In JC Vision and J Conran v HMRC [2023] UKUT 166 (TCC) (reported in Tax Journal, 21 July 2023), the Upper Tribunal (UT) has rejected the First-tier Tribunal’s (FTT’s) 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 UT 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 Ltd (JCV) for a sum of £8.25m. JCV was wholly owned by Jasper Conran Holdings Ltd, 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.
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 ICTA 1988 s 209 (equivalent provisions are now found in CTA 2010 Part 23). ICTA 1988 s 254 extended the meaning of ‘in respect of shares’ to include shares in other group companies, such as the holding company in this case.
The UT 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 UT 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 UT 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. 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 UT’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 UT went on to undertake such an analysis. Four factors in particular persuaded the UT that the payment was a distribution.
First, 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).
Second, there was no evidence that the business connected with the licence was offered to anyone other than entities owned and controlled by the taxpayer.
Third, 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 UT’s view, this demonstrated that the taxpayer was willing to protect the shareholder value of JCV at the expense of the LLP.
Fourth, 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 UT 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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When does a payment constitute a distribution?
In JC Vision and J Conran v HMRC [2023] UKUT 166 (TCC) (reported in Tax Journal, 21 July 2023), the Upper Tribunal (UT) has rejected the First-tier Tribunal’s (FTT’s) 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 UT 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 Ltd (JCV) for a sum of £8.25m. JCV was wholly owned by Jasper Conran Holdings Ltd, 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.
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 ICTA 1988 s 209 (equivalent provisions are now found in CTA 2010 Part 23). ICTA 1988 s 254 extended the meaning of ‘in respect of shares’ to include shares in other group companies, such as the holding company in this case.
The UT 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 UT 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 UT 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. 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 UT’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 UT went on to undertake such an analysis. Four factors in particular persuaded the UT that the payment was a distribution.
First, 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).
Second, there was no evidence that the business connected with the licence was offered to anyone other than entities owned and controlled by the taxpayer.
Third, 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 UT’s view, this demonstrated that the taxpayer was willing to protect the shareholder value of JCV at the expense of the LLP.
Fourth, 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 UT 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.
