Balloon Promotions Ltd and Others v Wilson and Another
| Jurisdiction | England & Wales |
| Judgment Date | 03 March 2006 |
| Date | 03 March 2006 |
| Court | Special Commissioners (UK) |
special commissioners decision
Michael Tildesley
The Right Honourable Viscount Dilhorne, Counsel instructed by Michael Ollerenshaw & Co for Appellant One and Mrs Carol Fraser, Counsel employed at Howard Kennedy, Solicitors, for Appellant Two.
Mr Phillip Jones, Counsel instructed by the Solicitors for HM Revenue and Customs for the Respondents.
Capital gains tax - Roll-relief - Goodwill - Franchisor purchasing Franchisees' restaurant businesses - part of the consideration allocated to goodwill not inherent in the property of the restaurant business - whether HM Revenue & Customs were bound by the terms of the contract of sale which was honestly reached and at arms length - no - whether as a matter of law ownership of goodwill in the franchisees' businesses belonged to the franchisor - no - principally a question of fact - was goodwill attached to the franchisees' restaurant businesses - yes - did the franchisees own the goodwill - yes - did the franchise agreements on termination realise considerable added value for the purchaser - no - the franchisor already had ownership of the brand - did the consideration obtained for goodwill qualify for roll-over relief - yes - should all or part of the consideration allocated to goodwill be apportioned to compensation for early termination of the franchise agreements - no - should the consideration obtained for goodwill be apportioned in accordance with Taxation of Chargeable Gains Act 1992 section 52 subsec-or-para 4s. 52(4) TCGA 1992 - no - Appeal allowed in principle - final determination of the quantum of chargeable gains and costs reserved.
1. The Appellants were appealing against the Respondents' decisions to refuse rollover relief under Taxation of Chargeable Gains Act 1992 section 152section 152 of the Taxation of Chargeable Gains Act 1992 (hereinafter referred to as TCGA 1992) in respect of chargeable gains arising from the Appellants' sale of their franchised restaurants to PizzaExpress.
2. The Appellants contended that part of their chargeable gains related to the sale of goodwill, a business asset against which rollover relief was available. The Respondents disputed the Appellants' contention submitting that there was no saleable goodwill. The Respondents were of the view that the Appellants received compensation for the early termination of the franchise agreements rather than consideration for goodwill, in which case TCGA 1992 did not include compensation as a business asset for the purposes of rollover relief.
3. The Appeals were heard together at the same time in accordance with Rule 7 of the Special Commissioner Regulations 1994. Essentially both Appeals involved the determination of the same issue.
4. PizzaExpress wished to acquire the Appellants' franchised restaurant businesses for the purpose of operating them in-house. Appellant One held a partnership share in two restaurants in London and in Liverpool. Appellant Two who comprised of two separate partnerships owned two restaurants at East Sheen and at Islington. The Appellants belonged to a consortium of PizzaExpress franchisees which negotiated the sale of the franchisees' businesses to PizzaExpress. The sale was completed on 11 November 1996. PizzaExpress purchased the Appellants' businesses together with the other franchisees' businesses in the consortium. As part of the sale the Appellants transferred their leasehold interests in the restaurant premises The sales agreement terminated the franchise and wholesale agreements between the franchisees and PizzaExpress.
5. The bulk of the purchase price for the Appellants' businesses was allocated to goodwill with a nominal amount of £1 for the termination of the franchise. In addition to the purchase price for their businesses the Appellants received sums of money from PizzaExpress in consideration of them entering into restrictive covenants not to operate other pizza restaurants in specific locations for certain periods of time.
6. The Appellants subsequently claimed roll-over relief for the capital gains arising from the sale of goodwill to PizzaExpress. The Respondents refused the claim on the ground that the payment by PizzaExpress was not for goodwill but for compensation for the early termination of the franchise agreements. The Respondents' refusal to admit the claim for roll-over relief gave rise to these Appeals.
7. The questions for determination were as follows:
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(2) Whether any part of the consideration obtained by Balloon Promotions Limited pursuant to two written agreements with PizzaExpress dated 16 October 1996 ("the Agreements" ) amounting to £405,113 and £107,000 respectively was obtained for the disposal of "Goodwill" within the meaning of Class 4, Taxation of Chargeable Gains Act 1992 section 155section 155 TCGA 1992, thereby allowing the gain on any such disposal to qualify for roll-over relief subject to the requirements of Taxation of Chargeable Gains Act 1992 section 152sections 152-154 TCGA 1992 on an application of that consideration to an acquisition of "new assets"
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(3) In the event of a finding that consideration was obtained by Balloon Promotions Limited for the disposal of "Goodwill" under the Agreements whether for the purposes of computing the gain on that asset, any apportionment of the total consideration specified in the Agreements is necessary by virtue of Taxation of Chargeable Gains Act 1992 section 52 subsec-or-para 4section 52(4) TCGA 1992.
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(4) In the event of a finding that an apportionment of the consideration obtained by Balloon Promotions Limited under the Agreements is required by section 52(4) TCGA 1992, what amount of the total consideration should be apportioned to Goodwill and what amount should be apportioned to the loss of the PizzaExpress franchise as just and reasonable.
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(5) Consequential upon the answers to (1) and (if required) (2 and 3) above, what is the amount of Balloon Promotions' chargeable gains for its accounting period to September 1997 and the quantum of its total chargeable profits for that accounting period?
8. The questions for determination in principle were as follows:
A Whether any part of the consideration obtained by
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(i) Mr Edward Kidney, Mr Natalie Lucibello and Mr Alonso Vela Castro pursuant to a written agreement with PizzaExpress (Restaurants) Ltd, PizzaExpress PLC and PizzaExpress (Soho) Ltd dated 16 October 1996
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(ii) (" Agreement 1" ) amounting to £1,379,498 and
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(iii) Mr Edward Kidney and Mr Natalie Lucibello pursuant to a written agreement with PizzaExpress (Restaurants) Ltd, and PizzaExpress PLC Ltd dated 16 October 1996 ("Agreement 2" ) amounting to £709,451 was obtained for the disposal of "Goodwill" within the meaning of Class 4, section 155 TCGA 1992, thereby allowing the gain on any such disposal to qualify for "Roll-over Relief" , subject to the requirements of sections 152 - 154 TCGA 1992, on an application of that consideration to an acquisition of new asset
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(iv) Please note that the amounts in dispute as stated in Appellant Two (Amended) Skeleton Argument were £1,179, 498 not £1,379,498 (Agreement 1) and £624,451 not £709,451 (Agreement 2). I have proceeded on the basis of the amounts as set out in the (Amended) Skeleton Argument
B In the event of a finding that consideration was obtained by Messrs Kidney, Castro and Lucibello for the disposal of "Goodwill" under Agreements 1 and 2 whether for the purposes of computing the gain on that asset, any apportionment of the total consideration specified in Agreements 1 and 2 is necessary by virtue ofTaxation of Chargeable Gains Act 1992 section 52 subsec-or-para 4 section 52(4) TCGA 1992.
C In the event of a finding that an apportionment of the consideration obtained by Messrs Kidney, Castro and Lucibello under Agreements 1 and 2 is required by section 52(4) TCGA 1992, what amount of the total consideration should be apportioned to Goodwill and what amount should be apportioned to the loss of the PizzaExpress franchise as just and reasonable.
9. Throughout the decision I have used PizzaExpress as a generic name for PizzaExpress PLC and its subsidiary companies. Likewise the term Appellant Two embraces the two separate partnerships of Messrs Kidney, Castro and Lucibello and Messrs Kidney, and Lucibello. I have treated Appellant Two as a plural for grammatical purposes
10. I have referred to the qualifications and titles of Mr Carmichael and Mr Watson, the two expert witnesses, in the introduction of the witnesses but not elsewhere in the decision.
11. Although the Appeal essentially involved a single issue, there was little agreement between the parties on the facts. In those circumstances I decided to give a more detailed account of the evidence received by me. My findings of fact are largely found under the heading of submission four.
12. I have not devoted a separate section to the submissions of Counsel. Instead I have identified four separate submissions which I consider to be the crucial ones for deciding the disputed matter in this Appeal. Under each submission I have summarised the arguments of Counsel, and on occasions have adopted those arguments as my own without giving full credit to the Counsel who advanced them
13. I was referred to the following authorities:
Agnew and another v Commissioner of Inland RevenueELR [2001] 2 AC 710
American Leaf Blending Company v Director General of Inland Revenue UNK [1978] 3 All ER 621
Booth v BuckwellTAX (1980) 53 TC 425
Butler v Evans (Inspector of Taxes)UNK [1980] STC 613
England v DownesENR (1842) 6 Beav 269
Gallagher v JonesTAX [1993] BTC 310
Herbert Morris Ltd v SaxelbyELR [1916] 1 AC 688
Kirkby v Thorn EMI plcWLR [1988] 1 WLR 445
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