In the budget the Chancellor has made an immediate change to the tax relief available on goodwill and customer-related intangible assets which has previously been available when acquiring a company. The new rules will apply to acquisitions made on or after the 8 July 2015.
Previously when a company acquired goodwill or intangible assets a corporation tax deduction was available for the amortisation that was charged to the profit and loss as the assets are written off or “depreciated”. This deduction was only available when purchasing the assets and trade of a company and not when purchasing the shares.
However under the new rules the amortisation charged to the profit and loss when writing off the acquired goodwill will no longer be an allowable deduction for tax purposes. This will mean that the amortisation charged in the companies accounts will not match the “costs” deemed to be allowable for tax.
This therefore means that the previous advantage that acquirers had when purchasing the assets and trade of a company compared to acquiring the shares has been lost. However these changes are not retrospective and any acquisitions completed before the 8 July 2015 will be under the old rules.
We expect that this change will remove the tax gulf between acquirers and sellers (who want to sell shares because of the benefits of the 10% CGT/Entrepreneurs Relief regime) and make share sales very much the norm. It could lead to some price distortion in the short term as buyers adjust their payback period without tax relief.
Of course, tax relief was only one reason why buyers may have previously favoured a goodwill and assets deal – there can often be commercial reasons for not wishing to buy shares such as historic or contingent liabilities. Similarly, there are sometimes commercial upsides for buying shares – typically in contractual based businesses or those that require regulatory or licences to trade which can be difficult or impossible to novate on an asset deal.
