Licence agreement was amortisable intangible asset

In Roger Preston Group Limited v HMRC [2021] TC08025, the First Tier Tribunal (FTT) upheld the appellant's appeal to have the amortisation of its intangible asset allowed for corporation tax purposes.

 The case concerned a long-standing engineering consultancy, its restructuring and eventual sale and whether or not a licence agreement had been properly identified.

• The business was originally started in the 1920s as a partnership, J Roger Preston & Partners.
• In 1994, the partners at the time considered restructuring the business. It was decided to operate the trade through a company, but for tax efficiency reasons, they wanted to retain the partnership. The resulting operating structure had the business and assets retained in the partnership, with a licence granted to Roger Preston and Partners Ltd (RPPL). 
• The licence allowed RPPL to trade using the trademarks, client lists, know-how and assets of the partnership. Goodwill was not part of the licence agreeement. Control over the trade was retained by the partnership.
• An annual fee was paid to the partnership based on the number of hours assistance was provided by the partners.
• In 2008, Dutch based group, Grontmij, agreed to buy the business:
  • The partnership sold the business and assets to Roger Preston Group Ltd ("RPGL" and the appellant in this case), a newly formed UK subsidiary of the Dutch group.
  • The shareholders of RPPL sold their shares to Grontmij UK.
• The post-sale accounts showed the licence recorded as an intangible asset for RPGL and amortisation was deducted for corporation tax purposes, following the accounting treatment. The accounts were filed showing the auditors signed off the accounts as being in accordance with IFRS.

 HMRC challenged the deduction claiming:

• There was no intangible asset existing in 2008 that could have been purchased. HMRC argued that the licence was a financial asset (a contractual right to cash).
• The restructuring of the business in 1994 was purely for tax purposes and commercially the trade belonged in RPPL not the partnership. 
• If the intangible asset reflected the goodwill of the business, this could not be a recognised intangible asset in its own right for UK tax purposes.
• The goodwill would have been sold by RPPL not the partnership. As such it did not qualify as being part of an asset if bought as part of a share sale.
• Under UK GAAP there was no right to claim amortisation of the asset.

The FTT considered the licence agreement in detail as this was integral to the appeal. It found that:

• The licence was a commercial reality and not a sham.
• Pre and post sale, several different firms of established accountants had recognised the value of the licence agreement in the partnership.
• HMRC had opened and closed two separate enquiries into the business, without any adjustments.
• Tax deductions follow the treatment of a recognised accounting standard. The fact that the accounts were prepared under IFRS and not UK GAAP was irrelevant.
• By definition and from the activities of the business, the licence was an intangible asset and not a financial asset.

The FTT upheld the appeal and the amortisation was allowed.

Comment: It seems strange that HMRC chose to argue this case when several Big 4 accountancy firms and two HMRC enquiries had accepted that the licence was a commercial reality. Even the HMRC expert accounting witness struggled to put forward a convincing and coherent argument.

Useful guides on this topic: 

 Goodwill and the intangibles regime 
How does the Corporation Tax intangible regime work? What is the treatment of goodwill for Corporation Tax? Do companies account for goodwill differently?

Goodwill & Tax: Changes under the new UK GAAP, FRS102 
The rules on when and how to recognise goodwill have changed from April 2019. What are the new rules? What is the impact on businesses?

Intangibles regime and partnership interests  
How does the intangibles regime treat partnership interests? What about other intangibles? Can you get a tax deduction for goodwill amortisation?

External Link

Roger Preston Group Limited v HMRC [2021] TC08025