Companies have been allowed to claim a tax deduction for the cost of goodwill since 2002. In the autumn Statement it was announced that this will now be restricted but when and how will this take effect?

In 2002 HMRC expanded the right of companies to claim tax deductions for intangible assets e.g. rights, know-how, and goodwill. Goodwill is the value of a business’s reputation. For example, a shop that has built up it’s business over the years might have generated part of it’s goodwill by having a reputation for excellent customer care. Whatever the source of goodwill it is an intangible asset that would have a value if the shop was sold.

Where a company owns goodwill, it’s entitled to claim a tax deduction equal to the amount charged as an amortisation, i.e. gradually written off, expense in it’s accounts. This is usually worked out in accordance with UK GAAP (generally accepted account principles). Alternatively a company can claim 4% on whatever it cost it to generate the goodwill.

In his Autumn Statement the chancellor announced a clampdown on tax relief for goodwill where it has been internally generated, i.e. built up by the business rather than purchased from someone else. However the restriction only applies where goodwill is transferred (sold) to a company by a person (or persons) related to it.

Are you related?  Related has a special meaning for tax purposes; broadly, where you or you together with an associate, e.g a business partner, control a company, i.e. you have the majority voting power, then you are related to it.

When do the new rules apply? Although the new rule won’t become law until the summer of 2015, it will have retrospective effect. Companies will not be entitled to tax deductions for internally generated goodwill that’s transferred after 3rd December 2014. Companies that acquired this type of goodwill prior to 3 December 2014 can continue to claim deductions for it.

Tip: If a contract to sell your business to a company with which you’re related was entered into prior to 3 December 2014, but the transfer took place on or after that date, the good news is that the old rules will apply.