M&A Diligence: goodwill – not so good any more?
As of 8 July 2015, companies who write off the cost of purchased goodwill and certain customer-related intangible assets will no longer benefit from a corporation tax (CT) relief… Read more
As of 8 July 2015, companies who write off the cost of purchased goodwill and certain customer-related intangible assets will no longer benefit from a corporation tax (CT) relief for the same. The measure, announced by the Chancellor in the recent budget, will apply to accounting periods beginning on or after 8 July 2015, but not in respect of acquisitions made before that date.
In accounting terms, purchased goodwill is the balancing figure between the purchase price of a business and the net value of the assets acquired. Goodwill can therefore be thought of as representing the value of a business’s reputation and customer relationships. Under the old regime, CT relief was given to companies for the costs of purchased goodwill and intangible assets that were recognised in the accounts. Relief was normally given on these costs as and when the expenditure was written off in accordance with generally accepted accounting practice. The old rules, however, only allowed relief to be claimed when a company acquired a business (as opposed to the shares in the target company), and so purchased goodwill could only be recognised on a business acquisition not an acquisition of shares.
The new measure has removed the tax relief that is available when structuring a business acquisition as a business and asset purchase so that goodwill can be recognised; according to the government policy paper, the historic rules: “allow corporation tax profits to be reduced following a merger or acquisition of business assets and distort commercial practices and lead to manipulation and avoidance. Removing the relief [has brought] the UK regime in line with other major economies, [will reduce] distortion and [will level] the playing field for merger and acquisition transactions“.
Certain reliefs are still available if the goodwill is sold.
The impact on the cash flow of purchasing entities has now become an area of concern, and we await to see the impact on the number of M&A transactions that are structured as asset sales.