It's official

Extracts from HMRC's eighty-third Tax Bulletin.

Franchised businesses

As the Special Commissioner's conclusions were based on findings of fact, HMRC do not consider that the ruling in Balloon Promotions Ltd and Others (SpC 524, see Taxation, 20 April 2006, page 62 for a report of the case) is of general application to other cases involving the sale of franchised businesses. HMRC do not intend to lodge an appeal.

HMRC believe that a franchisee's rights under a franchise agreement are an asset within the meaning of TCGA 1992, s 21(1), and that they are not part of goodwill is unchanged. However, they do accept that a franchisee may be able to generate some goodwill in a franchised business. The values of franchise rights and goodwill will depend upon the precise facts of each individual case and, in particular, the level of control exercised by the franchisor.

HMRC agrees with the Special Commissioner's conclusion that, for the purposes of TCGA 1992, the term 'goodwill' must be construed in accordance with the principles established by the legal authorities on goodwill and that the accountancy definition is deficient for the purposes of construing its meaning in that context.

The Special Commissioner questioned HMRC's approach of restricting rollover relief to specific categories of goodwill. He indicated that he considered that goodwill should be looked at as a whole to include whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers and absence from competition. HMRC do not accept that the term 'goodwill' in TCGA 1992 embraces all of the various types of goodwill described in HMRC's Capital Gains Manual. They say that they will continue to treat inherent and adherent goodwill as part of an asset in the form of a freehold or leasehold interest in land or buildings.

An updated version of the goodwill guidance in the Capital Gains Manual will be published shortly.

Hastings-Bass principle

The Hastings-Bass principle (see Re Hastings-Bass deceased [1974] STC 211) has been applied in the context of trusts where a trustee is given a discretion as to some matter, on which he acts, but where the purported exercise of his discretion has unintended consequences. Over the years there has been an increase of interest in and reliance on the principle, which has resulted in a number of decided cases at first instance. Apart from case law, the emerging principle has also generated a great deal of discussion and commentary by academics and practitioners alike.

An interesting feature of the majority of these cases is that the unintended consequence of the mistake by the trustees was a liability to tax. For this reason HMRC have been interested in this area of the law, although they have usually declined invitations to be joined as a party in cases where the court is being asked to set aside a transaction in reliance on the principle. However, HMRC now intend to consider participating in future cases where large amounts of tax are at stake. The following points give an indication of HMRC's present thinking on some of the main questions which arise. First, HMRC note that the principle in its present form has little to do with the type of situation which was considered by the Court of Appeal in Hastings-Bass itself, and that it owes its origin to the logically flawed positive reformulation of the principle in Mettoy Pension Trustees Ltd v Evans and others [1990] 1 WLR 1587. HMRC consider that any positive formulation of the principle should state that the court 'may' interfere with the trustee's action, not that it 'will' do so.

Secondly, HMRC consider that the effect of the principle should be to make the relevant decision by the trustee voidable and not void.

Third, the principle should be assimilated with the general principles of law by reference to which the exercise of a discretion by trustees may be impugned, and the courts will set aside voluntary transactions or written instruments for mistake. It may be that, properly understood, there is no need for a separate Hastings-Bass principle at all.

Fourth, where the trustee acts under a discretion, HMRC agree with the view in Sieff v Fox [2005] 1 WLR 3811, that the relevant test is whether the trustee 'would' have acted differently if the correct considerations had been taken into account, not whether he 'might' have acted differently.

Fifth, while trustees need to take into account fiscal consequences when deciding how to act, a distinction needs to be drawn between cases where the trustee fails to take relevant fiscal considerations into account at all, and cases where the trustee takes steps to obtain fiscal advice but that advice turns out to be wrong. While there may be scope for the principle to apply in cases of the former type, it is felt that in cases of the latter type the principle should not apply.

Similarly, in cases where the trustee obtains advice about the tax consequences of a proposed transaction, but then fails to implement the transaction in accordance with that advice, the principle should not apply.

Finally, HMRC feel that a breach of duty by the trustee or the trustee's advisers is not a separate requirement that has to be satisfied if the principle is to apply.

HMRC generally require an order of the court before reviewing the tax consequences of a decision on the basis of the Hastings-Bass principle, and this remains the position. It remains to be clarified by a higher court whether the effect of an application of the principle is to make a decision void or voidable. If the decision is voidable, the question of whether it should be avoided is one for the court and cannot be resolved by consent between the parties.    

The foregoing are extracts from longer articles in Tax Bulletin 83 to which reference should be made for details of the full text. Tax Bulletin is covered by Crown copyright and is available on www.hmrc.gov.uk/bulletins/index.htm. For subscription details, contact Jayne Harler, tel: 020 7147 2317.

Issue: 4065 / Categories: News , Capital Gains , Trusts