21 March 2000
TAX RELIEF ON MOBILE PHONE LICENCES AND IRUS
Summary of measures
From today tax relief will be available for the costs of acquiring capacity on submarine telecommunications cables, called IRUs (indefeasible rights of use).
This is an extension to the relief for the cost of buying third generation mobile telecommunication licences which was announced in last year’s Budget. (IR 24 – 9 March 1999). In both cases the relief will be spread over the life of the acquisition and will be legislated for in this year’s Finance Bill.
This will level the playing field by matching relief enjoyed in other tax administrations and assist in opening up the online world to competition with advantages for smaller operators.
1. The general rule in the UK tax system is that business expenditure is tax deductible if it is
· incurred wholly and exclusively for the purposes of the trade in question, and
· revenue, not capital.
2. An IRU would currently be regarded as a capital asset of the purchasing company, and the acquisition cost would not therefore qualify for a deduction. The cost does not, however, qualify for capital allowances either.
3. It is proposed to allow the costs of IRUs acquired on or after today to be relieved for tax purposes as revenue items. Any receipts for disposal of such IRUs acquired on or after today will be brought into charge as trading receipts.
4. As with the relief for the costs of acquiring licences to operate the third generation mobile spectrum, which was announced in last year’s Budget, the broad intention is to provide tax relief for IRUs by following the accounting treatment, spreading the relief over the life of the IRU.
5. In order to compete in the international market for telecommunications, all telecommunications companies need to acquire capacity on submarine cables. Large operators tend to build and install these cables themselves, whilst smaller companies purchase capacity by buying Indefeasible Rights of Usage (IRUs) – broadly equivalent to long leases. These IRUs are attractive as the cost of building or installing a cable is prohibitive for smaller operators.
6. The direct investment in the cable by the large operator qualifies for tax relief under the capital allowances regime. However the investment in the IRU by the smaller operator receives no tax relief until the expiry of the IRU, which can be up to 25 years later, and then only as a capital loss.
7. The proposal is to grant tax relief for all IRUs acquired from third parties on or after today, following the accounting treatment of amortising the cost over the life of the IRU.
8. This is the same approach as that being adopted for relieving the cost of acquiring licences to operate third generation mobile spectrum, which was announced in the Budget last year. The Government has announced the details of the spectrum auction (DTI Information Note P/2000/116 – 18 February (www.spectrumauctions.gov.uk)).
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