The Upper Tribunal (Tax Chamber) has rejected the First-tier Tax Tribunal’s (“FTT”) conclusions in relation to whether a payment for the transfer of a licence constituted a distribution to the purchaser’s ultimate owner, fashion designer Jasper Conran. The FTT’s decision had produced a somewhat surprising result, in that Mr Conran was not liable to capital gains tax or income tax on the amount received from the purchaser of the licence.
The Upper Tribunal has reversed that anomaly. In doing so, it has laid down a marker that a recipient of a benefit from a company who is also a shareholder will need clear evidence if they are to successfully argue that the benefit received was not a distribution.
In 2007, the taxpayer expanded his range to include branded eyewear. A limited liability partnership (the “LLP”) controlled by the taxpayer entered into a licence with Specsavers to design and sell Jasper Conran branded frames. In 2008, the benefits and obligations of the licensing agreement were transferred to JC Vision Limited (“JCV”) for a sum of £8.25m. JCV was wholly owned by Jasper Conran Holdings Limited, of which the taxpayer was the sole shareholder. In his personal tax return, the taxpayer treated the £8.25m as a capital gain. JCV treated it as consideration for the transfer and claimed relief for the amortisation under the intangible assets regime.
HMRC disagreed and sought to amend the returns on the basis that, in HMRC’s view, the market value of the transfer was £1 because the Jasper Conran trademarks were not included as part of the transfer. The FTT agreed, and the Upper Tribunal upheld this part of the FTT judgment.
In HMRC’s view, the £8.25m payment to the taxpayer (more accurately to the transparent LLP) was, therefore, a payment in respect of shares, amounting to a distribution under section 209 ICTA 1988 (equivalent provisions are now found in Part 23 Corporation Tax Act 2010). Section 254 ICTA 1988 extended the meaning of “in respect of shares” to include shares in other group companies, such as the holding company in this case.
The FTT had sided with the taxpayer in this regard. Its reasoning is important to the Upper Tribunal’s decision. The FTT considered that:
- The fact a recipient is also a shareholder is not of itself sufficient to meet the “in respect of shares” test
- The transfer agreement was between JCV and the LLP. The tax transparency of the partnership meant that the payable consideration was payable to the partners of the LLP in their capacity as partners
- There was no submission by HMRC that the valuation was not made in good faith (even though it was held to be wrong).
The arguments in the Upper Tribunal
HMRC contended that the FTT had, in effect, switched the burden of proof from the taxpayer to HMRC. HMRC’s position was that the fact that £8.25m was ultimately moved from JCV into the taxpayer’s hands, in circumstances where the entire value of the transaction giving rise to the movement in funds had been held to be an overpayment (since the transfer was only worth £1), “demanded an explanation”. Absent such an explanation, the taxpayer had not discharged the burden of proving that HMRC’s amendment to his tax return was incorrect. Moreover, the FTT’s conclusion (that the payment was not in respect of shares) was not open to it on the evidence.
The taxpayer emphasised that it was clear that the FTT had been fully aware of where the burden lay, noting, in particular, that HMRC had referred the FTT to passages to that effect from Bramwell on Taxation of Companies and Company Reconstructions. HMRC had not cleared the well-established high hurdle in Edwards v Bairstow for overturning a finding of fact by a first instance court or tribunal.
Decision and analysis
The Upper Tribunal considered that when addressing whether a payment was made “in respect of shares in the company”, it was necessary to look at the whole picture and avoid an analysis that focused on one particular factor. More specifically, the Upper Tribunal did not consider that the legal nature of the transaction by which value was delivered to the recipient (in this case, the payment by JCV pursuant to the transfer of the benefits and obligations under the licence agreement with Specsavers) was determinative.
The Upper Tribunal was struck by the FTT’s relatively brief discussion of this aspect of the case compared with the comprehensive and detailed analysis addressing the valuation issues. As noted above, the FTT’s approach placed significant emphasis on the transparency of the LLP for corporation tax purposes and the legal agreement under which JCV paid the £8.25m. In the Upper Tribunal’s view, the FTT had treated the legal agreement as determinative and, as a result, had not undertaken the necessary review of the wider picture. The Upper Tribunal went on to undertake such an analysis. Four factors in particular persuaded the Upper Tribunal that the payment was a distribution.
Firstly, the taxpayer’s ownership of the various entities. Mr Conran was a member of the LLP and the owner of the other member. In relation to the purchaser, JCV, he was shareholder and sole director. The taxpayer’s case, in essence, required the tribunal to accept that he had no regard to himself as the ultimate owner of JCV when agreeing to the price paid for the transfer (a price which turned out to be excessive).
Secondly, there was no evidence that the business connected with the licence was offered to anyone other than entities owned and controlled by the taxpayer.
Thirdly, there was a “tax reducer” clause, which meant that if JCV did not get a certain tax treatment (ie the amortisation under the intangible assets regime), the consideration payable reduced to £1. In the Upper Tribunal’s view this demonstrated that the taxpayer was willing to protect the shareholder value of JCV at the expense of the LLP.
Fourthly, the accountancy experts who gave evidence in the FTT hearing had indicated in their joint statement of experts that if the valuation of the transfer was £1, the payment would be treated as a distribution.
When weighing up the above factors, the Upper Tribunal was persuaded that the FTT had placed undue emphasis on the legal form of the transfer to JCV by the LLP. On a wider view, the evidence pointed towards the £8.25m being received by the taxpayer in his capacity as the ultimate shareholder of JCV rather than as a partner in the LLP.
The case highlights the difficulties that can arise when the recipient of value from a company is a shareholder. In HMRC’s view, the working assumption will almost certainly be that the value or benefit received will amount to a distribution unless adequate evidence is produced that demonstrates in what other capacity it was received.
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