Dyer and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 22 November 2013 |
| Neutral Citation | [2013] UKFTT 691 (TC) |
| Date | 22 November 2013 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 691 (TC)
Judge Malachy Cornwell-Kelly, Mark Buffery FCA AIIT
Mr Roger Dyer represented himself and Mrs Jean Dyer
Ms Lynne Gray, of HM Revenue and Customs, appeared for the Crown
Capital gains tax - share valuation - negligible value claim - whether shares originally had value - whether intention to create legal relations - valuation criteria - Taxation of Chargeable Gains Act 1992 ("TCGA 1992"), Taxation of Chargeable Gains Act 1992 section 24s. 24 - appeal dismissed.
The First-tier Tribunal dismissed the taxpayers' appeal against HMRC's decision not to allow their negligible value claim in respect of their shareholdings in a family business, holding that the shares were of negligible value when they were acquired and had therefore not "become" of negligible value.
In 2004 Miss Jenny Dyer (Miss D), the daughter of the taxpayers, Mr Roger Dyer and Mrs Jean Dyer (Mr and Mrs D), set up a boutique fashion company in which she held 100 per cent of the issued share capital. The company began trading in 2005 and Miss D gained a significant reputation in the fashion world. In October 2007 Mr D acquired 310 shares in the company for £310,000 and Mrs D acquired 40 shares for £40,000. In 2008 Miss D began a personal relationship with Mr Andrew Rosen (the American fashion mogul) and in autumn 2008 she left the UK to be with Mr Rosen in New York and subsequently the business was wound down and eventually liquidated in 2009 and 2010.
Mr and Mrs D made a claim under TCGA 1992, Taxation of Chargeable Gains Act 1992 section 24s. 24 that their shareholdings in the company had become of negligible value and under ITA 2007, Income Tax Act 2007 section 132s. 132 for the capital loss to be set against their net income. HMRC rejected the claim because although they agreed that the shares were of negligible value as at the date of the claim in January 2009, they concluded they were also of negligible value when they were acquired in October 2007.
Mr and Mrs D appealed to the First-tier Tribunal, but the Tribunal dismissed the appeal because at the time they acquired their shares any purported value in the company actually rested with Miss D and not the company, as it was her who was the key person in the business and the Intellectual Property was in her name, rather than the company's. Miss D's relationship with the company was not legally formalised and even though Mr and Mrs D argued that Miss D was de facto an employee of the company, on terms inferred from the course of dealings over the years, the tribunal found that this was not supported by evidence. Her relationship with the company was found to be casual and informal, including when she left in 2008 without any notice or letter of resignation. It was accepted that by the time Mr and Mrs D acquired their shares the registered marks and brand recognition of "Jenny Dyer London", "Jenny Dyer" and "JD" had achieved significant value, however because these were in Miss D's name and there were no assignment or licensing of the rights to the company, the value of this Intellectual Property was with Miss D and not the company. Both these issues meant that any hypothetical purchaser would not have proceeded with the purchase of the shares.
In this case a mother and father helped their daughter in her business, but by failing to formalise the arrangements of the daughter's relationship with the company and by having the Intellectual Property in the daughter's name it meant the company was "effectively worthless" when the parents made their investment and thus they could not claim that the shares had become of negligible value. The case acts as a useful reminder that when setting up and running a business with family or friends it is vital to formalise arrangements and consider the commerciality of any actions.
For commentary on assets becoming of negligible value see the CCH Tax Reporter at 515-150 and for the use of losses on unlisted shares in trading companies against income see 330-000ff.
[1]This appeal is against the decisions of the commissioners contained in closure notices issued on 6 September 2012 denying relief under the provisions of Taxation of Chargeable Gains Act 1992 section 24 subsec-or-para 2section 24(2) the Taxation of Chargeable Gains Act 1992 and Income Tax Act 2007 section 132section 132 of the Income Taxes Act 2007.
[2]This followed a claim by the taxpayers under Taxation of Chargeable Gains Act 1992 section 24section 24 of the Taxation of Chargeable Gains Act 1992 that their shareholdings in JD Designs Limited had become of negligible value, and under Income Tax Act 2007 section 132section 132 of the Income Taxes Act 2007 for the capital loss arising to be set against their net income for the tax years ending 5 April 2008 and 5 April 2009, with the balance of any loss carried forward as a capital loss. The commissioners had accepted that the shares were of negligible value as at 26 January 2009, the date of the claim, but concluded that they were of negligible value as at 31 October 2007, the date of their acquisition by the taxpayers, and had not therefore "become" of negligible value.
[3]We received a substantial volume of documentary evidence, which included a statement of agreed facts, and oral evidence from both Mr Roger Dyer for the taxpayers and Mr Gordon Wheeler for the commissioners. We regarded both witnesses as honest and straightforward. From the evidence given, we find the following facts.
[4]Beautiful Design Limited was incorporated on 24 September 2004 with one £1 ordinary share issued to Miss Jenny Dyer, the daughter of the taxpayers, who then changed the name to JD Designs Limited which we will refer to as "the company". A further 99 £1 ordinary shares were subscribed for, issued and were fully paid up by Miss Dyer on 14 December 2004, bringing her holding to 100 £1 ordinary shares, that is 100% of the company's then issued share capital. The company commenced trading on or about 1 April 2005, though there was some pre-trading activity noted in minutes of a meeting on 15 December 2004. Until late 2008 the company traded under the name "Jenny Dyer London" with a total input in loans by the taxpayers and their family trusts of £800,000. But by 2009 it was being wound down and dissolved, and it was finally struck off the register on 31 August 2010.
[5]The activities of the company were boutique fashion design and manufacturing of women's clothes, sometimes with associated jewellery, marketed under the registered marks of "Jenny Dyer London", "Jenny Dyer" and a stylised depiction of the letters "JD". The registered marks were, and still are, all held in Miss Dyer's name alone, following advice that she would thus best avoid a situation where she could lose control of her brand names. The first two marks were registered in respect of:-
Jewellery; costume jewellery; precious metals and their alloys; precious and semi-precious stones; pins, badges, lapel pins, earrings, bracelets, cufflinks, tie racks, rings, watches, clocks and dials and stopwatches and other horological and chronometric instruments; watch straps, watch bracelets; wrist watches; smokers' articles and articles of precious metal or coated therewith.
Articles of clothing, headwear and footwear, all included in Class 25
Tailoring; dress making; custom manufacture of jewellery.
Design of clothing, furnishings; design of jewellery.
[6]The third mark was registered in respect of Class 14 in the same terms, and for classes 40 and 42:-
Custom manufacture of jewellery.
Design of jewellery.
[7]We refer collectively to these registered marks, and to the brand recognition which was built up in connection with them, as "the Intellectual Property".
[8]During the company's years of trading, Miss Dyer acquired a significant reputation in the fashion world and the evidence from various published sources is that "Jenny Dyer London" in particular became a valuable mark and that Miss Dyer herself became well known and prominent in the fashion business. While we are not required to put a figure on it, we are satisfied that the Intellectual Property had achieved significant value by the time the shares the subject of this appeal were acquired by the taxpayers on 31 October 2007.
[9]There was no written agreement between the company and Miss Dyer to use the Intellectual Property, nor any payment by the company for its use, and consequently no deduction claimed by the company in respect of it. It is not clear whether that situation was always contemplated because, in the minutes of a meeting on 15 December 2004 between Mr Roger Dyer, Miss Dyer and an accountant to discuss how the business would be run, it was envisaged that:-
Basic structure is for ["Jenny Dyer London"] to become a trading division of a company e.g. JD Designs Ltd, which would then operate under licence from Jenny Dyer and to use her name. Eventually, a lawyer generated licence agreement would be required, in the meantime an internal letter would suffice setting out the conditions.
[10]No agreement was ever made, and no letter of the kind suggested was ever written. In an email to her father written on 9 May 2013, Miss Dyer said with reference to the period 2007-08 that "during this period I made my name and designs freely available [to the company] as events before and after Oct 2007 show". A specimen sales invoice in evidence however contained printed conditions, among which was:-
The Company are the owners of and retain all and any intellectual property rights as may subsist in the Goods, accompanying literature, promotional material and printed matter, including but not limited to design rights, copyrights and rights in the nature of copyright whether or not registered or capable of registration, and all and any trademarks of the Company (Intellectual...
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Dyer and another v Revenue and Customs Comrs
...value when acquired had not ‘become’ of negligible value as required by condition A of TCGA 1992, s. 24. Summary The FTT (Dyer TAX[2013] TC 03073) had found that a negligible value claim made by Mr Roger Dyer and his wife in respect of an investment made in a company established by their da......