practice to accept that expenses incurred personally by a member of a partnership can be treated as deductible for tax purposes provided it could be demonstrated that they had been incurred under the normal 'wholly and exclusively' expenses rule; in that had these expenses been incurred by the partnership itself and not by an individual partner then they would indeed have been eligible for tax relief. This rule essentially meant that what was important was the nature and character of these expenses themselves when they were incurred, not the person incurring them specifically. As such these expenses could then be adjusted against partnership profits, either by means of journaling them into the partnership’s profit and loss account or, (commonly) as a deduction against the individual partners’ profits when calculating their individual self-assessment taxable share of profits for income tax purposes.
However HMRC has recently altered its own internal guidance on this issue and unexpectedly changed, for some, the mechanism for eligibility of tax relief for such personally incurred expenses for the individual partner. Their new guidance now states that to be eligible for a tax deduction sand expenses must be 'incurred by the partnership itself' so that if the partnership does not bring the expenses into its financial accounts under the first option described above then the expenses cannot be an allowable deduction for tax purposes.
This represents a significant change in practice and will have a specific impact on the way in which such expenses will have to be dealt with in future. It would appear that the recent decided judgement in the case of Vaines v HMRC,  EWCA Civ 45, may be responsible for HMRC’s change of view on this matter and it seems that this new interpretation could also be regarded as controversial to say the least.
Why does the physical method of payment of the simple accounting treatment of the expenses alter their character for tax purposes? It surely remains the case that it is the nature of the expenses themselves as opposed to the identity of the payer that dictates their eligibility for the tax relief? Well, not according to HMRC. Whilst the problem can probably be dealt with by simply adjusting the partnership’s financial accounts to reflect these expenses in its profit and loss account for the future this does seem likely to introduce an added element of complexity when computing individual partners’ share of profits in some partnerships going forward and indeed may also necessitate changes to some partnership agreements to properly reflect the impact of the new regime.
Those readers who have studied the UK’s rather unique, (bizarre?), capital allowances regime at any time will probably have happy memories, (sic) of the case Schofield v R & H Hall Ltd (1975) 49 TC 538 in which it was decided that a silo in use as a method of temporary storage and delivery of grain for onward transportation to customers was held to be a qualifying structure for the purposes of the capital allowances legislation. Therefore the case allowed that the silo qualified as 'plant and machinery' despite HMRC’s argument that in essence it was just a building and not a functional item of equipment. This has been one of the leading cases on capital allowances for many years and confirmed the point that specialised buildings and structures could indeed qualify as plant despite their outward appearance as 'static' structures. Hence when the statutory restriction prohibiting 'buildings and structures' from qualifying as plant was introduced in Finance Act 1994, (now to be found in sections 20 – 22 CAA 2001), one of the items 'unaffected' by this change was grain silos, i.e. the status quo was to some extent maintained, at least as far as silos of the type dealt with in the Schofield case were concerned.
This case has also coloured the HMRC’s approach to this subject when faced with claims for capital allowances on other buildings, particularly in agriculture. They commonly argue that many agricultural buildings may contain plant but are not themselves plant and as such a detailed apportionment is required to identify the internal plant element in buildings such as grain dryers etc.
The more recent case S May and Others (TC6928) has thrown this approach into sharp focus. In this case a building which was in essence a storage facility but which also carried out drying and conditioning functions was claimed as plant on the grounds that it was in essence a grain silo although it perhaps did not look very much like the traditional vertical storage structure that many of us would picture in our minds-eye.
The Tax Tribunal concluded that the building had been specifically designed and constructed to 'dry and maintain' the condition of the grain” as well as its other use as a storage facility prior to onward sale of the grain and as such could indeed qualify as a silo and could be regarded as plant. On the storage point the tribunal also concluded that the fact that the grain might well be stored in the building for sometimes quite lengthy periods, perhaps up to ten months, did not alter its essential character as a an item of plant.
They took the view that it was the nature of the trade being carried on that sometimes there was a commercial reason for longer periods of storage in order to maximise the financial profits on the crops being stored within it. As such this did not alter the essential character of the silo itself. Thus the overall conclusion was that the building was indeed a 'functional' silo for drying and conditioning of grain as well as temporary storage and so could indeed qualify as an item of plant for the purposes of the capital allowances legislation.
This case may not seem to be of very wide relevance but it will undoubtedly be of considerable assistance to agricultural businesses looking to achieve capital allowances tax relief on some of the more modern buildings that have the appearance of 'buildings' but which in fact on closer examination perform important conditioning and storage functions.