Designer's business was overvalued on incorporation

In HMRC v Jasper Alexander Thirlby Conran & JC Vision Ltd v HMRC [2022] UKUT 166, the Upper Tribunal found that the value of the designer's optical business on incorporation was £1 and not £8m. The difference was taxable as a distribution and not as a capital gain. Intangibles relief claimed by the purchasing company was also reduced to the market value of £1.

• Jasper Conran was the majority owner of Jasper Conran Optical LLP, which had a five-year licence agreement with Specsavers to supply and sell Jasper Conran eyewear.
• In 2008, the optical business was incorporated into JC Vision Limited (JCV) for £8.25 million. The sale did not include any licences to use the Jasper Conran trademarks.
• Mr Conran paid Capital Gains Tax (CGT) on the disposal consideration of £8.25m and JCV claimed relief for amortisation on the same amount under the Intangibles regime on the basis that it was a transfer of post-2002 goodwill.
• HMRC concluded that without the Jasper Conran licences, the business was incapable of operating. They Valued the business at a nominal value of £1, denied the claim for amortisation on the £8.25m consideration and amended Mr Conran’s Self Assessment return, assessing him as having received a distribution of £8.25m. Mr Conran and JCV appealed.
• The First Tier Tribunal (FTT) found that the value of the assets transferred was £1 as they were not capable of operating as a business without the addition of the trademarks They also agreed that as a result relief could not be claimed for amortisation on £8.25m.
• The FTT also held that the £8.25 million received by Jasper Conran was not a consideration subject to Capital Gains Tax, but neither was it a distribution as the payment was not received by reason of his (indirect) shareholding in JCV. Mr Conran's tax liability on the receipt of the £8.25 million was reduced to nil.
• JCV appealed in respect of the goodwill amortisation claim and HMRC appealed the decision regarding the tax treatment of the £8.25m received by Mr Conran.

The Upper Tribunal allowed HMRC’s appeal but dismissed the JCV appeal:

• Without the licences to use the trademark, the business had no value and there was clearly no transfer of the use of the trademark, expressly or otherwise. The value of the business transferred was therefore £1 (not nil as HMRC submitted) and this was the value upon which amortisation relief could be claimed.
• If a benefit is received by a shareholder (and by extension to a non-shareholder in certain circumstances) the onus is on that direct or indirect shareholder to explain in what other capacity they received the benefit. It is then a question of fact and degree taking into account all of the facts and circumstances with no particular factor being determinative.
• Mr Conran had not satisfied the evidential burden of displacing HMRC’s amendment to his return. The fact that £8.25m came into his hands in circumstances where there was an overpayment for a business worth £1 demanded an explanation and none had been given other than that the payment arose from a good faith purchase of a business, which was not sufficient.
• As a result, the FTT had erred in law with respect to the taxation of the amount received by Mr Conran and the amendments made by HMRC to his tax return were upheld as were those to the JCV Corporation Tax returns reducing the amount eligible for intangibles relief to £1.

Useful guides on this topic

Incorporating an existing business
How to transfer an existing sole trader's business by incorporation into a company.

Valuation: Goodwill
What valuation methods are suitable for valuing a business? What are the issues with goodwill and other intangibles? What does HMRC suggest? What do the courts think?

Goodwill and the intangibles regime
How does the Corporation Tax intangible regime work? What is the treatment of goodwill for Corporation Tax? Do companies account for goodwill differently?

Dividend tax
How do you tax dividend income? An At a glance guide to the dividend allowance and dividend tax rates.

External link

HMRC v Jasper Alexander Thirlby Conran & JC Vision Ltd v HMRC [2022] UKUT 166