When buying a business, many people are unsure whether or not goodwill is tax deductible. That’s no surprise because the tax treatment of goodwill has changed many times over the last two decades. So, here’s some basic guidance to provide businesses with some clarity on the current position.

Qualifying for goodwill tax

For sole traders and partnerships, the position is rather straightforward. The cost of goodwill is never allowed as a deduction against trading profits.

For companies, since 1 April 2019 relief has been available at 6.5% providing the following conditions are met: 

  • Goodwill and relevant assets are purchased when you buy a business with qualifying intellectual property (“IP”).
  • The IP must be purchased for continued business use by the new owner.
  • The business is liable to corporation tax.
  • Relevant assets (including goodwill) are included in the company’s accounts.
  • The purchase of the goodwill is not from a related party.

What intellectual property assets qualify for relief?

Qualifying IP includes assets such as patents; copyright or design rights; customer relationships; customer information; unregistered trademark; plant breeders’ rights; or a licence in respect on one of these items listed. The Corporate Intangibles Research and Development Manual CIRD44060 defines IP in more detail.

The relief of 6.5% a year is applied to the lower of the cost of the relevant asset or six times the cost of any qualifying Intellectual property (IP) assets in a business purchase. The relief is given yearly until the limit is reached. The claim for relief is made within the annual corporation tax return.

Identifying your IP assets

The important thing to note is that no tax relief is available to companies on the goodwill if it is not also purchased with qualifying IP assets. Therefore, during any purchase negotiation it is crucial to clearly identify IP assets, list and value them together with general goodwill as part of the overall business purchase price.

Restrictions will apply in relation to assets that are:

  • Pre-Finance Act 2019 assets.
  • Acquired other than as part of a business acquisition.
  • Acquired as part of a business acquisition but not together with qualifying IP.
  • Acquired at a cost exceeding 6 times the value of the qualifying IP assets acquired.
  • Acquired from a related individual or firm.

Please note that relief can only be claimed when a company acquires a business directly, rather than acquiring shares in a target business. 

Where a deduction is not allowed for trading profits, a deduction should be taken for capital gains tax calculations on a later disposal or cessation.

Understanding the tax relief available on goodwill is important when considering a business purchase. If you need support, please do not hesitate to contact your usual Thomas Westcott advisor.

By Tom Stuckey, Director