Factual and Procedural Background
The appeals concern a series of transactions carried out in 2003 and 2005 involving a group of UK incorporated companies: a parent holding company (referred to as Company A) and its wholly owned subsidiaries (Company B, Company C, Company D, and Company E). The subsidiaries operated regional newspaper publishing businesses and owned various unregistered trademarks (UTMs), specifically newspaper mastheads.
In 2003, Company B, Company C, and Company D purported to assign these UTMs to Company A for nominal consideration and then took licences back from Company A for substantial lump sum payments, funded by loan agreements between the parties. Similar arrangements were entered into in 2005 involving Company C and Company E following acquisitions.
The appellants challenged closure notices issued by the tax authority, which disputed the validity and tax treatment of these assignments and licences. The tribunal heard extensive evidence, including witness and expert testimony on commercial purpose, valuation, accounting treatment, and tax law.
Legal Issues Presented
- Whether the assignments of the unregistered trademarks (UTMs) by the subsidiaries to the parent company were void because UTMs cannot be assigned in gross under common law;
- If the assignments were valid, whether they constituted unlawful distributions under company law;
- Whether the licence fees paid by the subsidiaries to the parent exceeded market value and if so, whether the excess constituted unlawful distributions of capital;
- Whether the accounting treatment applied by the subsidiaries complied with applicable accounting standards;
- Whether the licence fees received by the parent company were capital or revenue receipts for tax purposes;
- Whether the licences held by the subsidiaries were intangible assets within the scope of Schedule 29 Finance Act 2002 and whether the Schedule applied to them;
- Whether the assignment and licence-back arrangements were tax avoidance arrangements subject to disregard under paragraph 111, Schedule 29 FA 2002;
- Whether loan relationships entered into to facilitate the transactions had unallowable tax avoidance purposes under paragraph 13, Schedule 9 Finance Act 1996, affecting the deductibility of interest payments.
Arguments of the Parties
Appellants' Arguments
- The assignments included both UTMs and the goodwill attaching to them, so they were not assignments in gross and thus valid.
- The assignments were intra-group and did not risk deceiving the public, so the common law restriction on assignment in gross should not apply in this context.
- The licence fees reflected arm's length commercial transactions and were consistent with professional valuations.
- The accounting treatment under Financial Reporting Standard 10 (FRS10) was appropriate, and the licences were intangible fixed assets amortised over their term.
- The licence fees received by the parent company were capital receipts on part-disposals of capital assets, eligible for relief under section 171 Taxation of Chargeable Gains Act 1992.
- The transactions were driven by commercial objectives to reduce reported profits and were not primarily tax avoidance schemes.
- The loans entered into were for commercial purposes and not dictated by tax avoidance.
Respondents' Arguments
- The purported assignments were assignments in gross and therefore void under common law, as UTMs cannot be assigned independently of the business goodwill.
- The assignments and licence-back arrangements constituted unlawful distributions or disguised distributions of capital.
- The licence fees paid were excessive compared to market value, indicating disguised distributions.
- The accounting treatment should have applied Financial Reporting Standard 5 (FRS5), treating licence fees as distributions rather than acquisitions of intangible assets.
- The licence fees were revenue receipts (royalties) taxable under Schedule 29 FA 2002 or Schedule D, Case VI.
- The arrangements were tax avoidance schemes designed to obtain tax advantages by creating mismatches in tax treatment between the parent and subsidiaries.
- The loan relationships had unallowable tax avoidance purposes, affecting the deductibility of interest payments.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Progress Property Co. Ltd v Moore [2010] UKSC 55; [2011] 1 WLR 1 |
Consideration of whether transactions at undervalue but bona fide believed to be at market value constitute unlawful distribution. |
The court held that even if licence fees were in excess of market value, they did not constitute unlawful distributions where transactions were genuine arm's length dealings. |
| Thorneloe v Hill [1894] 1 Ch 569 |
Assignment of unregistered trade mark in gross is void. |
Applied to conclude that the assignments of UTMs without the business goodwill were void. |
| In re John Sinclair Limited's Trade Mark [1932] 1 Ch 598 |
Assignment of trade mark must be in connection with goodwill of business; assignment in gross invalid. |
Supported the proposition that UTMs cannot be assigned in gross, regardless of group structure. |
| Revlon Inc and others v Cripps & Lee Ltd and others [1980] FSR 85 |
Recognition that in a corporate group, trade marks held by one company can be connected to goods produced by another company in the group. |
Rejected as supporting an exception to the common law rule against assignment in gross of UTMs. |
| Scandecor Developments AB v Scandecor Marketing AB [2001] CMLR 30 |
Trade marks cannot be assigned independently of the business in which they are used; focus on connection between trade mark and business, not ownership. |
Supported the view that assignments of UTMs in gross are invalid. |
| John Lewis Properties plc v HMRC [2003] STC 117 |
Distinction between capital and revenue receipts; lump sum consideration for assignment of rights can be capital receipt. |
Applied to conclude that licence fees received as lump sums were capital receipts, not revenue. |
| Aveling Barford Ltd v Perion Ltd [1989] BCLC 626 |
Sales at gross undervalue can be recharacterised as distributions. |
Distinguished on facts; no intention to sell at undervalue found here. |
| IRC v Brebner [1967] 2 AC 18 |
Tax advantage as an incidental result of bona fide commercial transactions does not necessarily imply tax avoidance purpose. |
Considered in assessing subjective intention; tax advantage was not the sole or main object here. |
| Addy v IRC [1975] STC 601 |
Subjective test for main object of transactions relating to tax avoidance. |
Applied in determining subjective intentions of parties and advisers. |
| Lloyd v HMRC [2008] STC (SCD) 681 |
Tax advantage can be a main object of transactions. |
Considered in assessing whether tax avoidance was a main purpose. |
| McNiven v Westmoreland Investments Ltd [2003] 1 AC 311 |
Limits of recharacterisation under Ramsay principle; capital transactions structured for tax avoidance remain capital. |
Supported treating licence fees as capital receipts despite tax avoidance purpose. |
| IRC v Sema Group Pension Scheme Trustees [2002] EWHC 94 (Ch) |
Tax avoidance purpose as a main object of transactions. |
Distinguished; tax avoidance was a main object in that case but not determinative here. |
Court's Reasoning and Analysis
The tribunal first examined the validity of the assignments of UTMs by the subsidiaries to the parent company. It concluded that these were assignments in gross, which under established common law principles are void since UTMs cannot be assigned independently of the goodwill of the business to which they relate. The tribunal rejected the appellants’ argument that intra-group assignments should be exempt from this rule, holding that the separation effected by the assignments was real and contrary to the common law rule.
Despite this, the tribunal proceeded to consider the other issues on the basis that the assignments were valid, out of deference to the full submissions and evidence presented.
On unlawful distributions, the tribunal found that the 2003 assignments were not unlawful distributions under company law because the UTMs were not recorded as assets in the subsidiaries’ accounts, and thus the statutory measurement of distributions by reference to book value meant the distribution amount was zero or covered by distributable profits.
Regarding the licence fees, the tribunal analysed valuation evidence from experts. It rejected the valuation approach that attributed nearly all intangible asset value to the mastheads and accepted the view that the most likely purchasers of licences would be the existing publishers. This led to a valuation of the licences at about 35% of the cost of recreating the UTMs, substantially lower than the licence fees paid. However, the tribunal held that these overpayments, although significant, did not constitute unlawful distributions because the transactions were genuine arm's length dealings entered into in good faith with professional advice.
The tribunal accepted the appellants’ submission that the licence fees received by the parent company were capital receipts on part-disposals of capital assets and not revenue receipts, applying principles from John Lewis Properties and distinguishing the atypical lump sum payment structure as capital in nature.
On the application of Schedule 29 Finance Act 2002 to the licences, the tribunal held that the licences were not intangible fixed assets created after commencement of the Schedule because there was no expenditure on their creation after commencement by the licensor. Therefore, Schedule 29 did not apply to the licences.
On the tax avoidance provisions of paragraph 111, Schedule 29 FA 2002, the tribunal found that the transactions had as one of their main objects the enabling of a tax advantage by avoiding the bringing into account of a credit under the Schedule while obtaining debits for amortisation. This rendered the transactions tax avoidance arrangements to be disregarded for tax purposes under paragraph 111.
Regarding loan relationships under paragraph 13, Schedule 9 FA 1996, the tribunal found that the loans were entered into with a tax avoidance purpose as one of the main purposes. However, no part of the interest debits was attributable to this purpose, so no disallowance of interest arose.
Holding and Implications
Holding: The tribunal held that the purported assignments of unregistered trade marks by the subsidiaries to the parent company were void as assignments in gross. Consequently, no valid transfer or licence-back of the UTMs occurred. On this basis, the subsidiaries’ appeals regarding tax relief for the licences fail.
However, if the assignments were assumed valid, the tribunal held that the 2003 assignments were not unlawful distributions, the licence fees paid exceeded market value but were not unlawful distributions, the licence fees received by the parent were capital receipts, and Schedule 29 FA 2002 did not apply to the licences. It further held that the transactions were tax avoidance arrangements under paragraph 111 Schedule 29 and should be disregarded for tax purposes, and that loan relationships were entered into with a tax avoidance purpose but no interest deductions were disallowed.
Implications: The direct effect is that the subsidiaries’ claims for tax relief on amortisation of licence fees are denied due to the tax avoidance provisions. The parent company’s appeal concerning the tax treatment of licence fees and loan interest is allowed. No new precedent altering the common law rule on assignment of unregistered trade marks is established. The decision reinforces the strict application of the rule against assignment in gross of UTMs and clarifies the application of tax avoidance provisions to complex intra-group intellectual property transactions.