UT-2023-000116; - [2025] UKUT 00164 (TCC)

Schedule 29 permits a company to obtain a corporation tax deduction in respect of its amortisation of capital expenditure incurred on intangible fixed assets (including goodwill) to the extent that the expenditure and amortisation were reflected in the company’s UK GAAP-compliant accounts: FTT [77].

There was one point of law as regards corporation tax which was in dispute before the FTT. This concerned the question of the consequences under Schedule 29 if Nellsar’s accounts were not GAAP-compliant. This issue depended on the interpretation of paragraphs 5 and 105 of Schedule 29.

The FTT observed that paragraph 5 of Schedule 29 essentially provided that, if a company does not draw up its accounts in accordance with GAAP, the relief in Schedule 29 should be calculated as if it had done so: FTT [150].

For ease of reference, paragraph 5 of Schedule 29 provides:

“5 Company not drawing up correct accounts

(1)

If a company does not draw up accounts in accordance with generally accepted accounting practice (“correct accounts”)—

(a)

the provisions of this Schedule apply as if correct accounts had been drawn up, and

(b)

the amounts referred to in this Schedule as being recognised for accounting purposes are those that would have been recognised if correct accounts had been drawn up.”

The FTT noted that paragraph 105 of Schedule 29 provided that, where assets are acquired together, values allocated by the company to individual assets in accordance with GAAP should be accepted for the purposes of the relief, but, if no such values were allocated, then the expenditure on them should be decided by means of a “just and reasonable apportionment” of the overall expenditure: FTT [151].

Again, for ease of reference, paragraph 105 of the Schedule provides:

“105 Assets acquired or realised together

(1)

Any reference in this Schedule to the acquisition or realisation of an asset includes the acquisition or realisation of that asset together with other assets.

(2)

For the purposes of this Schedule assets acquired or realised as a result of one bargain are treated as acquired or realised together even though —

(a)

separate prices are, or purport to be, agreed for separate assets, or

(b)

there are, or purport to be, separate acquisitions or realisations of separate assets.

(3)

Where assets are acquired together —

(a)

any values allocated to particular assets by the company in accordance with generally accepted accounting practice shall be accepted for the purposes of this Schedule;

(b)

if no such values are allocated by the company, so much of the expenditure as on a just and reasonable apportionment is properly attributable to each asset shall be treated for the purposes of this Schedule as referable to that asset.”

In summary, the FTT agreed with HMRC’s submission as to the roles of, and interaction between, paragraphs 5 and 105 of Schedule 29 FTT [202]. The FTT summarised that submission as follows (FTT [153]):

“[I]f a company prepares accounts which are not GAAP-compliant, under paragraph 5 the tax treatment should be decided as if GAAP-compliant accounts had been prepared. If GAAP-compliant accounts allocated separate values to particular assets which had been acquired together, then under paragraph 105(3)(a) that allocation must be accepted. Paragraph 105(3)(b) only came into play if a company prepares GAAP-compliant accounts but those accounts do not contain allocations of value between separate assets which need to be treated differently for tax purposes under Schedule 29. It is only in such cases that paragraph 105(3)(b) steps in to require a just and reasonable apportionment.”

The FTT rejected Nellsar’s submission on this issue, which it recorded as follows (FTT [152]):

“The effect of paragraph 105(3)(b)… was that even if the accounts were not drawn up (and the individual assets valued) in accordance with GAAP (so that one fell outside 105(3)(a)), the correct method of valuing the assets for the purposes of the relief was by applying a “just and reasonable apportionment”; and since Nellsar had used one of the methods of valuation recognised in GAAP (depreciated replacement cost) in carrying out its apportionment, that apportionment must be accepted… paragraph 105, being the more specific provision, overrode paragraph 5 on this point.”

The FTT’s reasons for accepting HMRC’s submission were as follows. First, the basic scheme of the legislation was to align the tax treatment of intangibles with their correct accounting treatment: it would be a strange outcome if paragraph 105(3)(b) gave a company the option of “switching off” the correct accounting treatment under GAAP where intangible assets are acquired as part of a business acquisition, and replacing it with a “just and reasonable apportionment” of the overall acquisition cost: FTT [202].

Secondly, Nellsar’s fallback argument (that an apportionment decided on the basis of depreciated replacement cost (“DRC”) (a valuation basis referred to in accounting standards as appropriate only in certain limited circumstances, returned to below) would “necessarily” be “just and reasonable” because it was a basis recognised by accounting standards) was equally unattractive: FTT [202]. That was because it proceeded from the starting point that the accounts are not GAAP-compliant for the very reason that they adopted a DRC basis of valuation of the properties: FTT [202].

Thirdly, there were clearly situations where paragraph 105(3)(b) could fill what would otherwise be a potential lacuna arising from the absence of any requirement under GAAP to value any particular asset in a company’s accounts: FTT [203]. For example, where a company had incurred expenditure on a bundle of intangible assets and GAAP did not require it to allocate individual values to the constituent parts of the bundle, it might be necessary to differentiate between the different parts for tax purposes: FTT [203]. In that case paragraph 105(3)(b) provided the appropriate mechanism for doing so: FTT [203]. This provided a justification for paragraph 105 which did not put it into conflict with paragraph 5: FTT [203].

The FTT therefore concluded that, if Nellsar’s accounts were not GAAP-compliant, then the corporation tax goodwill amortisation allowances available to Nellsar in Schedule 29 should be recomputed as if GAAP-compliant accounts had been drawn up. Whether those accounts were GAAP-compliant was a matter to which the FTT then turned.