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Transfers between connected parties

A recent tax case has highlighted the importance of properly considering and documenting the terms and values of intra-group or other connected party transactions. Often, the tax treatment of connected party transactions is based on the market value of the assets or services transferred or provided. The market value is, for various taxes, based on the price that a willing third party purchaser would be prepared to pay. This can be difficult to establish where there is no ‘real’ third party involved.

In the case (Jasper Conran & another v HMRC), a business of licencing designs of spectacles was transferred from an LLP to a company (the Transferee). Jasper Conran (JC) was the 99.9% member of the LLP and JC also ultimately controlled the Transferee. The main assets transferred were the contract with Specsavers (under which Specsavers paid a licence fee for the trademarks and designs) and goodwill. The LLP itself had a licence from JC to use the trademark in the designs, but the Transferee already had the benefit of a similar licence so there was no assignment of this licence from JC as part of the contractual arrangements.

The taxpayer argued that the value of the business was £8.25M (based on professional valuation advice), but HMRC said that it was £1 on the basis that the trademark licence from JC was not transferred and the business could not be operated without it, therefore a third party purchaser would not have paid any value for the business absent that licence. The Tribunal agreed with HMRC on this point.

The outcome of this was that the Transferee could not take a tax deduction for writing down the cost of the assets under the intangibles regime. However, the quid pro quo for JC was that he was not subject to tax at all on the receipt (because the capital gain was deemed to be based on the market value of £1 and the receipt was not a distribution).

In deciding that the value of the business was £1, the Tribunal considered whether it is possible to take into account the fact that the Transferee already had a licence, but decided that it is not possible when considering the hypothetical third party purchaser. Further, there was no evidence that the reason for the lack of assignment of the licence was that the Transferee already had one. Perhaps if this had been better documented, or the licence had been assigned to the Transferee (even though it did not need it), there would have been a different outcome. This not only indicates the importance of documenting the transaction carefully but also how the structure of contracts can impact on a valuation (and should be carefully considered as part of any valuation process).

For more information on this article, please contact Angus Bauer or Teifi Warner.

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