CFM95805 - Interest restriction: Tax-EBITDA: Intangibles

TIOPA10/S408

TIOPA10/S407 lists the items which are specifically excluded from amounts within tax-EBITDA (as defined by S406). These include at 1(c) the category of excluded relevant intangibles debits and credits. These are defined more specifically in S408.

Certain relevant intangible debits and credits which are brought into account through CTA09/PT8 are excluded from the calculation of adjusted corporation tax earnings when determining a company’s tax-EBITDA. These are specified in Columns 1 and 2 of S408.

Intangible Assets Regime

The rules in CTA09/PT8 apply to intangible fixed assets used on a continuing basis in the course of a company’s activities. These rules set out how the gains and losses in respect of intangible fixed assets are calculated and dealt with for CT purposes.

Sums written off intangible fixed assets in a company’s accounts are deductible for CT as income, rather than as capital items, through the provision of a deductible debit, whilst all receipts received from those assets are similarly treated as revenue items through a taxable credit.

Further guidance on the Intangible Assets Regime can be found at CIRD10000.

Effect for tax-EBITDA purposes

Debits excluded for tax-EBITDA purposes will mainly be amounts in respect of amortisation (including where a 4% election has been made) and losses on the disposal of an intangible fixed asset.

Credits receivable under the intangible assets regime to be excluded for tax-EBITDA purposes will mainly be amounts in respect of gains on the disposal of an intangible fixed asset and amounts to the extent that they represent the reversal of excluded amounts.

Going through each of the main provisions in the intangible fixed asset rules in turn:

  • As credits brought into account under S721 for receipts recognised as they accrue, and under S722 for receipts in respect of royalties, do not arise in respect of a reversal of previous debits brought into account under the regime, they do not need to be excluded for tax-EBITDA purposes;
  • A credit is brought into account under S723 when a revaluation increases the account value of an intangible fixed asset. The amount of the credit received is capped at the total debits deducted for sums written off the asset, less any prior revaluation credits recognised for past periods. The credit should be excluded for tax-EBITDA purposes to the extent to which the debits reversed are excluded debits;
  • Credits brought into account under S724 in respect of negative goodwill arising on the acquisition of a business do not represent the reversal of a previous debit, and so should not be excluded;
  • Where a company recognises an accounting gain which reverses some or all of an accounting loss recognised in a previous period which had given rise to a deductible debit, S725 provides a corresponding credit up to the amount of the gain. The credit received should be excluded for tax-EBITDA purposes to the extent to which the debit is an excluded debit;
  • S728 provides that expenditure on an intangible asset gives rise to a deductible debit for the period of account in which it is written off to a company’s profit and loss account. The resulting debits should not be excluded for tax-EBITDA purposes as these amounts are revenue in nature and not amounts in respect of capitalised cost of an intangible fixed asset;
  • Conversely where the company obtains a deductible debit for expenditure that has been capitalised in the company’s accounts under S729, S731, S735 and S736, the entirety of debit provided should be excluded for tax-EBITDA purposes;
  • Where a company recognises an accounting loss which reverses some or all of an accounting gain recognised in a previous period which had given rise to a taxable credit, S732 provides a corresponding debit up to the amount of the loss. The debit received should be excluded for tax-EBITDA purposes to the extent to which the credit is an excluded credit;
  • A credit is provided by S735 when a company realises an intangible fixed asset and the proceeds of realisation exceed the tax written-down value of the asset. The credit should be excluded for tax-EBITDA purposes to the extent to which the cost of the asset exceeds its tax-written-down value;
  • S736 provides a taxable credit when a company realises an intangible asset shown on the company’s balance sheet which has not been previously written down, and the proceeds of the realisation exceed the cost of the asset. The credit should be included for tax-EBITDA purposes as it does not represent the reversal of a previous debit;
  • A credit is brought into account under S738 when a company realises an intangible fixed asset which has not been shown on the company’s balance sheet. As this section applies where no debits have been previously given in respect of the asset, the credit received cannot represent the reversal of a previous debit, and so should not be excluded for tax-EBITDA purposes;
  • Where a company incurs a loss in respect of abortive expenditure to acquire a fixed intangible asset, a corresponding deductible debit is taken into account under S740. As the expenditure incurred is not capitalised and does not represent the cost of acquiring an intangible asset, the debit provided should not be excluded for tax-EBITDA purposes.
  • S872 applies where, as a result of a change of accounting policy, there is a difference in the accounting value of an asset, comparing the value at the end of the previous period and the beginning of the current period. The amounts brought in are limited to the sum of previous debits and credits in respect of the writing down of the asset, and as such are therefore excluded for tax-EBITDA purposes.
  • S874 applies the same treatment as S872 where the original asset of the earlier period is treated as two or more assets in the later period.

Summary

The relevant intangible debits and credits brought into account under a provision of CTA09/PT8 and identified in Columns 1 and 2 of TIOPA10/S408(1) and (2) should be excluded when calculating taxable total profits of the period to determine a company’s tax EBITDA as follows:

Section Credits to be excluded? Debits to be excluded?
S721 (Receipts as they accrue) No n/a
S722 (Other royalties) No n/a
S723 (revaluations) Selective credits n/a
S724 (negative goodwill) No n/a
S725 (reversal of accounting debit) Selective credits n/a
S728 (written off as incurred) n/a No
S729 (amortisation / impairment) n/a Yes - All debits
S731 (fixed rate) n/a Yes - All debits
S732 (reversal of accounting gains) n/a Selective debits
S735 (asset written down for tax) Selective credits Yes - All debits
S736 (not written down but on balance sheet) No Yes - All debits
S738 (not on balance sheet) No n/a
S740 (abortive exp) n/a No
S872 No No
S874 No No