Tax Considerations When Purchasing a Customer List
When businesses buy a customer list, they’re not just acquiring names and contacts; they’re essentially buying relationships, complete with customer preferences and history. These lists, as intangible assets, often form part of the business’s goodwill. The tax implications of such a purchase vary depending on whether the buyer is a self-employed individual (or partnership) or a corporation.
For Self-Employed Purchasers
Self-employed business owners or partnerships face certain limitations in claiming tax relief on the purchase of a customer list. Since the tax rules only allow deductions for intangible assets related to specific processes rather than customers, buying a customer list isn’t deductible against revenue. However, while immediate tax relief may not be available, the cost of acquiring the customer list is considered a capital item. This means it can potentially reduce any capital gains when the business is eventually sold. Selling a customer list could qualify for business asset disposal relief, provided certain conditions are met. For the seller, the income received from the sale of the list is taxed as ‘other income’.
For Corporate Purchasers
The scenario is different for corporations. Purchases of customer lists are governed by the ‘intangible assets’ tax regime, particularly under the rules concerning goodwill. Post-1 April 2019, customer lists are explicitly included within this corporate regime. These are treated as part of goodwill and/or relevant assets. The tax relief is available for an intangible fixed asset that consists of information about customers or potential customers of a business.
When these assets are acquired as part of a business, they should be separately capitalized in the balance sheet at cost, distinct from goodwill, if their value can be reliably measured. The relief rate is set at 6.5% per annum. However, this relief is partially restricted based on the company’s expenditure on qualifying intellectual property in relation to its expenditure on the acquired assets.
There’s no relief if the company acquires the asset from a related individual or a partnership involving a related individual. This means companies cannot write down the cost of goodwill and customer-related intangibles acquired upon incorporation, unless the asset is acquired from a third party.
Purchasing a customer list can be a strategic move for business expansion or starting up, but it’s crucial to understand the differing tax implications based on the business structure. Self-employed individuals and partnerships face restrictions on immediate tax relief, while corporations can capitalise on specific tax regimes. Consulting with a tax professional is advisable to navigate these rules effectively and ensure compliance.
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