The Budget: Draft Bill to cover intellectual property, goodwill and intangible assets

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The government moved a step closer yesterday to fulfilling its undertaking, announced in the 2000 Budget, to reform the taxation of intellectual property, goodwill and intangible assets.

The government moved a step closer yesterday to fulfilling its undertaking, announced in the 2000 Budget, to reform the taxation of intellectual property, goodwill and intangible assets.

Businesses generally welcomed the launch of further consultation into the issue and the publication of draft legislation covering core elements of the proposed new regime.

The tax treatment of intellectual property and goodwill have become more important to companies with the development of a knowledge-based, post-industrial economy. The overhaul of tax rules affecting these areas is aimed at promoting innovation and encouraging large companies to increase research and development investment in the UK.

The new rules would extend tax breaks to virtually the full range of intangible assets and purchased goodwill by giving relief against current income based on the amortisation in companies' accounts.

The Government is thought to be committed to modernising the tax treatment of goodwill and other intangibles as soon as practicable, but there was some disappointment in the City that the Chancellor is still consulting on the issue. However, Gordon Brown has recognised the need for reinvestment relief to alleviate the potential cost to vendors of selling intangible assets, one of the main problems with the first set of proposals.

Other countries already allow relief for purchases of goodwill. In the US, for example, intangibles can typically be amortised over 15 years.

The new rules under consideration for the UK would also extend tax relief to expenditure in connection with the creation, acquisition or realisation of goodwill and intangibles which end up being worthless.

They would include expenditure on computer software development, although companies will be able to choose capital allowance treatment instead. This latter measure is meant to ensure that companies can continue to benefit from the incentive rates of capital allowance available for investment in information technology.

However, the proposed regime would exclude expenditure on research and development as currently defined for tax. It would also not extend to expenditure on oil and gas exploration and development.

Representations to the business tax division of Inland Revenue will be accepted until 31 May.

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