291A Intangible assets

Summary

The Finance Act 2009 introduced a new scheme of tax relief for expenditure incurred by a company on intangible assets after 7 May 2009.

Under the scheme, relief in the form of capital allowances against trading income is given on capital expenditure incurred by companies on the provision of intangible assets for the purposes of a trade. The scheme applies to a broad range of intangible assets – either externally acquired or internally developed – which are recognised as such under generally accepted accounting practice and which are listed in the new section.

Allowances provided under the scheme reflect the standard accounting treatment of intangible assets and are based on the amount charged to the Profit and Loss account, or Income Statement of the company for the accounting period in respect of the amortisation and any impairment of the specified intangible asset. However, companies may opt instead for a fixed write-down period of 15 years at a rate of 7 per cent per annum or 14 years and 2 per cent in the final year.

Where expenditure was incurred on the provision of an asset before 14 October 2020, no balancing charge will arise if, in relation to the asset, the balancing event (as outlined in section 288(1)) occurs more than five years after the beginning of the accounting period of the company in which the asset was first provided. This is subject to the condition that the event may not result in a connected company claiming allowances under section 291A in excess of the tax written down value of the asset at the time of transfer (i.e. the amount of unclaimed allowances).

Certain restrictions apply to ensure that the scheme operates effectively. Activities which consist of managing, developing or exploiting specified intangible assets and carried on by a company as part of a trade are to be treated as a separate trade (referred to as a “relevant trade”). This is so that allowances may only be offset against income from such activities and not against any other profits. Also, for claims made in respect of capital expenditure incurred by a company on or after 11 October 2017, the aggregate amount of capital allowances and related interest deductions may not exceed 80% of relevant income for that period excluding such allowances and interest. However, any excess allowances and interest is available for carry forward to succeeding accounting periods.

A similar cap of 80% applied in respect of claims for capital allowances and related interest deductions made for accounting periods commencing before 1 January 2015. The cap was increased to 100% for claims made in respect of accounting periods commencing on or after 1 January 2015, and is reduced to 80% for claims made in respect of expenditure incurred by a company on or after 11 October 2017.

The scheme does not apply to capital expenditure on specified intangible assets to the extent that this expenditure is in excess of an arm’s length amount payable between independent parties. Provision is made to enable an authorised officer to consult with an expert on matters relating to the cost of the expenditure incurred.

Relief is also not available in respect of any expenditure not laid out wholly and exclusively for bona fide commercial reasons and that was incurred as part of a tax avoidance arrangement

The scheme does not apply to capital expenditure incurred by a company on specified intangible assets for which any relief or deduction may be given under the Tax Acts other than by virtue of this section.

In the case of transfers of specified intangible assets between group companies, the acquiring company will be able to claim capital allowances on the assets acquired where both it and the transferring company jointly elect not to avail of capital gains tax relief provisions under section 617. A similar facility will apply in the case of assets transferring under a company reconstruction or amalgamation under the provisions of section 615. In such situations it is important to note that it will not be possible to claim both CGT relief and capital allowances under this section.

Details

Definitions

(1) The term “authorised officer”, “intangible asset”, “specified intangible asset” and “profit and loss account” are defined for the purpose of the section. The section applies to intangible assets which-

• are recognised as intangible assets under generally accepted accounting practice, and
• are listed as specified intangible assets in the section.

Accounts-based relief

(2) Capital expenditure incurred by a company on the provision of specified intangible assets for the purposes of a trade shall be treated as expenditure on machinery or plant for the purposes of Chapter 2 and Chapter 4 of Part 9. This ensures that the normal rules regarding wear and tear allowances, balancing allowances and charges for expenditure on machinery or plant will also apply for capital expenditure on specified intangible assets, subject to the specific provisions of this section.

(3) An allowance provided under this section for an accounting period shall be a percentage of the actual cost of the asset based on a formula-

where-

• A is the amount, computed in accordance with generally accepted accounting practice, charged to the profit and loss account of the company for the accounting period in respect of the amortisation, impairment or depreciation of the specified intangible asset. [Provision is also made for apportionment where the accounting period for tax purposes and the company’s period of account are not the same], and
• B is the actual cost of the asset or, if greater, the value of the asset on which the amortisation, impairment or depreciation charge is computed.

Fixed Rate Relief

(4)(a) A company may elect to claim relief over a fixed write-down period of 15 years at the rate of 7% per annum and 2% in the final year in respect of capital expenditure incurred on the specified intangible asset.

(4)(b) An election under subsection (4)(a) must be made in the corporation tax return for the accounting period in which the expenditure on the specified intangible asset was first incurred by the company and such election will apply to all capital expenditure incurred on the asset.

Relevant Trade

(5)(a), (c) Activities (referred to as “relevant activities”) which consist of the managing, developing or exploiting of a specified intangible asset which are carried on by a company wholly or as part of a trade, including activities comprising the sale of goods or services deriving the greater part of their value from specified intangible assets, such activities are to be treated as a separate trade (“relevant trade”) and profits from such activities are to assessed separately. This ensures that capital allowances are only available for offset against the trading income from the relevant trade and not any other income.

Apportionment – Arm’s length amount

(5)(b) It may be necessary to apportion income to ensure that excessive income is not attributed to the relevant trade referred to in paragraph (a). Where the relevant activities are carried on in a separate company there should be no difficulty in ascertaining the profits from such activities. However, where the managing, developing or exploiting of a specified intangible asset is carried on as part of a wider business, an apportionment of receipts and expenses will be necessary to ensure that the correct amount of income is attributable to the deemed separate trade. Such apportionment is to be done on a just and reasonable basis. The amount of income attributed to the relevant trade should not exceed the amount that would be attributed to a distinct and separate company engaged in the relevant activities if it were independent of, and dealing at arm’s length with, the company availing of relief under the scheme.

80% cap on relief

(6)(a) The aggregate amount of capital allowances and related interest deduction incurred in connection with the provision of a specified intangible asset for an accounting period shall not exceed 80% of the trading income of the relevant (i.e. separate) trade for that period excluding such allowances and interest. This means, in effect, that a minimum 20% of income from the relevant trade is left in charge for an accounting period and that a loss cannot be created by such allowances or interest expense. Where the deductible amounts exceed relevant trading income the excess will continue to be carried forward for offset against trading income of the relevant trade in subsequent periods. In applying this restriction, capital allowances for expenditure on the provision of specified intangible assets are restricted before interest on related borrowings is restricted. The 80% cap applies to claims made in respect of capital expenditure incurred by a company on or after 11 October 2017. Where a claim for an accounting period is made in respect of capital expenditure incurred by a company both before 11 October 2017 and on or after 11 October 2017, the cap will apply subject to paragraph (ba).

Carry forward of unused amounts

(6)(b)(i) Where it is not possible to utilise all the capital allowances available for an accounting period under paragraph (a) and, where applicable paragraph (ba), the excess allowances will be carried forward and added to any allowances which are available for offset against trading income of the relevant trade for the next succeeding accounting period and so on for each succeeding accounting period.

(6)(b)(ii) Similarly, any excess interest expense arising in an accounting period by virtue of paragraph (a) and, where applicable paragraph (ba), will be carried forward and added to any interest deductible against trading income of the trade for the next succeeding accounting period and so on for each succeeding accounting period.

Streaming of income

(6)(ba) Where the trading income from the relevant trade comprises income relating to capital expenditure incurred by a company both before 11 October 2017 (referred to as “the earlier period”) and on or after 11 October 2017 (referred to as “the later period”) the company must stream the trading income from its relevant trade in the accounting period between that which relates to expenditure incurred before 11 October 2017 (referred to as “first income stream”) and that which relates to expenditure incurred on or after 11 October 2017 (referred to as “the second income stream”).

The paragraph applies the cap in with any necessary modifications such that –

• the amounts of capital allowances and interest expense that relate to capital expenditure incurred in the earlier period shall not exceed the amount of the first income stream and
• the amounts of capital allowances and interest expense that relate to capital expenditure incurred in the later period shall not exceed 80% of the amount of the second income stream

Apportionment of streamed income

(6)(bb) The trading income of the relevant trade must be apportioned between the two streams of trading income on a just and reasonable basis and an arm’s length approach should be applied.

(6)(c) In computing the trading income from the relevant trade no account shall be taken of any income which is disregarded for the purposes of the Tax Acts.

Prevention of double relief

(7)(a) The section shall not apply to capital expenditure incurred by a company on specified intangible assets for which any relief or deduction may be given under the Tax Acts other than by virtue of this section.

(7)(b) The section shall not apply to capital expenditure on a specified intangible asset to the extent that it exceeds an arm’s length amount payable in a transaction between independent persons.

Wholly and exclusively/Bona Fide

(7)(c) The section shall not apply to capital expenditure on the specified intangible asset which is not laid out wholly and exclusively for bona fide commercial reasons and was incurred as part of a tax avoidance scheme.

Consultation with an expert

(8)(a) An authorised officer may consult with an expert where in his/her opinion that person may be of assistance in ascertaining the extent to which expenditure is incurred on a specified intangible asset or in valuing such an asset where it is acquired from a connected person (within the meaning of section 10).

(8)(b) The authorised officer must notify the company of the identity of the expert they intend to consult and the information they intend to disclose to that person and permits the company, within a 30 day period, to prevent such disclosure where it demonstrates that disclosure of such information could prejudice the company’s trade.

Intra group transfers

(9) The section will not apply where-

1. another company acquires the specified intangible asset as part of the transfer of the whole or part of a business under a scheme of reconstruction or amalgamation where relief from CGT is available under section 615, or
2. another company within the same group acquires the specified intangible asset and relief from CGT is available under section 617.

(9)(b) Where either section 615 or section 617 apply, no allowance may be claimed under this section in respect of the specified intangible asset(s) acquired by the transferee company. However, if companies wish to obtain capital allowances, they can elect not to avail of CGT relief, in which case the acquiring company will be entitled to claim an allowance for capital expenditure on the specified intangible assets acquired while the transferring company will be subject to capital gains tax on the transfer of those assets.

(10) Claims under this section must be notified to Revenue within 12 months from the end of the accounting period in which the capital expenditure giving rise to the claim is incurred.

Relevant Date: Finance Act 2021