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Corporate interest restriction ‘devil is in the detail’ – intangible fixed assets

Corporate interest restriction ‘devil is in the detail’

This week’s article looks at the treatment under the CIR rules of amounts recognised in respect of intangible fixed assets.

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This is the twenty second in our series of articles looking at some of the detail of the new corporate interest restriction (CIR) rules. The CIR legislation was included in Finance (No.2) Bill 2017, published on 8 September, with the start date continuing to be 1 April 2017. Two sets of adjustments are required to be considered. First, in calculating tax-EBITDA based on amounts derived from the corporation tax (CT) computations, certain debits and credits related to intangible fixed assets (IFAs) must be excluded whereas others may not be. It will therefore be necessary to carefully analyse any IFA debits and credits recognised for CT purposes and determine which category they fall into. Second, in calculating group-EBITDA for the purposes of the group ratio method, adjustments will also need to be made to strip out any amounts recognised in respect of capital expenditure on intangible assets.

Treatment of IFA debits and credits in calculating tax-EBITDA

As discussed in earlier articles, a group’s ‘basic interest allowance’ under the CIR rules will be determined as 30 percent (or the group ratio percentage) of the group’s ‘aggregate tax-EBITDA’, subject to the modified debt cap.

‘Aggregate tax-EBITDA’ is calculated based on amounts brought into account in the CT computations, but excluding certain categories of items that represent ‘tax depreciation’.

One of these categories is ‘excluded relevant intangibles debits and credits’, which refers to certain debits and credits brought into account for CT purposes under the income regime for IFAs (in Part 8 CTA 2009). However, it is important to note that not all debits and credits brought into account for CT purposes under these rules will be excluded under this heading.

Broadly speaking:

  • Excluded debits will mainly be amounts in respect of amortisation (including where a 4 percent election has been made) and losses on the disposal of an intangible fixed asset; and
  • Excluded credits will mainly be amounts in respect of gains on the disposal of an intangible fixed asset and amounts to the extent that they represent the reversal of excluded debits.

However, for example:

  • Taxable credits arising in respect of royalties and other receipts in respect of IFAs will not be excluded;
  • Nor will deductible debits arising in respect of revenue expenditure on IFAs written off in the period in which it is incurred.

It will therefore be necessary to carefully analyse any IFA debits and credits recognised for CT purposes in order to determine whether they fall to be excluded or included in calculating tax-EBITDA. HMRC have now published detailed draft guidance on this topic.

Treatment of intangibles in calculating group-EBITDA

If a group makes a group ratio election, its group ratio percentage will be calculated as its ‘qualifying net group interest expense’ (QNGIE) divided by its ‘group-EBITDA’.

‘Group-EBITDA’ is based on the profit before tax in the group’s consolidated financial statements, but making various detailed adjustments to remove the effects of depreciation and amortisation on ‘relevant assets’.

‘Relevant assets’ are defined as including ‘intangible assets’, which is in turn defined as having the meaning it has for accounting purposes and as specifically including an internally-generated intangible asset.

Accordingly, the various adjustments required to remove the effects of depreciation and amortisation on ‘relevant assets’ will need to be applied in respect of any capital expenditure incurred by the group on intangible assets.

The previous articles in this series can be found here:

 

For further information please contact:

Rob Norris

Richard Rudman

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