The valuation of transactions for fiscal purposes can be a peculiar world in which the taxpayer is often required to imagine transactions which have not happened between parties who do not exist in assets which are untransferable. The hypothetical transactions considered in Conran and another v HMRC [2022] did not involve hypothetical transactions at the extremes of unreality but it did have a sufficient fictional element to provide an enjoyable story and one with a happy ending.
The fashion designer, Jasper Conran, was the sole shareholder of Jasper Conran Holdings Limited (the ‘JCHL’) which was the holding company of a trading group (the ‘JC Group’) which included JC Vision Limited (‘JCV’). On 28th June 2007 Mr Conran formed Jasper Conran Optical LLP (the ‘LLP’) of which he became a member and to which he contributed 99% of its capital.
Mr Conran granted the LLP a non-exclusive licence to sub-license various trademarks of optical products (the ‘Trademarks’) which he owned. It appears that the LLP was formed to enter into an Optical Product License Agreement (the ‘OPLA’) with Specsavers under which it was to sub-license the Trademarks for Specsavers’ use. Specsavers would pay licence fees under the sub-licences.
On 29th July 2008, it appears that Mr Conran granted to JCHL, for the benefit of the members of the JC Group, a licence (the ‘Group Licence’). On 31st October 2008 the LLP entered into a Business Transfer and Novation Agreement (the ‘BTNA’) with JCV under which JCV was to succeed to the LLP’s business relating to the operation of the OPLA and the LLP was to transfer (the ‘Sale’) to JCV its goodwill, marketing information, various of its assets and the benefit of the OPLA. It seems to have been assumed that, after the BTNA was made, JCV would be in a position, by virtue of the Group Licence, to fulfil the duties originally imposed on the LLP under the OPLA in respect of licensing the Trademarks to Specsavers.
Under the BTNA JCV was to pay a consideration of £7.3 million but:
‘4.1.1 To the extent that the valuation of the Business is subsequently agreed with the Shares Valuation division of [HMRC] at a different figure to that contained in Clause 4.1, the consideration shall be adjusted accordingly.
4.1.2 In the event that relief from Corporation Tax under Schedule 29 Finance Act 2002 for any amortisation of the consideration in Clauses 4.1 or 4.1.1 is subsequently denied to the Purchaser by [HMRC], the consideration shall be reduced to £1.’
Arguably, as we shall see, the conditions of 4.1.2 have been satisfied and those of 4.1.1 have not and yet, the appellant’s accountants (‘BHG’) having valued the business at the date of the Sale at £8.25 million, it was this sum which was paid by JCV to the LLP. The Tribunal Judges did not comment on this apparent departure from the terms of the BTNA but seemed to accept that the £8.25 million was the amount payable under the BTNA.
Mr Conran and JCV completed their self-assessment returns for the relevant years. Mr Conran took the view that under TCGA 1992, s.59A he was treated as the holder of the assets of the LLP and treated as having made a disposal of the goodwill passing to JCV under the Sale. He considered that TCGA 1992, ss.17 and 18 applied to treat the disposal of goodwill as having taken place for a consideration equal to its market value at the time of the Sale. He considered that the market value of the goodwill at the time of the sale was £8.25 million and he calculated the chargeable gain arising on the Sale on this basis with the result that he paid CGT of £1,400,464.
JCV took the view that it had acquired an intangible asset, goodwill, for its market value of £8.25 million and this amount could be amortised over five years with the amortised amounts being deductible in calculating its trading profits for the purposes of Corporation Tax. Such amounts of amortisation were reflected in the company’s Corporation Tax self-assessment returns for the five accounting years 31st March 2009 to 31st March 2014. The judgment is not entirely clear but it seems that these deductions for amortisation reduced JCV’s Corporation Tax liabilities over these years by £1,393,140 in aggregate. There was, therefore, a rough equivalence between the CGT paid by Mr Conran and the Corporation Tax saved by JCV by reason of the amortisation.
One might say that, by means of the transaction, Mr Conran had managed to extract £8.25 million of cash from the company with only an insignificant net tax charge but that would be a misleading way to look at the matter. What had actually happened was that the LLP had exchanged one asset, the goodwill for another, cash of £8.25 million with the vendor and the purchaser both believing in good faith that the goodwill was worth the amount which was paid for it.
HMRC, however, took the view that the market value at the date of sale was only £1 (indeed, initially it took the view that its value was nil) and accordingly, that Mr Conran had not made a gain on the sale. The taxation of intangible assets is dealt with by FA 2002, Sch 29 and HMRC took the view that para. 5 of that Schedule treated the goodwill acquired by JCV as having been acquired for its market value with the result, one presumes, that the only amortisation charge deductible by JCV would have been £1.00.
If HMRC had stopped there, it is unlikely that Mr Conran and JCV would have objected to the revised assessments. Mr Conran controlled JCV and, looking at the tax charges falling on JCV and Mr Conran in the aggregate, the tax charged was slightly decreased by HMRC’s adjustments.
HMRC also took the view, however, that because JCV had paid £8.25 million for an asset which was worth only £1 it had made a distribution to Mr Conran within ICTA 1988, s. 209(2)(b) which provided:
‘In the Corporation Tax Acts “distribution”, in relation to any company,
means –
… any other distribution out of assets of the company (whether in cash or otherwise) in respect of shares in the company, except so much of the distribution, if any, as represents repayment of capital on the shares or is, when it is made, equal in amount or value to any new consideration received by the company for the distribution…’.
The result, according to HMRC, was that Mr Conran was subject to Income Tax on the amount of the distribution, which was in HMRC’s view, one presumes, £8,249,999 (£8,250,000 – £1).
HMRC’s arguments as to valuation were accepted by the Tribunal which also accepted HMRC’s argument in respect of FA 2002, Sch. 29 para. 5.
HMRC’s view on the valuation issue was based on the argument that the LLP’s rights under the OPLA which had been assigned to JCV were worthless unless they were accompanied by a right to sub-license the Trademarks. JCV had that right but by virtue of the Group Licence and not by virtue of the BTNA. The sale in the open market posited for CGT purposes by TCGA 1992, s. 17 and the fair value accounting which was of relevance to FA 2002, Sch. 29 para. 5, required one to consider a hypothetical sale between a hypothetical willing vendor and a hypothetical willing purchaser. Those hypothetical vendors and purchasers were to be treated as disposing of, and acquiring, that which was to be valued but they were not to be treated as holding the other assets actually held by the actual vendors and purchasers. This hypothetical purchaser under the Sale, therefore, was to be treated as acquiring the LLP’s rights and obligations under the OPLA, but without possessing the sub-licensing rights, the hypothetical purchaser would be unable to meet those obligations.
The result of the Tribunal agreeing with HMRC on the valuation issue was that the Tribunal accepted that Mr Conran was to be treated for CGT purposes as having received just £1 for the disposal of the goodwill which was actually made by the LLP but was treated as being made by Mr Conran. Similarly, for the purposes of the amortisation of goodwill, JCV should have treated the goodwill as having been acquired for its value of £1 and the intangibles regime applied as if this was the value at which JCV had accounted for it under FA 2002, Sch. 29 para. 5.
The Tribunal did not agree, however, with HMRC in respect of whether the Sale was a distribution to Mr Conran. The Tribunal held that the payment of £8.25 million from the LLP was indeed made ‘out of assets’, of JCV within s. 209(2)(b). It was not, however, ‘in respect of shares in’ JCV. The Tribunal found that:
‘JATC received £8.25 million as he was the majority partner in [the LLP] which conducted the business, in the form of the OPLA with Specsavers. We do not accept HMRC’s submission that this payment was made by JCV to [Mr Conran] as the (indirect) holder of the shares in JCV, ie in respect of shares in JCV. For this reason, the payment was not a distribution within s209(2)(b).’
In coming to this conclusion the Tribunal said that:
‘Section 254(12) provides that a thing is to be regarded as done in respect of a share if it is done “to a person as being the holder of the share”. We consider that this does require that something is done to a person in their capacity as shareholder, albeit that this can extend to capture acts done to indirect shareholders. But the fact that the recipient is a shareholder, whether direct or indirect, is not of itself sufficient to mean that it was necessarily in respect of shares in the company.
The business of [the LLP] was treated by s118ZA(1) ICTA 1988 as being carried on in partnership by its partners, ie [JC Eyewear Ltd] and [Mr Conran], anything done to or in relation to the partnership in connection with its activities is treated as done to the members as partners, and the property of the partnership is treated as held by the members as partnership property. The BTNA is between [the LLP] and JCV, but this transparency for corporation tax purposes means that the amount stated to be payable as consideration was payable to [JC Eyewear Ltd] and [Mr Conran] as partners in [the LLP]. There was no submission by HMRC that the valuation had been made otherwise than in good faith, and it is notable that although the expert evidence before us as to valuation for the Appellants was the report of Mr Brewer, there had been three earlier reports (albeit that two were prepared by BHG) concluding that the business had substantial value (the lowest being £8.25 million).’
So HMRC failed in its attempt to subject Mr Conran to Income Tax on the sum of £8,249,999 so that the result of HMRC’s closure of these enquiries was that its taxation receipts were slightly decreased and its cashflows were deferred by some years. By a somewhat roundabout route the case is a warming story of an honest taxpayer successfully resisting HMRC’s attempt to over-assess him.
