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HMRC internal manual

Capital Gains Manual

Intellectual Property Rights: franchise rights, dealerships and licences: market value as at 31 March 1982

If in computing a gain or a loss arising on the disposal of the rights under a franchise, dealership or licence, a deduction is made for the value of the rights at 31 March 1982 you will need to establish whether those rights were capable of being put on the market at that time. It will normally be essential to obtain a copy of the franchise, dealership or licence agreement in order to ascertain whether it imposes any restrictions on transfer or disposal. If the rights did not exist at 31 March 1982 there can be no question of the asset in question having a market value at that date.

Experience suggests that most franchises, dealerships or licence agreements fall into one of the following categories:

Transfer possible without restrictions

Here you are looking at a deemed disposal at 31 March 1982 where the limits of the hypothesis, see CG68150, do not include any restriction on the disposal. It is therefore simply a question of estimating how much a person would have been prepared to pay for the franchise, dealership or licence at the date in question. The general principles in CG68150 will apply.

Here the limits of the hypothesis, see CG68150, require you to ask whether consent would have been given for the transfer if the franchisor had been approached in March 1982. We would expect the taxpayer to provide some form of evidence that transfers were taking place at the date in question or that there is no reason to suppose that permission would have been refused. If this evidence cannot be supplied the presumption has to be that a transfer would not have been possible.

Transfer not possible

Here the limits of the hypothesis, see CG68150, are such that if a transfer is not possible in the real world it is not possible in the hypothetical world. The statutory fiction requires you to assume that an event that could have happened actually took place. It does not require you to assume that an event took place if, in fact, it could not have happened.

In our view a franchise or licence which could not be transferred has a value of nil at 31 March 1982. We would require convincing evidence that, notwithstanding the prohibition on transfer, such franchises or licences were changing hands for valuable consideration before accepting any other value.

Where the terms of a franchise or licence impose restrictions preventing its transfer or disposal, you may meet the argument that these should be ignored when considering whether a deemed disposal could have taken place. This argument is based on the decision in CIR v Crossman, [1937] AC 26. In that case, the Court held that a hypothetical purchaser of shares should be regarded as standing in the shoes of the vendor so far as any restrictions on the sale of the shares were concerned. The CG effect of this judgment was considered in O’Brien v Benson’s Hosiery (Holdings) Ltd, 53TC241, see CG12040, when the Court of Appeal considered that the decision in the Crossman case was relevant in deciding that contractual rights were not assets. However, in the O’Brien case the House of Lords drew a distinction between assets that are not capable of transfer which have no market value and assets that are capable of transfer subject to a restriction.

Whilst it will be a question of fact in every case as to whether or not the franchise, dealership or licence existed in March 1982 it must be the same franchise or licence as that which has been disposed of. Accordingly, if a franchise, dealership or licence granted before 31 March 1982 has been replaced, the replacement will not necessarily be the same asset as the original franchise, dealership or licence in which case rebasing to and indexation from 31 March 1982 may not be appropriate. However, indexation may be available on the costs of any renewal of the franchise, dealership or licence, see CG17700+ for disposals on or after 30 November 1993.

Any substantial case that cannot be resolved should be referred to the CG Technical Group with copies of all relevant documents.