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The tax cost of getting a good name for your business

 

If you're thinking of buying an existing brand from another business in order to boost your company's profile, the good news is that there's a tax-efficient way to do it.

What's in a brand?

An intangible asset. A brand is a so-called "intangible asset". As well as brands this label is also applied to commercial know-how, patents and logos (but not research and development expenditure).

Taxman's view. Broadly, since 2002, a company can obtain Corporation Tax (CT) relief on the amount of depreciation applied in the company's accounts to an intangible asset, such as a brand name. The amount you write off against your profit each year is based on generally accepted accounting principles. For example, where your asset has an indefinite life, relief is given at 4% per year on a straight-line basis. And in the year you acquire the asset the norm is to write a full year's depreciation into those accounts.

What's covered? These rules only apply to companies and in respect of intangible assets purchased or created by them after March 31 2002. The tax relief applies not only to purchase costs but also to any development costs.

For example

Expense now. Let's say that in December 2012 you buy the brand of a business at a cost of £50,000. Your company's accounting policy is set to writing this off over five years. Under the Finance Act 2002, your company can claim a tax deduction for CT of £10,000 per year. With an effective rate of CT at 20% this will save your company a total of £2,000 a year in tax for five years.

Profit later. Where an intangible asset is sold, the profit or loss is treated as a taxable credit or debit rather than as a capital gains transaction.

Example. In April 2020 you sell the brand on for £100,000. The cost of £50,000 has already been written off against profits so the whole £100,000 is subject to CT. At a CT rate of 20% this means tax of £20,000.

Tip. It is possible to defer any tax on the sale by reinvesting the proceeds into the purchase of new intangible assets. However, you have to reinvest the whole of the proceeds to defer all the tax. The time limit for reinvestment is from one year before until three years after the disposal.

Related parties catch

Trap. This tax concession does not apply where an intangible asset is acquired from a related third party. A related third party includes a close company buying intangible assets from an individual who is a shareholder in that company.

For example, no relief is available if you incorporate your own self-employed business and then sell your brand from the old business to your new company in which you have shares. The trap also catches intangible assets sold by one company to another where either company has control of the other. (But it doesn't catch transfers between 75% owned group companies where the transferee takes the place of the transferor.)

Tip. When purchasing a business comprising intangible assets, you should buy assets rather than shares. The cost of assets such as goodwill can be written off against future profits to obtain CT relief on the purchase price. In contrast, a purchase of shares does not qualify for any relief. However, the seller may have a different view so some negotiations will be needed.

If you need any more information on tax issues, please get in touch with us on 0191 386 4786 or by emailing information@westwaters.com

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How can we help?

We are a proactive firm of accountants who can assist you in all your financial needs in a friendly, efficient and professional manner.

Building partnerships, listening to your needs, and implementing a solid financial strategy is the backbone of our practice. 

Why work with us?

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