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No tax due on transfer of business to connected company

23 March 2022. Published by Keziah Mastin, Associate

In Jasper Conran and another v HMRC [2022] UKFTT 39 (TC), the First-tier Tribunal (FTT) found that the market value of assets transferred from a limited liability partnership to a company on incorporation of a business was £1 (and not £8.25m) and therefore the majority partner did not realise a capital gain. It also held that the consideration paid could not be treated as a distribution and that the buyer was not entitled to intangibles relief.

Background

Jasper Alexander Thirlby Conran (Mr Conran) was the majority (99.9%) owner of Jasper Conran Optical LLP (JCO). JCO signed a 5-year Optical Product Licence agreement with Specsavers. Following a valuation of the business by Mr Conran's accountants, JCO was sold for £8.25m to JC Vision Ltd (JCV), a wholly-owned subsidiary of Jasper Conran Holdings Ltd, Mr Conran's fashion design group, which Mr Conran had 100% ownership of. 

JCV made payment to the partners in JCO. Mr Conran included the respective figure in his tax return as a capital gain, paying capital gains tax (CGT) of £1.4m. JCV recognised the consideration of £8.25m as an expense in its accounts and amortised this figure on a straight-line basis over a five-year period. JCV claimed relief under the intangible assets regime.

Following an enquiry, HMRC concluded that the open market value of the business had been overstated and that the correct figure was nil. HMRC was also of the view that the £8.25m consideration should be treated as a distribution to Mr Conran, giving rise to an additional tax liability. HMRC amended JCV's tax returns accordingly. A review by HMRC concluded that the market value, for the purposes of capital gains and accountancy fair values, was £1.

Mr Conran and JCV appealed to the FTT.

FTT decision

Mr Conran's appeal was allowed and JCV's appeal was dismissed.

The FTT concluded, contrary to HMRC's view, that the payment to Mr Conran was not a distribution. The FTT agreed with HMRC that looking at what was actually being transferred, the fair market value of JCO was £1, there being no trademarks contractually available for use by JCV without further payment. As such, Mr Conran did not realise a chargeable gain on the sale of JCO.

With regard to JCV, the FTT disallowed the intangibles relief claimed as it would only be entitled to relief if the transfer was treated as having a fair market value of £1. 

Comment

This decision has produced an unexpectedly good result for Mr Conran, who had anticipated a large CGT liability on the proceeds of the sale. The decision should be carefully considered by taxpayers in a similar position who wish to incorporate a valuable business in a tax efficient manner.

The decision can be viewed here.