SPC00524
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 section 52(4) TCGA 1992 – no – Appeal allowed in principle – final determination of the quantum of chargeable gains and costs reserved.
SPECIAL COMMISSIONERS

	BALLOON PROMOTIONS LIMITED	Appellant One
				
ALONSO VELA–CASTRO, EDWARD KIDNEY  &          Appellant Two
NATALE LUCIBELLO
	
- and -

                   	 D J WILSON		Respondents One
(HM INSPECTOR OF TAXES)

	JEFFREY LAWRENCE RODIN  	Respondents Two 
(HM INSPECTOR OF TAXES)

Special Commissioner :	Michael Tildesley OBE
									
Sitting in public in London on 5,6,7, & 9 December 2005
The Right Honourable Viscount Dilhorne, Counsel instructed by Michael Ollerenshaw & Co for Appellant One.
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.

© CROWN COPYRIGHT 2006

DECISION
The Appeal
1.	The Appellants were appealing against the Respondents’ decisions to refuse rollover relief under section 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.
Background
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. 
The Questions for Determination for Appellant One
7.	The questions for determination were as follows:
(1)	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, 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 assets”.
(2)	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 section 52(4) TCGA 1992.
(3)	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.
(4)	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?
 The Questions for Determination for Appellant Two
8.	The questions for determination in principle were as follows:
A    Whether any part of the consideration obtained by
(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 (“Agreement 1”) amounting to £1,379,498 and
(ii) 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 assets.
(iii) 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 of 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. 
The Structure of the Decision
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.
The Authorities
13.	I was referred to the following authorities:
Agnew and another v Commissioner of Inland Revenue [2001] 2 AC 710
American Leaf Blending Company v Director General of Inland Revenue [1978] 3 All ER 621  
Booth v Buckwell (1980) 53 TC 425
Butler v Evans (Inspector of Taxes) [1980] STC 613
England v Downes (1842) 6 Beav 269
Gallagher v Jones [1993] STC 537
Herbert Morris Ltd v Saxelby [1916] 1 AC 688
Kirkby v Thorn EMI plc [1988] 1 WLR 445
Heather (HM Inspector of Taxes) v P-E Consulting Group Ltd [1972] 3 W.L.R 833
IRC v Fitzwilliam [1913] 2 KB 593
IRC v Muller & Co’s Margarine Ltd [1901] AC 217
IRC v Westleigh Estates Co Ltd [1924] 12 TC 656
James Ashley Arbib v Earl Cadogan et al 15 September 2005 (LRA 23/2004, LRA 62/2004, LRA/08/2005, LRA/87/2004, LRA/18/2005)
MacNiven v Westmoreland [2003] 1 AC 311
Pinto v Badman  (1891) 8 RPC 181
Potter v CIR (1854) 10 Exch 147
Reckitt & Coleman Products Ltd v Borden Inc [1990] 1 WLR 491
Re Pszon [1946] 2 DLR 507
R J Reuter Co Ltd v Ford Mulhens [1954] Ch 50
Scandecor Development AB v Scandecor Marketing AB [1999] FSR 26
Spectros plc v Madden [1977] STC 114
Spectrum Plus Limited [2005] 3 WLR 58
Stanton v Drayton [1983] 1 AC 501
Street v Mountford [1985] AC 809
Trego v Hunt [1896] AC 7
Wedderburn v Wedderburn (No 4) (1856) 22 Beav 84
Whiteman Smith Motor Co v Chaplin [1934] 2 KB 35
14.	I was referred to the following extracts from legal textbooks:
Halsbury’s Laws of England, 4th edition, Vol 35, reissue, para 1206 –10
Mendelsohn, Franchising Law, 2nd edition, 2004 at 210-2
Wadlow, The Law of Passing Off, 3rd edition, 2004 at 105-231; 475-479
The Evidence
15.	I heard evidence from the following persons called by the Appellants:
(1)	Martin Hovey, partner to Appellant One in respect of the Liverpool restaurant. He gave evidence about the operation of the Liverpool restaurant including the circumstances surrounding the start up of the business.
(2)	Edward David Kidney, partner in both the East Sheen and Islington restaurants. He gave evidence about the start up and operations of the East Sheen and Islington restaurants.
(3)	Thierry Muller, partner to Appellant One in the London restaurant since 1994. He gave evidence about the operation of the London restaurant.
(4)	Ronald Simson, Director of Appellant One, who gave evidence about the start up of the London restaurant and the operations of both restaurants.
16.	I received expert evidence from
(1)	Keith S Carmichael who was a Fellow of the Institute of Chartered Accountants, Fellow of the Chartered Institute of Taxation, Fellow of the Institute of Directors, and Council Member of the Society of Share and Business Valuers. He was also a Commander of the Most Excellent Order of the British Empire and a Commander of the Venerable Order of St John. Mr Carmichael was a sole practitioner Chartered Accountant and a director of several private companies. He had extensive experience of carrying out negotiations with Inland Revenue over the whole range of taxation disputes. He has given expert evidence in Court and before the Commissioners where the amount in dispute varied between £1 million to £75 million. Appellant One instructed Mr Carmichael. His instructions were:
“The question on which my opinion as an Accountant has been asked concerns part of the purchase/sale consideration, which is referred to in the agreements as ‘goodwill’”. 
(2)	Trevor Martin Watson who was a Bachelor of Science, Master of Business Administration and a Fellow of the Royal Institution of Chartered Surveyors and Member of the Restaurant Property Advisors Society. Mr Watson qualified as a Chartered Surveyor in 1986. Since 1996 Mr Watson has been the Director of Special Projects at Davis Coffer Lyons and has undertaken a wide range of valuation work across the catering, leisure and licensed sectors throughout the United Kingdom. His clients included major multiple pub companies, nightclub and restaurant operators. Mr Watson stated that he was widely recognised as a leading valuer of restaurant premises in London by several clearing banks. The Respondents instructed Mr Watson. His instructions were:
“….to provide expert evidence as to the purchase price paid by PizzaExpress and its subsidiaries for four franchised PizzaExpress restaurants and the apportionment of the total consideration across land and buildings (including inherent goodwill, fixtures and fittings and other possible elements)”.
17.	I disregarded the witness statement of Mr Graeme Nuttall as I considered it had no probative value.
The Facts
Balloon Promotions Limited, Appellant One
18.	The principal activity of Balloon Promotions Limited was the management of restaurants both Pizza Express franchises and proprietary.  Appellant One was wholly owned by the Simson family.  Appellant One had issued share capital of £108 divided into eight ordinary shares of £1 and 100 five per cent cumulative participating redeemable preference shares of £1. Mr Ronald Simson owned 70  of the preference shares with his wife, Mrs Patricia Simson owning the remaining 30. Their children, Martin and Julia Simson, each owned four ordinary shares in  Appellant One.
Victoria Street Partnership (London)
19.	In March 1980 Appellant One entered into partnership with Mr Patrice Brun and Mr Denis Caslon setting up a restaurant at 154 Victoria Street London which operated under a PizzaExpress franchise. Appellant One held these premises under a lease from the Rothschild Trust Company and its original tenant, EMI Leisure Limited, for a term of 20 years from 25 December 1978. Appellant One held the lease in trust for the partnership.  Appellant One was wholly liable for the rent payable under the lease which rose from £30,000 per annum to £91,000 per annum. 
20.	Mr Thierry Muller succeeded Mr Patrice Brun as a partner through inheritance on 21 November 1994. Prior to that date Mr Muller had been an employee at the restaurant.
21.	The profit sharing ratio for the partnership was 47.5 per cent for Appellant One, 47.5 per cent for Mr Patrice Brun (Mr Thierry Muller) and five percent for Mr Dennis Caslon.
22.	The restaurant operated under a franchise agreement with PizzaExpress from its inception. The agreement was last renewed on 31 August 1992 for a period of ten years. The restaurant’s notepaper and a plaque in the premises advised customers and suppliers that it was a restaurant which operated under a PizzaExpress franchise. 
23.	 Appellant One and its partners provided the capital to set up and run the restaurant. They carried the risk if the restaurant failed as a business. Appellant One and its partners were responsible for running the business which included meeting the overheads and running expenses, dealing with all employment matters and discharging the administrative and statutory obligations associated with a business partnership. 
24.	Under the franchise agreement Appellant One and its partners were required to purchase the dough and tomato source for the pizzas from PizzaExpress. They were, however, able to source other materials from suppliers to which PizzaExpress did not give approval.  PizzaExpress supplied the menu with prices from which the restaurant prepared the meals. Appellant One and its partners were able to provide one dish of the day which was not on the menu. Also they supplied side salads which originally were not on the PizzaExpress menu.   PizzaExpress supplied the wine list. Appellant One and its partners were able to purchase and choose the wines from its own suppliers provided the wines met the general categories stipulated on the wine list.
25.	 PizzaExpress did not show much interest in the running of the restaurant. It undertook inspections of the restaurant examining cleanliness but its inspectors did not taste the pizzas.  PizzaExpress carried out no advertising for the restaurant.
26.	Appellant One and its partners trained their staff without assistance from PizzaExpress. The franchisees knew how to operate a PizzaExpress restaurant because of their previous connections with PizzaExpress. Mr Ronald Simson was a director and shareholder of PizzaExpress from 1965 until 1992.
27.	Mr Simson described PizzaExpress as “not a slavish outfit”. In his opinion the obligations under the franchise agreement were negotiable and remarkably flexible. Mr Simson expressed the view that there was not a common PizzaExpress design for the restaurants. The restaurants shared some common features but did not have uniform tables and chairs. Standard ovens, however, were fitted in the restaurant premises. 
28.	Mr Simson considered that the franchised PizzaExpress restaurants were ran better than the managed restaurants. The customers identified with the floor manager and were attracted to the restaurant by the good service offered. 
29.	Mr Muller stated that their customers noted the difference between the restaurant owned by Appellant One and himself and a managed PizzaExpress restaurant.  Their restaurant gave better customer care. Mr Muller testified that the customer base for the restaurant comprised of many repeat customers. He considered that the quality of the PizzaExpress pizzas was excellent. The restaurant had 80 covers.
Victoria Street Partnership (Liverpool)
30.	In July 1993 Appellant One acquired the partnership share of Mr Gillingham in the PizzaExpress franchised restaurant operating from 11-13 Victoria Street Liverpool. Appellant One entered into a partnership agreement with Mr Martin Hovey dated 13 July 1993 to run the restaurant on the basis that it would receive 75 per cent of the profits with the remaining 25 per cent to Mr Hovey.
31.	Appellant One acquired an under lease dated 21 March 1991 of the ground floor and basement premises at 11/13 Victoria Street for a period of 17 years until 18 May 2010. Appellant One held its interest in the property throughout this time in trust for the partnership.
32.	Appellant One and Mr Hovey operated the restaurant under a franchise agreement with PizzaExpress dated 9 May 1994 for a period of ten years from 25 March 1991 which amended the original franchise agreement to incorporate the partnership change. 
33.	Mr Hovey and his original partner Mr Gillingham set up the restaurant from scratch in 1991, investing £250,000 between them. They acquired a lease in a derelict building which required a complete refit and design in order to run a restaurant business. Mr Hovey and Mr Gillingham engaged the services of an independent restaurant designer who was recommended to them by PizzaExpress. They were not, however, tied down by PizzaExpress to a particular restaurant design. Mr Hovey and Mr Gillingham paid the fees of the designer. According to Mr Hovey it cost them a fortune to set up the building.
34.	Mr Hovey purchased the majority of his supplies from PizzaExpress because he found it more convenient to source his supplies from one supplier.
35.	Mr Hovey knew personally Mr Boizot, the founder of Pizza Express. Mr Hovey worked for three months in the PizzaExpress warehouse in London and for six weeks in a PizzaExpress restaurant before opening the franchised restaurant in Liverpool. Mr Hovey trained the staff and undertook the day-to-day management of the restaurant. The restaurant had 98 covers.
36.	 Mr Hovey was attracted to PizzaExpress because his friend had done very well with a PizzaExpress restaurant in Manchester. Unfortunately Mr Hovey did not share the same success in Liverpool. He discovered that very few people in Liverpool had heard of PizzaExpress. He could count on his hand the number of people who had heard of PizzaExpress in Liverpool. Thus in the early years the weekly takings for the restaurant was £1,000 when £5,000 was required to break even. Mr Hovey operated a cheaper menu than other PizzaExpress restaurants. He would agree beforehand the menu charges with PizzaExpress in London. He also cooked specials everyday which were not on the standard menu. Some days he would offer more than one special.  PizzaExpress did not advertise the restaurant. Mr Hovey occasionally would do his own advertising by giving “flyers” about the restaurant to people in the street. Mr Hovey eventually built up the weekly takings to between £6,500 and £7,500, however, he suffered considerable initial losses from the venture.
Alanso Vela Castro, Edward David Kidney and Natale Lucibello, Appellant Two		
37.	Messrs Castro, Kidney and Lucibello were owners of equal partnership shares in the Islington restaurant. Messrs Kidney and Lucibello were a separate partnership owning the East Sheen Restaurant.
38.	Appellant Two acquired the East Sheen site in 1980 where they purchased an existing Italian restaurant.  In 1983 Appellant Two took over the lease of a furniture shop in Islington and obtained the consent of the landlord to change the use of the building to a restaurant.
39.	Appellant Two decided to operate the restaurants under a franchise agreement with PizzaExpress. Ten year agreements were taken out for the East Sheen and Islington in 1980 and 1983 respectively. The agreements contained a break clause allowing Appellant Two to give notice to terminate the agreement after five years.
40.	Mr Kidney and Mr Lucibello previously worked for PizzaExpress in the late 1970’s. They knew Mr Boizot, the founder of PizzaExpress. They were aware of his intentions to keep the company small whilst establishing the PizzaExpress brand through franchises. Appellant Two considered that the franchise would be an advantage to their business building upon the PizzaExpress reputation in the Fulham Road and Notting Hill Gate. PizzaExpress, however, at that time was not a well established brand having just seven branches all located in central London. Appellant Two saw themselves as entrepreneurs and pioneers of the PizzaExpress brand.
41.	Appellant Two refurbished the premises in East Sheen and Islington from their own resources. The work at Islington was considerable because it had previously been a furniture shop. They received no help from PizzaExpress in respect of the refurbishments. Appellant Two employed their own designer who was known to PizzaExpress. Although Appellant Two were required to obtain  the approval of Pizza Express for the design, Pizza Express did not insist upon a standard design for the premises. At that time there was no manual for the design of PizzaExpress restaurants. The only guideline issued by PizzaExpress was that no two restaurants should be alike, which enabled Appellant Two to design the premises around the individual features of the buildings. They opted for a new design which was clear, contemporary and chic aimed at the upper end of the market. 
42.	In his evidence Mr Kidney described PizzaExpress not as a restaurant chain but as a bracelet with all different charms on it. Pizza Express did not have a set “get up” like MacDonalds or Pizza Hut which transplanted their USA designs into the United Kingdom. 
43.	Appellant Two chose the sites for East Sheen and Islington because of their potential for business growth. East Sheen was located in a residential area with very little passing trade. The partners worked full-time on the premises and built up a regular clientele from the locality. Their customers knew that Appellant Two were franchisees and owners of the restaurant.  In the early1980’s pizza was not a well-known product and the partners had to explain the nature of pizza to their customers. Appellant Two carried out their own advertising using advertisements in selected newspapers. 
44.	Appellant Two spotted the potential of the Islington site. In 1983 Islington was in a period of transition starting to become a more desirable area after suffering years of depression. When Appellant Two set up their business, there was only one other restaurant in Islington Green which was a Wimpey Bar. The Islington business depended much more on passing trade than the East Sheen restaurant. Appellant Two, however, built up a base of regular customers at the Islington site. Appellant Two was informed by their customers that they supplied a much better pizza than other PizzaExpress restaurants.
45.	At least one of the partners was always on site at each of the restaurants whilst they were open for business.
46.	 The East Sheen restaurant had 65 covers which increased to 80 covers in 1994. Islington had 80 covers which was later increased to 120. Appellant Two took three years to bring the East Sheen premises into profit, whilst Islington took two years to yield profits. When the restaurants were sold the weekly turnover for East Sheen was £15,000, whilst for Islington it was £25,000 to £30,000.
47.	In 1986 Appellant Two purchased a long lease of 125 years for the East Sheen premises. In 1994 they renewed the lease for the Islington premises for a further 20 years. Appellant Two were responsible for meeting the tenants’ obligations under the leases.  
48.	Appellant Two were required under the franchise agreements to purchase the dough and tomato sauce from PizzaExpress. They were free to buy other ingredients and supplies including wine from suppliers of their own choice. The only restriction on the wine was that it had to conform with the broad categories of wine described on the wine list which generally consisted of the standard Italian wines. 
49.	Appellant Two received no instruction and no manuals from PizzaExpress on the baking of Pizzas. Messrs Kidney and Lucibello were self trained in the art of making a pizza. Eventually PizzaExpress published a manual which consisted of a simple grid of ingredients. This manual was later replaced in the mid 1980’s with a ring folder consisting of photographs and recipes for each type of pizza. 
50.	Appellant Two received no support from PizzaExpress with the running of their businesses. Mr Kidney expressed the view that PizzaExpress was only interested in its franchise fee. In this respect Appellant Two were obliged to report to PizzaExpress their previous weeks turnover on the following Monday at 12 midday to enable PizzaExpress to calculate the four per cent franchise payment. PizzaExpress carried out inspections of the premises every eight to ten weeks looking at cleanliness and the quality of the pizzas but without tasting them. 
51.	 Appellant Two experienced tensions between themselves and PizzaExpress about the range of menu options. Mr Boizot preferred a limited menu, whereas Appellant Two wished to give their customers greater choice, in particular the provision of garlic bread and mixed salads. Eventually PizzaExpress resolved the dispute by approving a different menu for the franchised businesses.
52.	In 1988 Appellant Two considered implementing the break clause in the franchise agreement because they felt that Pizza Express was not going in the direction they wanted and that they were receiving no benefits from the franchise agreements. However, Appellant Two relented and negotiated new franchise agreements which had a fresh break clause of six months notice on either side after the first anniversary of the agreement.
The Franchise Agreements
53.	The bundle of documents contained the following copies of franchise agreements:
(1)	Franchise contract between Pizza Express of the one part and Balloon Promotions Limited; Martin Hovey and Ronald Simson of the other part dated 9 May 1994 (Liverpool premises).
(2)	Franchise agreement between Pizza Express of the one part and Balloon Promotions Limited; Thierry Muller and Denis Caslon of the other part dated 31 August 1995 (London premises).
(3)	Franchise contract between Pizza Express of the one part and Messrs Kidney, Lucibello and Castro of the other part dated 25 August 1983 (Islington premises).
(4)	Franchise contract between Pizza Express of the one part and Messrs Kidney, Lucibello and Castro of the other part dated 12 January 1990 (Islington premises).
(5)	Franchise agreement between Pizza Express of the one part and Messrs Kidney, and Lucibello of the other part dated 3 May 1996 (East Sheen premises).
54.	The bundle did not contain a complete set of the franchise agreements. The parties accepted that the terms incorporated in the agreements included in the bundles were representative of the parties’ obligations throughout the duration of the respective franchises except for the East Sheen premises. The operative franchise agreements for those premises contained the five year break clause which was then replaced with the termination clause by six months notice.
55.	During the hearing Respondents’ counsel was taken by surprise regarding the termination clauses in the franchise agreements for Appellant Two. Messrs Kidney, Lucibello and Castro negotiated specific termination rights for their respective restaurants. Thus the first set of franchise agreements enabled Appellant Two to terminate their agreements after a term of five years.  Under the second set of agreements the termination clause enabled either party after the first anniversary of the agreement to terminate the agreement by giving six months notice. Appellant Two did not produce the franchise agreements for the East Sheen premises to substantiate the specific termination rights in respect of these premises. Respondents’ counsel, however, kindly conceded that the specific termination rights applied to both the Islington and East Sheen premises.
56.	There were no substantive differences between the franchise agreements of Appellant One and Appellant Two except for the specific termination rights given to Appellant Two.
57.	Each of the franchise agreements was for a term of ten years, but with a right granted to the franchisee to renew the agreement for a further ten years on the same terms.
58.	The recitals of the agreement provided that the parties each respectively represented that
(1)	The franchisor had developed and operated a chain of Pizzeria Restaurants under the name of PizzaExpress and had established an exclusive reputation and goodwill in such name.
(2)	Each of the restaurants was known as PizzaExpress and had similar menu, décor, furnishings, facilities, services and the like which were more fully described and illustrated in the franchisor’s operating manual.
(3)	The franchisor was the proprietor of the design and copyright in the get-up of such restaurants including colour schemes, signs, pattern of furnishings both soft and hard, inventories, dress styles of the staff and the like being the insignia of the style of PizzaExpress restaurants (the “copyright designs”)
(4)	The franchisee had requested the franchisor to provide instruction to the franchisee and the franchisee’s staff in the know how for operating the business.
59.	The franchisee was granted the right to operate the particular premises as a PizzaExpress restaurant and to use the trade mark, trade marks, service marks and other symbols of the franchisor and to use the franchisor’s methods of merchandising promotion and packaging. The franchisee did not acquire a licence to operate any other premises as a PizzaExpress restaurant: the franchisee could only operate the specified premises as a PizzaExpress restaurant and could not move the restaurant to another location. Nor could the franchisee prevent PizzaExpress operating another PizzaExpress restaurant nearby.
60.	The franchisor was obliged under the agreements:
(1)	To specify the promotion and management material required by the franchisee.
(2)	To make available to the franchisee the result of its research and development into products format, market image and equipment, its regular costing of products and analyses of margins and its recommendations as to menu prices to be charged by the franchisee.
(3)	 To provide a free consultancy service to the franchisee.
(4)	To provide free instruction in the know how to the franchisee’s staff for operating the business.
61.	The franchisee, on the other hand, was obliged to perform and observe and follow the covenants, restrictions, conditions, agreements and procedures contained in the schedule and in the franchisor’s operating manual. The schedule obliged the franchisee:
(1)	Not to alter the premises or the fixtures and fittings and not to depart from the franchisor’s designs without the consent in writing of the franchisor.
(2)	To conform in regard to the décor furnishings and the like to the franchisor’s copyright designs and to apply the same in all the relevant detail in the conversion and decoration of the premises.
(3)	To install the type of oven and other equipment specified by the franchisor.
(4)	To ensure that the staff received such training as the franchisor shall from time to time prescribe.
(5)	To furnish the restaurant in accordance with the copyright designs of the franchisor including soft and hard furnishings, tables, chairs, linen, towels, table cloths, table napkins, stationery, cutlery, china glasses and the like each of such items being of a type and quality specified by the franchisor.
(6)	To operate the restaurant and maintain the premises in accordance with the practice and standards of the franchisor from time to time described in the franchisor’s operating manual.
(7)	To sell only those dishes foods and drinks listed on the menu  prescribed by the franchisor for use at its restaurants and those optional extras for the time being approved by the franchisor, although the franchisee was permitted in addition to sell each day one house speciality dish the recipe ingredients and prices of which had been previously approved in writing by the franchisor.
(8)	To prepare all dishes with ingredients mixtures and products of a type and quality specified by the franchisor and in accordance with the recipe or cooking directions from time to time provided by the franchisor and to serve such dishes in the manner specified and in the quality determined by the franchisor.
(9)	To purchase from the franchisor all the franchisee’s requirements for dough and tomato sauce.
(10)	To purchase from the franchisor all of the franchisee’s requirements for promotion and management material.
(11)	To comply with any recommendations made by the franchisor from time to time regarding the choice of wines, beers and other drinks to be offered for sale.
(12)	To comply with any recommendations made by the franchisor from time to time regarding the choice of records to be made available in any jukebox or other recorded sound system installed at the premises.
(13)	Not to sell any dishes or drinks which have been prepared otherwise than in accordance with the franchise agreement or which contain ingredients mixture or products of a type or quality different from that specified by the franchisor and in the case of dishes or other items of food preparation not to sell any that do not conform to any current specification as to the type and quality made by the franchisor.
(14)	To comply with the franchisor’s recommendations for the time being in force regarding uniform or dress for staff.
(15)	Not to carry out any advertising of the business nor exhibit any signs on the premises except in a style approved by the franchisor.
(16)	To observe the minimum opening hours prescribed from time to time by the franchisor and not to close the business during business hours except with the prior written approval of the franchisor.
62.	The franchisee agreed not to take any action of whatever nature based upon any trade or service marks owned by the franchisor or any common law rights which the franchisee was licensed to use or exercise pursuant to the franchise agreement. The franchisee agreed that it was the sole discretion of the franchisor as to whether any action should be taken against infringements or imitators of trade or service marks or any business attempting to pass itself off as a PizzaExpress outlet. 
63.	The agreements gave the franchisee the right to sell their businesses provided   notice in writing was given to the franchisor specifying the sale price. The franchisor could accept that price or require the open market value to be determined. If the franchisor did not wish to purchase the business at the sale price or the open market value the franchisee was entitled for period of six months to sell the business on the open market on the same terms as offered to the franchisee. Where the business was sold to a third party the franchisor under the agreement was required to grant the franchise to the third party on the same terms as granted to the selling franchisee but only for the residue of the term of the existing agreement and subject to the franchisor approving the third party as a prospective PizzaExpress franchisee. Such approval should not be unreasonably withheld.
64.	The agreements gave the franchisor the right to terminate the agreement early on the occasion of a defined event which included bankruptcy or liquidation of the franchisee, failure by the franchisee to comply with the terms of the agreement and persistent justifiable complaints regarding the quality of service or food given by the franchisee.
65.	Under the agreements the franchisee was required to pay a franchise fee on signing the agreement plus a continuing fee of four per cent of total sales. The agreements also permitted the franchisor to raise an advertising levy against the franchisee. In this Appeal Appellant One and Appellant Two paid PizzaExpress just the continuing fee of four per cent. They were not required to pay the initial franchise fee nor an advertising levy. 
66.	No provision was made in the franchise agreements for payments representing compensation to the franchisee pursuant to the purchase by PizzaExpress of franchisee interests before expiry of their franchise agreement by effluxion of time, save for clause 14.1. That clause stipulated that the rights of each party to the franchise agreement existing immediately before the termination or expiration of the franchise agreement shall not be prejudiced by or cease on account of the cessation of this agreement but shall survive and be enforceable. No mechanism was provided in the agreements to calculate the quantum of damages payable to the franchisee, although there was a mechanism to calculate the loss suffered and the compensation payable to PizzaExpress.
67.	The franchise agreements permitted the Appellants to have use of certain assets owned by the franchisor in return for a payment of a fixed fee of four per cent of the turnover. The franchise agreements did not give the franchisor any rights of ownership over the Appellants’ businesses or any goodwill attached to those businesses. The franchise agreements did not interfere with the Appellants’ ownership of their businesses. The Appellants were required to provide premises, equipment, raw materials and staff  from their own resources. The Appellants were the employers. They retained the profits and suffered the losses of the businesses and paid the appropriate taxes arising from their businesses.
68.	There was a clear discrepancy between the terms of the franchise agreements and the Appellants’ evidence about how the franchise operated in practice. I make my findings of fact on the discrepancy under submission four.  
The Sale of the Franchised Restaurants
69.	Prior to 1993 PizzaExpress was an unquoted company, operating its own and franchised PizzaExpress restaurants. In 1993 Star Computer Group PLC issued 35 million ten pence shares to acquire the entire issued share capital of PizzaExpress. Star Computer Group PLC subsequently sold its existing computer business and changed its name to PizzaExpress PLC. The new PLC was restructured having three wholly owned subsidiaries:
(1)	 PE Restaurants – responsible for the operation of the PizzaExpress Restaurants.
(2)	PE Wholesale – responsible for the import and wholesale distribution of food products.
(3)	PE Franchises – responsible for the franchising of restaurants.
70.	Mr Kidney noted that the new management for PizzaExpress adopted an aggressive attitude towards the franchisees. In his view the management resented the individual control exercised by the franchisees of their restaurants. The new management made life difficult for the franchisees by requesting their own managers in the restaurants, insisting on standardised wine lists and offering a new franchise agreement but with an increased continuing fee of six per cent rather than the previous four per cent. The franchisees sought legal advice on the options available to them to impede or ideally prevent a war of attrition being waged by PizzaExpress. The franchisees were advised that nothing proposed by PizzaExpress was in breach of the franchise agreements. The legal advisers suggested instead that the franchisees attempt a syndicate sell-back of their restaurant businesses to PizzaExpress.
71.	The Annual Report of PizzaExpress PLC for the year ending 30 June 1994 recorded that there were 36 wholly owned restaurants and 37 franchised restaurants. The Report noted that discussions continue with franchisees who may wish to realise their current investment by selling their franchised restaurant to PizzaExpress. The report also noted that each PizzaExpress restaurant was unique designed to fit in with its environment. Further each restaurant attracted an intensely loyal following, preferring that restaurant over its competitors, and even other PizzaExpress restaurants.  The 1995 Annual Report reported that there remained additional scope to acquire franchised restaurants which contributed immediately to the group’s profits. Mr Simson in his evidence confirmed that PizzaExpress wanted to acquire the franchised businesses because it would make greater profits.
72.	The franchisees’ interests were represented by a consortium, the PizzaExpress Franchise Association (PEFA) which consisted of 24 franchisees who owned between them 33 of the franchised restaurants. PEFA sought on behalf of its members to negotiate a syndicate sale of their restaurants to PizzaExpress for a global price. Originally PizzaExpress offered a price which represented 95 per cent of the total turnover of the 33 restaurants. After further negotiations PizzaExpress on 9 May 1996 agreed to pay £25 million for the restaurants representing 140 per cent of the total turnover which compared with the typical range of between 85 per cent and 110 per cent of turnover for the sale of franchised restaurants. The sale was completed on the 11 November 1996.
73.	The £25 million was allocated between the franchisees in the same proportion as represented by the turnover of their respective restaurant businesses as against the total turnover of the businesses comprised in PEFA.  The £25 million included £4m as consideration for the franchisees entering into restrictive covenants. 
74.	The Appellant franchisees’ respective allocations of the £25 million less the restrictive covenant consideration was then further broken down into categories of consideration  in each of their respective sale agreements. Thus:
	Appellant One 
London Premises (£)	Appellant One 
Liverpool Premises (£)	Appellant Two 
East Sheen Premises (£)	Appellant Two 
Islington Premises (£)	
Total Sale Consideration excluding stock	435,113	251,999	1,014,453	1,489,500	
Plant and Equipment	30,000	29,999	60,000	60,000	
The Rights (excluding goodwill)	Nil	Nil	1	1	
The Property	Nil	115,000	245,000	50,000	
Termination of the Wholesale Supply Agreement	Nil	Nil	1	1	
Goodwill not inherent in the property	405,113	107,000	624,451	1,179,498	
Personal Goodwill	Nil	Nil	85,000	200,000	
Termination of Franchise Agreement	1	1	1	1	
75.	 The bundle included a letter from Matthew Allen of PizzaExpress to Mr Kidney (Appellant Two) dated 8 October 1996. The letter contained a counter proposal from PizzaExpress regarding the proposed allocation of the agreed purchase price for the assets. Mr Allen suggested that the balance of the purchase price after the deduction for plant and equipment be split equally between goodwill and inducement to surrender the franchise agreement. Mr Allen commented that
“We are advised that the Inland Revenue are unlikely to accept that there is any goodwill being sold since PizzaExpress already owns the goodwill. It may be that the sale of the rights to operate a PizzaExpress franchise would be more supportable as a sale of a business asset”.
76.	Mr Kidney had a vague recollection of the letter but insisted that it would have been passed to his accountant. The Appellants were advised by their accountants on the  breakdown of the consideration as set out in the sale agreements.
77.	The PizzaExpress PLC Annual Report 1997 recorded that the consideration for the acquisition of the franchisee’s restaurants included the sum of £24,187,000 for goodwill. The consideration paid to Mr Muller and Mr Hovey, partners to Appellant One, incorporated an element for goodwill which was assessed by Inland Revenue for income tax under Schedule D.
78.	The sale agreements for each of the Appellants contained the same terms and followed the same format. The purpose of the Agreement was for the sale and purchase of the Business (as defined in Clause 1.2) as a going concern. Clause 1.2 defined the business: 
“as the pizza restaurant business now carried on under the name “PizzaExpress”  by the vendor under the franchise agreement”.
79.	 Clause 3.1 of the agreement stated that
“the business will be sold/purchased on a going concern the vendor shall sell with full title guarantee and the purchaser relying upon the representations shall purchase with effect from completion the Assets and whatever interest in the property is provided to be surrendered to the purchaser pursuant to Schedule 3”.
80.	The Appellants’ restaurant businesses were transferred as going concerns to Pizza Express. No value added tax was, therefore, chargeable on the assets transferred. 
81.	Clause 10.1 stipulated that the franchise agreement and the wholesale supply agreement shall be terminated on completion of the sale. Under Clause 21 the Vendor agreed with the Purchaser not to disclose to any person or use for any purpose any confidential information of the Purchaser. Confidential information included:
(1)	PizzaExpress’ operation manuals and staff training manuals;
(2)	the recipes, menu arrangements and new offerings belonging to PizzaExpress;
(3)	any know-how specific to the business of PizzaExpress.
82.	Schedule 1 of the agreement defined the assets subject to the sale. The assets included plant and equipment, stock, rights and records. The rights category was defined as “the full and entire benefit of the contracts and the vendor’s goodwill in relation to the business”.
83.	The sales agreement contained no provision for the Appellants to receive compensation for termination of the franchise agreements. The agreement contained a clause to the effect that the agreement and the documents referred therein constituted the entire agreement of the parties. Further the clause prohibited any variation of the sales agreement unless made in writing. The agreement had not been varied by the parties.
Restrictive Covenants
84.	The Appellants entered into covenants with PizzaExpress in consideration for a sum of money restricting their freedom to operate or manage a pizza restaurant for  a period of two years anywhere in the United Kingdom.
85.	Pizza  restaurant was defined as a restaurant which:
(1)	offers a menu which may any objective or reasonable customer would deem to be substantially similar to or equivalent to that of PizzaExpress having regard to the type and range of food on the menu and the proportion of the each menu that each item of food comprises; and/or
(2)	has an imitative pricing policy to PizzaExpress; and or
(3)	has the appearance of décor, waiting staff and layout which any reasonable and objective customer would deem to be substantially similar to a restaurant operated by PizzaExpress or one of its franchisees.
86.	The consideration received by the Appellants for entering into the covenants was as follows:
The Appellant	The Consideration (£)	
Appellant One 
Martin Simson	
2,791	
Ronald Simson	41,871	
Patricia Simson	27,914	
Julia Simson	2,791	
Appellant Two
Mr Castro	
94,571	
Mr Kidney	167,853	
Mr Lucibello	167,853	
 
The Claim for Roll-over Relief
87.	 On 30 September 1999 Appellant One submitted a formal claim for rollover relief under section 152 of TCGA 1992 in the sum of £157,043, leaving gains of £42,344 chargeable to Corporation Tax. The new assets for the purpose of the relief were numerous depreciating assets which fell within the classes of assets defined in section 115 of TCGA 1992.
88.	On 22 October 2001 the Respondents rejected the claim for rollover relief on the ground that that there was no saleable goodwill, and, therefore, no business asset which could be rolled over. On the 25 July 2002 the Respondents gave notice under section 52(4) of TCGA 1992 that the amount allocated by Appellant One to goodwill should be re-allocated to “early termination of franchise agreement” which in the Respondents’ view represented a just and reasonable apportionment of the consideration for the sale of the restaurants.
89.	On 13 April 1999 Messrs Castro and Kidney filed their 1996/97 self assessment returns with Mr Lucibello filing his return on 23 July 1999.  Those returns included capital gains computations for the disposal of assets in connection with the sale of the East Sheen and Islington restaurants. On 5 October 1999 the Respondents opened enquiries into the returns. The Respondents issued closure notices on 17 December 2004 on the basis that rollover relief was not available and that the whole of the gains included in the 1996/97 returns were chargeable to capital gains tax. Thus amended self assessment notices were issued in the following amounts:
Appellant	Chargeable Gains (£)	Tax Increase Due (£)	Amended Self Assessment (£)	
Mr Castro	577,551	196,257.60	230,913.60	
Mr Kidney	959,495	197,161.50	377,539.60	
Mr Lucibello	959,494	298,525.60	395,126.50	
90.	On 22 March 2005 the Respondents highlighted several issues regarding the capital gains computation for Appellants Two which were separate from the substantive issue of the Appeal. It is not clear to me from the bundle of documents whether these separate issues have been resolved.
91.	On 1 June 2005 the Respondents gave notice under section 52(4) of TCGA 1992 that the amount allocated by Appellant Two to goodwill should be re-allocated to “early termination of franchise agreement” which in the Respondents’ view represented a just and reasonable apportionment of the consideration for the sale of the restaurants.
Expert Evidence
92.	There was no agreement on the substantive issue in the Appeal between the expert witnesses, Mr Carmichael instructed by Appellant One and Mr Watson instructed by the Respondents.
93.	The experts received different instructions. Mr Carmichael was requested to give his expert opinion as an accountant on that part of the purchase/sale agreement which was referred in the agreements as goodwill. Mr Watson, on the other hand, was instructed to provide expert advice as to the purchase prices paid by PizzaExpress and its subsidiaries for four Pizza Express franchised restaurants and the apportionment of the total consideration across land and buildings (including inherent goodwill), fixtures and fittings and other possible elements”.  I did not consider, however, that the different instructions were the cause of the disagreement between the experts on the substantive issue of this Appeal.
94.	  Mr Carmichael formed the view that PizzaExpress owned the brand name and trade mark of the franchised business, whilst the rest of the assets of the business were under the ownership of the franchisee. Mr Carmichael was of the opinion that it was the franchisee who determined the standard of the meal, the quality of service and the customer care. Customers returned to the restaurants because of the welcoming ambience created by the franchisee. The franchisee generated goodwill from the effective deployment of his assets in his restaurant. Thus PizzaExpress owned the goodwill attached to the brand name “PizzaExpress”, whereas the franchisee owned the goodwill derived from the running of the franchised restaurants.
95.	Mr Carmichael expressed the view that the trade name PizzaExpress informed the potential customer that he was purchasing a pizza. The effect on the potential customer was similar to a person entering a public house and ordering “Carling Black Label” or a supermarket to buy Heinz baked beans. The use of the brand name PizzaExpress simply distinguished the product to be consumed, for example, from Chinese food or fish and chips.
96.	Mr Carmichael disagreed with the Respondents’ submission that the sum allocated to goodwill in the sale agreements was in effect a payment by PizzaExpress to terminate the franchise agreement. If that was so Mr Carmichael did not understand why PizzaExpress would pay a sum of money to end its own income flow. Further PizzaExpress did not make the payment to obtain the benefit of future profits but instead paid for the benefit of existing profits which was goodwill by another name.  
97.	Mr Carmichael applied the definition of goodwill as set out in paragraph 4 (2), Schedule 29, Finance Act 2002 to the facts of the Appeal which essentially used the accounting definition of goodwill in Financial Reporting Standard 10, namely, the amount paid over the value of the other assets less liabilities shall be treated as goodwill. Mr Carmichael accepted that the Finance Act 2002 did not strictly apply to the circumstances of this Appeal because the sale took place in 1996 and a partnership was involved rather than a company. Mr Carmichael, however, pointed out that the definition of goodwill in Finance Act 2002 was based upon the established accountancy treatment of goodwill for the past 50 years. Mr Carmichael was satisfied that the value accorded to goodwill in the sale agreements between PizzaExpress and the franchisees was accurate and met the legal definition for goodwill. Goodwill was represented in the sale agreements as the excess of the purchase price over that paid for the tangible assets of the franchisee’s business.
98.	Mr Carmichael accepted that the franchise agreement was a valuable asset for PizzaExpress because it was entitled to receive four per cent of the franchisee’s turnover for the use of its trade name. The goodwill generated by the franchisee would increase the value of the PizzaExpress trademark which would be reflected in the price charged by PizzaExpress for the use of the trademark in future franchise agreements.
99.	Mr Carmichael had considerable experience of franchised businesses. He was aware that other franchisors charged franchisees a significant starting fee for use of its trademark. A figure of £ 2 million was cited in respect of MacDonalds. Mr Carmichael noted that in this Appeal Pizza Express did not impose a starting fee on the franchisees which indicated to him that the PizzaExpress did not have the pull of other more established franchisors. Mr Carmichael expressed the opinion that the restrictive covenants entered into by the franchisees was indicative of the existence of goodwill owned by the franchisees in their restaurant businesses. 
100.	Mr Watson, the expert instructed by the Respondents observed from the PizzaExpress Annual Reports that during 1996 PizzaExpress, one of the country’s leading branded restaurant chains, wanted to expand its business rapidly. The market for casual dining was growing swiftly with the consequence that the PizzaExpress share price was relatively high.  Expanding restaurants at this time was difficult due to lack of opportunities for new sites. By buying back in the franchises, PizzaExpress was able to enhance profitability swiftly which would significantly boost share price and earnings for shareholders. It was also likely to result in improved and more consistent operating standards across the group. 
101.	Mr Watson applied the valuation principles as set out in the Valuation Information Paper No 2 on The Capital and Rental Valuation of Restaurants, Bars, Public Houses and Nightclubs in England, Wales and Scotland and GN1 Trade Related Valuations and Goodwill published by the Royal Institution of Chartered Surveyors (hereinafter referred to as RICS) to the apportionment of the purchase price for the Appellants’ restaurant businesses. The principles stated that the value of restaurants sold as businesses on the open market were made up of three principal component parts, namely:
(1)	Land and buildings
(2)	Fixtures and fittings
(3)	The market’s perception of the trading potential, excluding personal goodwill together with an assumed responsibility to renew existing licences’ consents, certificates and permits.
102.	The publication GN1 Trade Related Valuations and Goodwill, paragraphs 4.1, 4.2 and 4.3 described trading potential as:
“The trading potential that is attached to a property is sometimes referred to as “goodwill”. However, a valuation on the basis of market value should exclude any personal goodwill to the present owner or operator which would not be passed to a purchaser of the property.
The task of the valuer is to assess the fair maintainable level of trade and future profitability that could be achieved by an operator of the business upon which a potential purchaser would be likely to base an offer. When assessing future trading potential the valuer should exclude any turnover and profit that is attributable solely to the personal skill, expertise, reputation and/or brand name of the existing owner or management. However, in contrast the valuer should include any additional trading potential which could be realised under the management of an average competent operator taking over the existing business at the date of the valuation. 
Problems can sometimes be encountered in understanding and defining the goodwill attached to the land and buildings of a property by virtue of its circumstances, such as its location, design, planning rights, licence and occupation. This inherent goodwill should be carefully differentiated from personal goodwill”. 
103.	 Paragraph 6 of Trade Related Valuations and Goodwill dealt with valuations on the basis of a going concern. Paragraphs 6.1 and 6.2 stated that 
A business trading as a sole trader, partnership or company, which is expected to continue in operation, will potentially have a transfer value as a gong concern. The value of a company, as reflected in its balance sheet, comprises the net value of all its assets, less liabilities. The assets include property assets, financial assets and also intangible assets, which may include goodwill.
Whether or not goodwill is included in its balance sheet, the going concern value of a company in the open market value will reflect its overall potential earning capacity and may therefore be higher or lower than the figure included in the balance sheet.
Paragraph 6.4 stated that
“The goodwill element of a going concern includes intangible as well as tangible assets and requires an overall appreciation of the business in question. The valuer of the property interest will therefore need to liaise with other consultants who have specialist knowledge of analysing the business’s financial performance, and valuing intangible assets, such as brands and trademarks”.
104.	Mr Watson in his evidence expanded upon the RICS’ definition of goodwill. He stated that inherent goodwill remained with the property and did not depart with the outgoing operator or business. Inherent goodwill formed part of the purchase price and was valued with reference to fair maintainable trade which represented the buyer’s view of the current value of the right to trade from the premises and future potential profits. In so doing a purchaser would have regard to the robustness of the recent trading performance, likely additional capital expenditure, potential build up period and risk of the proposed venture going forward. Thus a well established robust business with consistent demonstrable levels of turnover and profitability which can easily be maintained and continued by a prospective purchaser would represent a relatively low level of risk and consequently have enhanced value. Mr Watson likened the RICS’ definition of inherent goodwill to the definition of adherent goodwill in the Respondents’ Capital Gains Tax Manual. Likewise he classified the RICS’ definition of personal or individual goodwill with the term free or separable goodwill as used in the Capital Gains Tax Manual.
105.	Mr Watson’s instructions were that the Respondents did not challenge the apportionments for land and buildings and fixtures and fittings in the sales agreements between PizzaExpress and the Appellants. The Respondents accepted that these figures reflected a fair value for the assets bought. Mr Watson, therefore, concentrated upon the apportionments recorded in the sales agreements for the rights excluding goodwill; termination of the Wholesale Supply Agreement; goodwill not inherent in the property; and the early termination of the franchise agreements. Mr Watson disagreed with the nominal apportionment for the rights excluding goodwill. He formed the view that the rights represented the right for the franchisee to trade in the style of a PizzaExpress restaurant and to benefit from the support provided by the franchisor organisation. He considered that the potential benefits of these rights were considerable because:
(1)	Brand recognition: PizzaExpress was a well established national brand. Customers were attracted to branded restaurants in high street locations because they  offered a greater chance of consistent service and a familiar experience. PizzaExpress has a strong trading reputation and as a consequence, consumers would be drawn to this venue to a greater extent whilst branded as a PizzaExpress.
(2)	Operating expertise support: PizzaExpress was contracted to provide operating support which was beneficial to the franchisee.
(3)	Marketing: under the franchise agreement, PizzaExpress provided a full marketing strategy and support for the business.
(4)	Pricing: the franchisee was obliged to maintain PizzaExpress standard pricing which was proven across the group to maximise operating margins and profits.
106.	Mr Watson considered that the substantial apportionment for goodwill was misleading. On his analysis the apportionment for goodwill in fact represented the value of the PizzaExpress brand, in which case the critical question was who had ownership and control of the PizzaExpress’ operating style and brand. After examination of the franchise agreement for the Islington premises he concluded that it was recognised by both parties that the ownership of the goodwill not inherent in the property rested with PizzaExpress and its related companies rather than the franchisees because of the following reasons:
(1)	The franchisees were unable to replicate the PizzaExpress trading style and brand and have no control over it.
(2)	Franchisees have control only at the local level of their own business and even then their control was strictly limited and governed by the franchisor under the terms of the Franchise Agreement.
(3)	The franchisor retained long term control of the brand. It was the franchisor that has the long term success of the business at heart rather than the franchisee. Each franchisee was only interested in maximising profit from its own particular branch or branches.
107.	Mr Watson, therefore, decided on his analysis that the apportionments for goodwill not inherent in the property as stated in the sales agreements between PizzaExpress and the Appellants should be nil. Further the apportionment for rights (excluding goodwill) should be the figures shown in respect of business goodwill not inherent in the property and personal goodwill.   
108.	Mr Watson did not consider the Appellants’ restaurants to be separate businesses. In his view the restaurants were very much constrained by the product delivered to the customer who would view each PizzaExpress restaurant part of the same establishment. The individual franchisees had limited discretion in the way they operated the business. Their position was dissimilar from that of an individual entrepreneur who would have the ability to change the product and the style of the trade. 
109.	Mr Watson accepted that PizzaExpress bought ongoing restaurant businesses so as to obtain the future profits and turnover from these outlets. However, PizzaExpress was effectively buying back the rights under the franchise agreement in return for giving up the continuing fee so as to secure the ongoing businesses for itself.  Mr Watson stated that the value of the Appellants’ restaurant businesses would be considerably reduced if they did not have the PizzaExpress badge. He accepted, however, that PizzaExpress did not have the right to occupy the restaurant premises by buying back the rights under the franchise agreement.
110.	In Mr Watson’s view PizzaExpress was not the same as entering a public house or a supermarket to buy a branded product. PizzaExpress meant more than simply serving a pizza.
111.	Mr Watson acknowledged that PizzaExpress was a “soft” brand. It differed from MacDonalds, Kentucky Fried Chicken and Pizza Hut which insisted upon a uniform style and get up. Pizza Express on the other hand permitted the franchisees a wider discretion to run their businesses but still within the context of the brand DNA. The franchise agreement was of considerable value to the franchisees because it gave them the benefit of selling a recognised brand and as a result a more secure business future. He reported that Wetherspoon, another soft branded franchisor in the licensing trade, had sold several of its public houses without its name and the turnover of those public houses had dropped by 20 to 30 per cent from the franchised public houses. 
112.	Essentially Mr Watson proposed that the excess of the purchase price over that attributed to property and fixture and fittings represented the value of the franchise contract in the open market.  
113.	Mr Watson accepted that he was not trained in the valuation of intellectual property. He was a Chartered Surveyor trained in the valuation of goodwill in the context of property transactions. Mr Watson’s specialist area was valuations of businesses in the leisure market, for which he had a toolbox of skills and analytical methods. He operated firmly within the real world against market transactions. Mr Watson accepted that he did not follow the guidance in paragraph 6.4 of the RICS publication GN1 Trade Related Valuations and Goodwill in respect of his valuation of the Appellants’ businesses in that he did not liaise with other experts about the valuation of intangible assets. He found the wording of paragraph 6.4 onerous and considered that the specific valuations mentioned in the said paragraph were well within his expertise as a surveyor. 
114.	Mr Watson agreed that he was not familiar with the term free goodwill as used in the Respondents’ Capital Gains Tax Manual. He accepted that he should have perhaps clarified his understanding of the term before submitting his report. However, in response to a question by Respondents’ counsel he expressed the opinion that free separable goodwill was part of the personal goodwill as understood by the RICS.
115.	I evaluate the expert opinion of Mr Carmichael and Mr Watson under the various submissions.
Taxation of Chargeable Gains Act 1992
116.	TCGA 1992 provides that tax shall be charged in accordance with the Act on chargeable gains accruing to a person on the disposal of assets. Section 21(1) of the Act stipulates that all forms of property shall be assets for the purposes of the Act. Section 22 of the Act extends the meaning of disposal of assets to include a disposal where any capital sum is derived from those assets notwithstanding that no asset is acquired by the person paying the capital sum. Section 22 includes capital sums received by way of compensation for the loss, destruction or dissipation of assets or received in return for forfeiture or surrender of rights, or for refraining from exercising rights. Consideration for the disposal of goodwill or for the surrender of rights under a franchise agreement which give rise to chargeable gains are subject to capital gains tax.
117.	Sections 152 to 159 of TCGA 1992 permits a person carrying on a trade to claim roll-over relief where he disposes of business assets at a gain and uses the disposal consideration to acquire replacement assets within three years of the disposal (including the period of 12 months prior to disposal). Roll-over relief, however, is restricted to specific business assets which are defined in section 155 of  TCGA 1992.
118.	Section 155 includes goodwill as an asset which on disposal would be eligible for roll-over relief. Section 155 makes no mention of any other type of intangible asset. TCGA 1992 does not define goodwill. 
119.	Section 275 of the Act which deals with the location of assets, however, distinguishes, the various types of intangible assets. Thus:
(1)	Section 275(g): the situation of good-will as a trade, business or professional asset is at the place where the trade, business or profession is carried out.
(2)	Section 275(h): patents, trade marks, service marks and registered designs are situated where they are registered.
(3)	Section 275(j): copyright, design right and franchises are situated in the United Kingdom if they or any right derived from them are exercisable in the United Kingdom.
120.	Respondents’ counsel derived the following legal propositions from the analysis of the TCGA 1992:
(1)	Goodwill is not specifically defined in the TCGA 1992 and, therefore, must bear its well known legal definition.
(2)	Goodwill is an asset which is distinct from other intangible assets, including the rights which a person has under a franchise agreement.
(3)	Roll-over relief under sections 152 to 159 of TCGA 1992 is available in respect of chargeable gains arising from the consideration received for the disposal of goodwill.
(4)	Roll-over relief, however, is not available in respect of chargeable gains arising from the consideration received for disposal of intangible assets, such as franchises.
(5)	 A franchisee who sells his rights to operate a franchise or receives a sum of money to terminate the franchise agreement is not entitled to claim roll-over relief in respect of chargeable gains arising from such disposals.
121.	Appellants’ counsel did not challenge these legal propositions but maintained the position that consideration received was for the disposal of goodwill rather than the termination of the franchise agreements.  
122.	Sections 52(4) and 152 (11) TCGA 1992 provide the power to re-apportion the elements in the sale agreements on a just and reasonable basis. Section 52(4) provides that
“For the purposes of any computation of the gain any necessary apportionments shall be made of any consideration or of any  expenditure and the method of apportionment adopted shall subject to the express provisions of this Chapter be …. just and reasonable”.
Section 152 (11) provides that
“Without prejudice to section 52(4) where consideration is given for the acquisition or disposal of assets some or part of which are assets in relation to which a claim under this section applies, and some or part of which are not, the consideration shall be apportioned in such manner as if just and reasonable”. 
Legal Definitions of Goodwill
General Definitions
123.	Halsbury’s Laws of England, 4th edition, Vol 35 paragraph 1206 re-issue states as follows in relation to the meaning of goodwill:
“The goodwill of a business is the whole advantage of the reputation and connection with customers together with the circumstances, whether of habit or otherwise, which tend to make that connection permanent. It represents in connection with any business or business product the value of the attraction to the customers which the name and reputation possesses”.
124.	The leading case on the legal nature of goodwill which has stood the passage of time is Inland Revenue Commissioners v Muller & Co’s Margarine Ltd [1901] AC 217.  Lord MacNaghten stated at 223:
“What is goodwill? It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old-established business from a new business at its first start. The goodwill of a business must emanate from a particular centre or source. However widely extended or diffused its influence may be, goodwill is worth nothing unless it has power of attraction sufficient to bring customers home to the source from which it emanates. Goodwill is composed of a variety of elements. It differs in its composition in different trades and in different businesses in the same trade. One element may preponderate here and another element there. To analyze goodwill and split it up into its component parts, to pare it down as the Commissioners desire to do until nothing is left but a dry residuum ingrained in the actual place where the business is carried on while everything else is in the air, seems to me to be as useful for practical purposes as it would be to resolve the human body into various substances of which it is said to be composed. The goodwill of a business is one whole, and in a case like this it must be dealt with as such.
For my part, I think that if there is one attribute common to all cases of goodwill it is the attribute of locality. For goodwill has no independent existence. It cannot subsist by itself. It must be attached to a business. Destroy the business, and the goodwill perishes with it, though elements remain which may perhaps be gathered up and revived again. No doubt, where the reputation of a business is very widely spread or where it is the article produced rather than the producer of the article that has won popular favour, it may be difficult to localise goodwill”.
125.	Lord James at 228:
“And this business, locally situate out of the United Kingdom, has a goodwill attached to it. It is difficult to separate them – certainly out of the business, the goodwill springs, and its value depends entirely upon the local existence of the premises and the manufactory, and the existence and action of more or less local customers. The parties to the agreement certainly attached value to the continuance of the business in the locality, for the vendor contracted not to carry his business on within fifty miles of the existing premises”.

126.	Lord Brampton at 230:
“This word goodwill when used in connection with the sale and purchase of a trade, must, I think be interpreted according to its popular acceptation. Taken in its strictest sense, goodwill, would hardly be a saleable commodity at all.
 ….. there is a wide difference  between the sale of a goodwill together with the premises in which the trade is then carried on, whereby the value of the premises is enhanced, and the sale of a goodwill without any interest in land or buildings connected with it, and which is merely the advantage of the recommendation of the vendor to his connections and customers and his covenant to allow the vendee to use his trade name, and to abstain from competition with him.
In the first of these cases the trade and premises are inseparable so long as the trade is therein carried on. The advantages and facilities constituting the goodwill are all more or less derived from them, or the profitable results of such goodwill are therein realised. The goodwill of a trade carried on in a shop is as essential to the tradesman as the shop itself which is benefited by it. What is the trade of a shop but the business done in it, and how is the custom brought to the shop but by the goodwill attached to it. In my judgment, it matters not whether the business be a manufacturing one, or that of a shopkeeper, or a publican, or a brewer: in case the seller of his business premises with his goodwill sells, and the purchaser buys, the outgoing man’s premises, with, so far as in him lies, the whole business carried on therein  as a going concern, with the same prospects the vendor himself would have had, had he continued it; and I think it immaterial whether the business has been built up by reason of the personal good qualities of the outgoer, the goodness of his wares and merchandise, the good situation of the premises or the absence of competition; in each case  the business and custom, in fact have been attracted to the house or premises, and when the incomer takes possession, he takes all the chances offered and conveyed to him by his purchase, of standing, so far as the business is concerned, in the shoes of the outgoer, and he must rely upon his own good qualities and aptitude for his undertaking to continue the prosperity of the business and profit by his bargain.
127.	Lord Lindley at 235:
“Goodwill regarded as property has no meaning except in connection with some trade, business or calling. In that connection I understand the word to include whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers and agreed absence from competition ….. In this wide sense, goodwill is inseparable from the business to which it adds value, and exists where the business is carried on”.
128.	Lord Macnaghton in Trego v Hunt [1896] AC 7 at 23:
“Generally speaking, goodwill (my italics), means much more than what Lord Elton took it to mean in the particular case actually before him in Cruttwell v Lye (1810) 17 Ves 335 at 346 where he says: ‘the goodwill which has been the subject of sale is nothing more than the probability that the old customers will resort to the old place’. Often it happens that the goodwill is the very sap and life of the business, without which the business would yield little or no fruit. It is the whole advantage, whatever it may be, of the reputation and connection of the firm, which may have been built up by years of honest work or gained by lavish expenditure of money”
 Goodwill as a Separate Asset
129.	The ability to separate goodwill and deal with it as an asset in its own right is dealt with in Halsbury’s Laws of England 4th ed, Vol 35, reissue, para 1208:
“Goodwill is not a thing which can be separated and dealt with apart from the business out of which it arises, but it may be dealt with as an entity separate from the particular premises in which that business has been carried on”.
130.	Dillon J in Butler v Evans (Inspector of Taxes) [1980] STC 613 observed that
“Essentially, however, it seems to me that the question whether the goodwill is indissolubly linked with the premises, or is a separate asset, is a question of fact”. 
Zoological Definitions of Goodwill and Net Adherent Goodwill
131.	The Court of Appeal decision in Whiteman Smith Motor Co v Caplin [1934] 2 KB 35 is often cited as support for the zoological definition of goodwill breaking it down into the categories of cat, dog, rabbit and rat goodwill. However, the value of these categories was seriously questioned by  Maugham LJ at 49:
“I will now add a word on the picturesque attempt to divide the value of the goodwill by describing it as consisting of three elements, named respectively the cat, the rat, and the dog values …..To my mind this division, except as an illustration, is of little value, and may be misleading. …. For these reasons I regard the arbitrary division into thirds of goodwill into cat, rat and dog as valueless unless all sorts of qualifications are made”.
132.	The crux of the Whiteman Smith Motor Co decision is the clarification of the concept “net adherent goodwill” which was described by Maugham LJ at 48:
“The only kind of goodwill which can be in addition to the value of the premises in the hands of the landlord is that kind which has become attached to the premises, irrespective of their position, and which would naturally be reflected in a higher rent payable by a person carrying on a similar business. It may be greatly diminished if the tenant is able to obtain premises in the neighbourhood…… Whilst it is obvious that profits due to the reputation of the proprietor or to the personal skill or ability of the persons or the assistants employed in the business must be excluded, it should be pointed out that there is not necessarily any such goodwill as that referred to in the last paragraph, even if the personal goodwill is excluded, since that which surveyors and referees sometimes call adherent goodwill ….. may be largely or wholly due to the custom of  persons  who come to the premises, simply because of their proximity, or because they lie on a line of route which the customers frequent. If the term adherent goodwill is used, it is essential to define it. I shall use the phrase, net adherent goodwill as meaning the goodwill, if any, which will remain attached to the premises, not including the site goodwill, that is irrespective of customers who would come to a new tenant, starting a new business, simply because of their convenient situation, in a sentence it is important not to confuse site goodwill, which is inherent, with net adherent goodwill”.
133.	The Whiteman Smith Motor Co decision on “net adherent goodwill”, however, must be viewed in the context of the specific legislative provisions which were the subject of the dispute, namely sections 4 and 5 of the Landlord and Tenant Act 1927. Section 4 provided that a tenant was entitled to compensation from the landlord  at the termination of the tenancy in respect of goodwill which has become attached to the premises by reason whereof the premises could be let at a higher rent than they would have realised  had no such goodwill attached thereto. Section 5 enabled the tenant to serve on the landlord a notice requiring a new lease of the premises if the sum awarded under section 4 would not compensate him for the loss of goodwill he would suffer if he moved to and carried on his trade or business in other premises.
134.	Thus under sections 4 and 5 of the Landlord and Tenant Act 1927 the court was not required to consider goodwill as a whole but a particular type of goodwill which related to the premises. Net adherent goodwill will only pass to the purchaser of the business if the premises are sold together with the business. However, Whiteman Smith Motor Co was not authority for the proposition that the value of net adherent goodwill will as matter of course be incorporated in the valuation of the premises sold. 
Existence of Covenants in restraint of Trade and Personal Goodwill
135.	Halsbury’s Laws of England, 4th edition, Vol 35 paragraph 1210 re-issue noted that an important element in estimating the value of goodwill was the existence or non existence of covenants restraining the vendor from competing with the purchaser of the goodwill.
136.	Thus where the vendor of a business enters into a covenant with the purchaser, the existence of the covenant suggests that goodwill was sold by the vendor to the purchaser; Nicholls LJ  in Kirkby v Thorne EMI PLC [1988] 1 WLR 445 at 453: 
“One of the recognised elements of goodwill is the reputation of the person owning or running the business. The importance of this element will vary from case to case, but often it will be an important element….. When the owner of a small one man business sells his business as a going concern, it is common for him as vendor to enter into a covenant with the purchaser precluding him from opening up a new, competing business for a stated period within a defined area. In such a case the vendor is fettering his liberty to trade but in my view it would be wrong to regard his restraint covenant as doing no more than that. The purchaser is concerned not merely, and it may be not primarily, to prevent competition as such: he is, or may be concerned to prevent competition by the vendor, because of the vendor’s existing connection and trade reputation. Thus the covenant is the means by which all the advantages that the purchaser was intended to have by taking over the goodwill of the business are secured to him”.
137.	Respondents’ counsel described the goodwill referred to in Kirkby as personal goodwill which could not be sold with the business unless the vendor agrees to be involved with the transferred business. Personal goodwill, however, is an asset which can be exploited for money; Nicholls LJ in Kirkby at 454:
“The covenant is the means by which, amongst other matters, the vendor, for the benefit of the purchaser precludes himself from exploiting the reputation he has regarding the trade in question. That reputation, as already mentioned, is a form of goodwill. It is not something possessed by everyone. It has a value, even though of its nature it is not assignable. It can be protected by an action for passing off”.
138.	I consider that Respondents’ counsel was placing a narrow interpretation on the decision in Kirkby by restricting it to personal goodwill. Kirkby was establishing the general principle that the covenant given by the vendor amounted to a disposal of goodwill. 
Submissions on the Legal Concept of Goodwill
139.	Respondents’ counsel in his submission purported to demonstrate how HM Revenue and Customs have incorporated the various judgments in its approach for dealing with goodwill in the context of capital gains.  He referred to HM Revenue and Customs Capital Gains Tax manual which derived three categories of goodwill from the legal authorities:
(1)	Personal: related to the skills and personality of the proprietor of the business.
(2)	Inherent: related to the location of the business premises
(3)	Free: related to the overall worth of the business which was further subdivided by the manual into:
a)	Free adherent goodwill: This is the goodwill which arises not from the locational advantages of the premises itself but from the carrying on of a particular business for which those premises have been or are specifically adapted or licensed.
b)	Free separable goodwill: This is the true free goodwill which is entirely separate from the business premises and can be transferred independently from them.
140.	The Respondents in the Manual expressed the view that where a business was sold as a going concern the only types of goodwill which can pass will be any separable free goodwill and if the premises were also disposed of, any adherent free goodwill together with any inherent goodwill.
141.	Respondents’ counsel submitted that the distinction between inherent goodwill and adherent goodwill was irrelevant for the present Appeal. He took the view that the value of any adherent goodwill would be incorporated in the value of the property sold in the transaction. Thus goodwill in the context of TCGA 1992 referred to separable goodwill and or personal goodwill, not to inherent goodwill and adherent goodwill which were merely elements in the valuation of real property. In his opinion inherent or adherent goodwill did not exist as a separate form of property within the meaning of section 21(1) TCGA 1992 independently of the real property to which they were attached. 
142.	Counsel for Appellant One considered that Respondents’ Counsel had confused the issue of goodwill by his legal analysis. He cautioned against making goodwill over complex. In his opinion TCGA 1992 did not distinguish between the various categories of goodwill as identified in the HM Revenue and Customs Capital Gains Tax manual. The Act simply referred to goodwill. The issue for the Tribunal was to reach a decision based upon the facts of the Appeal on whether goodwill was sold by the Appellants.
143.	Both Counsel for the Appellants submitted that I should look no further than the definition of goodwill as defined by Lord MacNaghten in Muller & Co’s Margarine Ltd which emphasised that goodwill was inextricably linked to the business and that the goodwill of a business should be treated as a single whole.
144.	Counsel for the Appellants placed great weight upon the link between a business and goodwill. Counsel relied on the definition of business in the cases of Re Pszon [1946] 2DLR, American Leaf Blending Company v Director General of Inland Revenue [1978] 3 All ER 621,  IR Comrs v Westleigh Estates Co Ltd [1924] 12 TC 656.  This definition was summed up by Laidlaw J A in Re Pszon at 511:
“The term business is of wider import than trade…. As used in various statutes it involves at least three elements: (1) the occupation of time, attention and labour; (2) the incurring of liabilities to other persons; and (3) the purpose of a livelihood or profit”.
145.	In Counsels’ view the Appellants’ conduct of their restaurants met the legal definition of a business which was a necessary pre-requisite for the existence of goodwill.
146.	Respondents’ counsel questioned the relevance of the term business for the issue in dispute. He contended that goodwill should not be confused with business, which was something broader and not a form of property. Business was an amalgam of different types of property, one of which may be goodwill. The TCGA 1992 dealt only with property, the sale of a business was not subject to capital gains only the assets which constituted the business were subject to the tax.
Goodwill from an Accountancy Perspective
147.	Mr Carmichael, the expert for Appellant One, opined that the excess of the total payment by PizzaExpress over the other assets less liabilities purchased was correctly described as goodwill. In reaching his opinion he relied on the definition of goodwill under paragraph 4(2), Schedule 29, Finance Act 2002 which stated that goodwill has the meaning it has for accounting purposes. Financial Reporting Standard 10 dealt with the term “purchased goodwill” from the accountancy perspective which was the difference between the cost of an acquired entity and the aggregate of the fair value of that entity’s identifiable assets and liabilities.
148.	Counsel for the Respondents pointed out that Financial Reporting Standard 10 was not in force at the time of the sale of the Appellants’ restaurants. However, he accepted that the definition of goodwill in Financial Reporting Standard 10 broadly replicated the Accountancy Standard (SSAP 22) in existence at the time of sale. Counsel sought to distinguish the accountancy definition of goodwill from the legal definition. He stated that the accountancy definition was restricted to “purchased goodwill” which incorporated positive and negative goodwill. The latter concept was alien to the legal interpretation of goodwill which was about added value. Counsel also suggested that the accountancy definition of the difference between the cost and the fair value of identifiable assets could include intangible assets other than goodwill whose value could not be separately identified and assessed. For these reasons Counsel for the Respondents submitted that the accountancy definition of goodwill could not be used for the definition of goodwill in the TCGA 1992 because it did not conform with the legal interpretation of goodwill.
149.	Schedule 29 of the Finance Act 1992 did not apply to the facts of this case. Schedule 29 came into force on 1 April 1992, five and half years after the sale of the Appellants’ restaurants. Schedule 29 introduced a new code for the taxation of intellectual property, goodwill and other intangible assets for companies. This Appeal was dealing with partnerships not companies. Further Counsel for the Respondents submitted that if Parliament had intended that the definition for goodwill in TCGA 1992 should bear the  meaning it has for accountancy purposes Parliament would have expressly said so, as it had in schedule 29 of the Finance Act 2002. 
150.	Counsel for Appellant Two cited Gallagher v Jones [1993] STC 537 as authority for the proposition that no judge-made rule could override the application of a generally accepted rule of commercial accountancy. Sir Thomas Bingham MR said at 553:
“Despite the length of this judgment, the central issue is at root a very short one. The object is to determine, as accurately as possible, the profits or losses of the taxpayers’ businesses for accounting periods in question subject to any express or implied statutory rule, of which there is none here, the ordinary way to ascertain the profits or losses of a business is to apply accepted principles of commercial accountancy. That is the very purpose for which such principles are formulated…. The authorities do not persuade me that there is any rule of law such as that for which the taxpayers contend and the judge found. Indeed given the plain language of the legislation, I find it hard to understand how any judge-made rule could override the application of a generally accepted rule of commercial accountancy which a) applied to the situation in question, b) was not one of two or more rules applicable to the situation in question and c) was not shown to be inconsistent with the true facts or otherwise inapt to determine the true profits or losses of the business”.
151.	The decision in Gallagher v Jones appeared should be viewed in the context of an earlier Court of Appeal decision of Heather (HM Inspector of Taxes) v P-E Consulting Group Ltd [1972] 3 W.L.R 833 which was not referred or cited to the Court of Appeal in Gallagher.  Orr LJ in Heather stated at 328F:
   “  Nothing in any of the judgments in the Odeon case throws any doubt on the proposition, which was common ground in his appeal and supported by a long line of authority, that the question whether an expenditure is for tax purposes on revenue or on capital account is ultimately a question of law. Accountancy evidence may be helpful in a case of this kind in so far as it discloses in what manner accountants deal in practice with a particular item; but it is for the court to decide whether what is done in practice is in accordance with sound accountancy practices; and further what is in other respects properly done in practice  may not ….. accurately reflect the difference between income and capital expenditure for the purposes of income tax”.
152.	I am satisfied after examining the various submissions and authorities that the accountancy definition is deficient for the purposes of construing the meaning of goodwill for roll-over relief under section 152 of the TCGA 1992. The definition under SSAP 22 permits the possibility that intangible assets other then goodwill which cannot be separately identified and assessed to be categorised as goodwill. The central dispute in this Appeal is about whether the consideration apportioned to goodwill should instead be apportioned to another intangible asset, namely compensation for early termination of a franchise agreement. Thus goodwill should be construed in accordance with legal not accountancy principles. However, I consider the question whether the sale of the Appellants’ restaurants was done in accordance with sound accountancy principles will be relevant to my finding of fact about the Appellants’ purported sale of goodwill.
Goodwill from a Chartered Surveyor’s Perspective
153.	Respondents’ Counsel’s submissions regarding the accountancy perspective on goodwill applied equally to the Respondents’ expert, Mr Watson, who gave evidence from his perspective of a Chartered Surveyor.
154.	His evidence demonstrated that the RICS’ guidance on goodwill as laid out in the Red Book did not align with the legal concept of goodwill and in particular with the definitions in the Respondents’ Capital Gains Tax Manual.
155.	Respondents’ Counsel sought to explain away the differences by suggesting that the RICS’ definition of personal goodwill comprised both separable and personal goodwill as described in the Capital Gains Tax Manual. However, Mr Watson described personal goodwill as:
“one which was not included within inherent goodwill and which  was likely to be extinguished with a change of ownership and which could be removed from the property”.
156.	I consider that Mr Watson’s definition equated solely with the Respondents’ definition of personal goodwill in their Capital Gains Tax Manual. The key feature of free separable goodwill is that it could be transferred to the new owner of the business, which was not recognised in Mr Watson’s definition. Mr Watson fairly stated in his evidence that he was not as familiar with the concept of free separable goodwill.
157.	Respondents’ Counsel also stated that the Respondents’ concepts of inherent and adherent goodwill were merged into the RICS’ definition of inherent goodwill. I disagree with his proposition. The Capital Gains Tax Manual at the moment regards adherent goodwill as a sub-species of separable goodwill not part of inherent goodwill.
158.	 My concern with the RICS’ approach to goodwill was highlighted by a reference to the use of the Red Book in a Land Tribunal decision which only came to my attention after the hearing. The Red Book is the RICS Appraisal and Valuation Manual which Mr Watson used to carry out his valuation of the Appellants’ businesses. The Land Tribunal Decision of James Ashley Arbib v Earl Cadogan et al (LRA 23/2004, LRA 62/2004, LRA/08/2005, LRA/87/2004, LRA/18/2005),15 September 2005 pointed out at paragraph 74:
“Firstly however we should draw attention to the specific disclaimer of the Red Book itself which makes it inappropriate to apply it to:- ‘valuations in anticipation of evidence and pre-hearing statements in connection with legal and quasi-legal proceedings and those of tribunals, courts and committees for the settlement of property related disputes’”.
My Conclusions on the Construction  of Goodwill in TCGA 1992
159.	TCGA 1992 does not define the term goodwill. 
160.	Goodwill in the context of TCGA 1992 must be construed in accordance with the principles established by the legal authorities on goodwill.
161.	Whether goodwill exists is a question of fact
162.	Goodwill is a type of property.
163.	Goodwill should be looked at as a whole and includes whatever adds value to a business by reason of situation, name and reputation, connection, introduction to old customers and absence from competition. The precise composition of goodwill will vary in different trades and in different businesses in the same trade.
164.	Goodwill realises profits for the business.
165.	Goodwill cannot subsist by itself but must be attached to a business.
166.	Goodwill distinguishes an established business from a new business and is built up by years of honest work and investment in the business. Goodwill is created by trading activities.
167.	 The value of goodwill will be enhanced if the business and the premises in which the business is carried on are sold together as a going concern.
168.	Goodwill can be sold separately from the premises in which the business is carried on.
169.	The authorities caution against an over analytical approach to goodwill (see Muller & Co’s Margarine Ltd and Whiteman Smith Motor Co). In view of these authorities I question the applicability of the approach adopted by the Respondents in their Capital Gains Tax Manual and by their counsel which categorises goodwill into three types with the third type broken down into two sub-categories. The thrust of the categorisation is to restrict roll-over relief to specific categories of goodwill. The categorisation is partly derived from the zoological definition of goodwill which was considered to be of limited value in Whiteman.  I prefer the approach advocated by Appellants’ counsel that goodwill in TCGA 1992 shall be looked at as whole which I consider to be consistent with the authorities and conforms with the principles of statutory construction. 
170.	A covenant restricting the trade of the trader selling the goodwill is a means by which all the advantages that the purchaser was intended to have by taking over the goodwill of the business are secured to him. The existence of such a covenant is indicative that goodwill was sold by the vendor.
The Submissions
Submission One: The Respondents had no Authority to Re-Apportion the Consideration
171.	Counsel for Appellant One contended that it was not open to the Respondents to alter the apportionment of the consideration in the sale agreement between PizzaExpress and the Appellants when the agreement was reached honestly and at arm’s length. 
172.	Counsel for the Respondents submitted that the Crown was not bound by the parties’ apportionment of the sale consideration. The Crown was not a party to the agreement. Further the labels used by the parties of the various components sold were not determinative of the true legal nature of the transaction.
173.	I prefer the argument of Respondents’ counsel. I accept that the circumstances of the sale negotiations and the contract itself would be relevant factors in determining the factual position as to whether the Appellants sold goodwill and its apportioned value. I, however, do not accept that the parties themselves are the final arbiters of the legal construction and interpretation of their agreement. It, therefore, follows that if the Respondents formed the view that the Appellants had got the law wrong with their apportionment of the sale considerations, they had the legal authority to re-apportion the consideration on a just and reasonable basis pursuant to section 52(4) of TCGA 1992. The issue of whether the Respondents were correct in re-apportioning the consideration is a different question which formed the substantive matter of this Appeal.
174.	I found the authorities relied upon by Counsel for Appellant One did not support his submission. Stanton v Drayton [1983] 1 AC 501 was essentially authority for the alternative submission, namely, that the legal meaning of the contractual terms was determined by the construction of the relevant statutory provisions. In Stanton the issue was whether Inland Revenue could substitute the market value of the asset for the actual consideration paid for it.  The House of Lords rejected Inland Revenue’s approach because it did not fit in with the legal construction of value in paragraph 4(1)(a) of Schedule 6 of the Finance Act 1995. Booth v Buckwell (1980) 53 TC 425 supported Respondents’ counsel’s argument that the Crown was not bound by the agreement of the parties because it was not a party to it (see Browne-Wilkinson J at 430G – 431B). MacNiven (HM Inspector of Taxes) v Westmoreland Investments Ltd [2003] 1 A.C. 311 concerned the application of the Ramsay principle and whether steps with no commercial purpose had been artificially inserted for tax purposes in a composite transaction.  The facts of MacNiven were different from the facts of this Appeal. The Respondents were not suggesting that the Appellants had embarked upon an elaborate scheme to evade tax but simply that they had made an error in law and in fact in their apportionment of the consideration to goodwill.  MacNiven is helpful on the statutory construction of taxing statutes which may be of assistance to the wider issue in this Appeal but the decision did not support the specific submission of Counsel for Appellant One.
175.	Respondents’ Counsel relied on the dicta in Street v Mountford [1985] AC 809 which dealt with the issue of whether an agreement granting the right to occupy two rooms was a licence or a tenancy. Lord Templeman at 819 stated that
“In the present case, the agreement dated 7 March 1983 professed an intention by both parties to create a licence and their belief that they had in fact created a licence. It was submitted on behalf of Mr Street that the court in these circumstances decide that the agreement created a tenancy without interfering with the freedom of contract enjoyed by both parties….. But the consequences in law of the agreement, once concluded, can only be determined by consideration of the effect of the agreement. If the agreement satisfied all the requirements of a tenancy, then the agreement produced a tenancy, and the parties cannot alter the effect of the agreement by insisting that they only created a licence. The manufacture of a five-pronged  implement for manual digging results in a fork even if the manufacturer, unfamiliar with the English language, insists that he intended to make and has made a spade”.
In Agnew and another v Commissioner of Inland Revenue [2001] 2 AC 710 which dealt with whether a charge was fixed or floating Lord Millett at paragraphs 31 and 32 stated:
“ The question was therefore simply one of construction; unless unlawful the intention of the parties, to be gathered from the terms of the debenture, must prevail. It was clear from the descriptions which the parties attached to the charges that they had intended to create a fixed charge over the book debts while they were uncollected and a floating charge over the proceeds. It was open to the parties to do so, and freedom of contract prevailed.
Their Lordships consider this approach to be fundamentally mistaken. The question is not merely one of construction. In deciding whether a charge is a fixed charge or a floating charge, the court is engaged in a two-stage process. At the first stage it must construe the instrument of charge and seek to gather the intentions of the parties from the language they have used. But the object at this stage of the process is not to discover whether the parties intended to create a fixed or floating charge. It is to ascertain the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets. Once these have been ascertained, the court can then embark on the second stage of the process, which is one of categorisation. This is a matter of law. It does not depend upon the intention of the parties. If their intention, properly gathered from the language of the instrument, is to grant the company rights in respect of the charged assets which are inconsistent with the nature of the fixed charge then the charge cannot be a fixed charge however they may have chosen to describe it”. 
176.	The decisions in Street and Agnew emphasised that the parties’ intentions as gathered from the terms of the agreement cannot prevail over the correct legal construction of the agreement derived from applying legal concepts to the facts. 
177.	I am, therefore, persuaded by Respondents’ counsel’s argument that the parties’ description of goodwill in the sales agreement was not determinative in law as to whether goodwill was in fact sold by the Appellants.
Submission Two: The Respondents had no Lawful Authority to re-apportion the Sale Consideration after issue of the Completion Notice under section 28 of the Taxes Management Act 1970
178.	Counsel for Appellant Two submitted that the Respondents could not seek to re-apportion the sale consideration under section 52(4) of TCGA 1992 because the letter informing the Appellants of the re-apportionment was issued on 1 June 2005 after the closure notices under Section 28A (1) & (2)  Taxes Management Act 1970.
179.	Respondents’ counsel expressed his bafflement with her submission. He did not understand the point being made. 
180.	I was presented with no detailed legal analysis to support the submission. On my analysis of the legal provisions and the relevant correspondence in the bundle I conclude that the submission is without foundation because:
(1)	The purposes of closure notices under section 28 are to end the enquiry into the taxpayer’s return and to amend the self assessment for tax if the Officer is of the opinion that the return is insufficient or excessive. 
(2)	The notices issued on 17 December 2004 closed the enquiry into the 1996/97 self assessments returns for Appellants Two and increased the tax due because the amount of capital gains was deficient.
(3)	The author of the letter of 1 June 2005 did not re-open the enquiry into the Appellants’ returns. Further he did not amend the new assessment issued on 17 December 2004. He merely clarified the reasons for the increased assessment. 
(4)	 I am satisfied that the Respondents were entitled in law to re-apportion the sales consideration under section 52(4) of TCGA 1992 after the notices of closure. The apportionment had no effect on the Appellants’ self- assessments amended on 17 December 2004 and did not open new lines of enquiry.
Submission Three: As a Matter of Law the Ownership of Goodwill in the Franchised Business belongs to the Franchisor
181.	In Wadlow, the Law of Passing Off, 3rd edition, 2004 at 475 franchising was described as:
“Franchising is used in English commercial practice to describe a relationship in which numerous legally independent businesses trade under a common style and to common standards as if they were branches of one large enterprise. The franchisor invariably specifies the manner in which each franchised business is to trade, often in great detail, although the day-to-day running is left to the franchisee. The element of operational control typically distinguishes franchising from simple licensing arrangements. The success of any franchising operation depends on the public relying on the individual outlets of the franchise to provide goods or services of a uniform degree of quality. The public may frequently be unable to distinguish franchised businesses from those run as branches of a single business, and in some cases there may be a mixture of franchised outlets and branches owned and operated by the franchisor”. 
182.	Mr Carmichael and Mr Watson, the two expert witnesses, testified that the degree of control exercised by the franchisor over the franchisee in respect of the running of the franchisee’s business varied enormously between different franchised arrangements. Mr Watson regarded the PizzaExpress franchise at the lower end of control whereas a franchisee operating under a Macdonald or Pizza Hut franchise enjoyed a very limited discretion to run his franchised business.
183.	Mr Watson accepted that a franchisee would normally be the proprietor of the franchised business, responsible for the employment of staff, the purchase of materials and the sales and services to customers.  The franchisee would enjoy the profits from the business but also suffer the risks of the business becoming insolvent. The franchisor, on the other hand, would own the trademark and the associated intellectual property rights such as know how and get up. The franchisor would derive income from the granting of those rights to the franchisee. The size of that income would inevitably be linked to the profitability of the franchisee’s business. Thus franchising was essentially a contractual arrangement between two independent legal entities with a view to each making a profit from the synthesis of the franchisor’s business format and the franchisee’s business. 
184.	Counsel for the Respondents proposed that the goodwill of the franchisee’s business was derived from the supplied business format owned by the franchisor. Thus as a matter of law the goodwill of the franchisee’s business belonged to the franchisor not the franchisee.
185.	His starting point was the Court of Appeal decision in Commissioners of Inland Revenue v Earl Fitzwilliam [1913] 2KB 593 which concerned the assessment of reversion duty on the determination of leased premises having the benefit of a justices’ licence for the sale of alcohol.  Kennedy LJ said at 603:
“The licence is in form of a grant to a person who thereby becomes for the time the holder of the licence; but the grant is made to him only in respect of the partnership premises. It is really attached to those premises. It is not, as the goodwill of a business may be, a separately saleable thing. It cannot be transferred to other premises without the authority of the magistrates and the consent of the owner of the premises in respect of which it was granted…
Nor is the licence, as I think, in any true sense a part of the goodwill of the publican’s business. Its existence is essential, no doubt, to the creation of such a goodwill because the business of the sale of the intoxicants cannot lawfully be carried on without a licence. Other connection between the licence and the goodwill of the publican’s business, there is, so far I can see, none”.
186.	Counsel  suggested that the franchise agreement was analogous to the justices’ licence in that it could not be part of the franchisee’s own goodwill. However, Counsel did not comment upon the other aspect of Kennedy LJ decision where he stated that the licence was essential to the creation of the publican’s goodwill, which carried the implication that the publican owned the goodwill derived in part from the licence.
187.	Counsel then cited passages from two text books to support his proposition regarding the ownership of goodwill under a franchise arrangement. Mendelsohn, Franchising Law, 2nd ed, 2004 at 212:
“  Establishing ownership of goodwill, particularly in franchising, may not be straightforward. It is helpful to think of there being, in the context of franchising two kinds of goodwill.
The first is that arising from the trade marks, trade names,systems, get up and so on common to the whole of the franchise system. This belongs to the franchisor. This is partly because it is intrinsic to the rights granted by the franchisor to the franchisee; rights by way of licence to use these disparate but commercially linked elements of the franchise business for a fee and for a period. This is what the franchisee shares in during the period of its franchise and loses when the franchise ends. It is also partly, and more simply, because the franchise agreement will normally provide that that goodwill belongs to the franchisor. This approach seems to be supported by the judge in Body Shop International plc v Rawle,  unreported, 1992, QBD, where it was held that the goodwill in a franchised business remains the property of the franchisor.
The other goodwill essentially reflects the going concern value of the franchisee’s business. At its simplest it is no more than an accountancy convention, reflecting the fact that the business of a franchise may be worth more to a purchaser than its net asset value. This goodwill is of little relevance for the purposes of a passing off claim”.
188.	Wadlow, The Law of Passing Off, 3rd ed, 2004 at 476-7:
“The traditional approach to ownership of goodwill might have been to say that each individual franchised owned a goodwill of its own, and that the goodwill of the franchisor related solely to the granting of franchises to business. This would be wrong. The public may or may not know that a franchising relationship exists, but they do appreciate that one person is responsible for the standards of every franchised outlet. The person is in fact the franchisor, who therefore owns the relevant goodwill quoad the public. It is only if the franchisor is perceived to have abandoned control of the business, or surrendered it to the franchisee that the situation contemplated in Coles v Need arises and the franchised name or format may become public juris, or distinctive of someone other than the franchisor. This is not to say that individual franchised outlets can have no goodwill of their own, but their position is roughly equivalent to that of a tied public house or a retail shop selling nationally advertised brands of goods.
It follows that under a properly drafted and managed franchise operation the franchisor is the owner of the goodwill relating to the name of the franchised business and whatever else may be distinctive of it, such as the characteristic get up of premises”.
189.	I observe that the authors did not support Counsel’s proposition that as a matter of law the goodwill of the franchised business belongs to the franchisor. The extracts give credence to the Appellants’ counsels’ representations that the franchisor owns the goodwill of the trademark and associated intellectual property rights and the franchisee owns the goodwill of the franchised business.
190.	It was not possible to obtain a copy of the unreported decision of Body Shop International plc v Rawle.  However, Counsel for the Respondents indicated that he was not relying on this case for his proposition.
191.	Counsel for the Respondents acknowledged that the authors of the two extracts recognised that a franchise can itself have goodwill. However, he sought to undermine the authors’ proposition by suggesting that the operations of a tied public house and a retail shop selling nationally advertised brands were fundamentally different from that of a franchised operation where the franchisor owned the name, get up and know how of the franchised business. Counsel stated that the owners of the public house and the retail shop owned the name and characteristic get up of their business which would have separable goodwill. In these circumstances the owners of the business would be able to assign their businesses and goodwill separate from the premises at which it was carried on and grant franchises to others to similar establishments in other locations.  In contrast the franchisees under the PizzaExpress franchise did not own the name, the know how and get up, and, therefore had no separable goodwill to assign. The franchisee merely has the right to use various assets owned by the franchisor.
192.	Counsel developed his analysis by suggesting that the position of the franchisee was analogous to a partnership where the partnership agreement provided for one partner only to own the goodwill. The other partner shared in the profits generated in the goodwill  but has no goodwill which he owns or can exploit. Counsel expanded his analysis to say that the franchisee was equivalent to an employee who cannot acquire any interest in the goodwill of his employer’s business despite the fact that his exertions and his skill have contributed to the success of the business. 
193.	Counsel ended his analysis by referring to the Respondents’ position on franchising as declared in its Capital Gains Tax manual which has not been challenged in any proceedings prior to this Appeal:
“Capital gains problems may arise where either a new franchise acquired for a capital sum or one changes hands for a capital sum and it is claimed that what has been acquired or disposed of is goodwill. Generally such claims will be made in connection with claims to roll-over relief …
A franchise is an asset for capital gains tax purposes, being property within the meaning of section 21 of TCGA 1992. It is not regarded as goodwill and therefore is not within any of the classes of asset in section 155 TCGA 1992.
Enhancing or detracting from the value of the outlet only increases or decreases the free goodwill of the franchiser. A franchisee never acquires any interest in this free goodwill. Free goodwill can be exploited by the franchisee to increase the income from the franchise but that is all.
Accordingly we take the view that the only form of goodwill  which can be affected by a franchisee’s efforts in running a franchise is their own personal goodwill and that is not capable of sale … When a franchisee changes hands therefore all that passes is the franchise itself. No free goodwill passes since the franchisee was never in a position to own that particular asset. It has always remained with the franchisor”.
194.	I am not convinced by the analysis of Counsel for the Respondents. I am satisfied that the ownership of goodwill between franchisor and franchisee is primarily a question of fact against which the relevant principles of law are applied not a proposition of law. I say this because:
(1)	Counsel  produced no authority to support his proposition. He accepted that it was a novel point which had not been decided by a court.
(2)	The authors of the two extracts cited by Counsel supported Appellants’ counsels’ submissions that there were two kinds of goodwill in franchising, one kind owned by the franchisor, the other owned by the franchisee.
(3)	Counsel’s comparison of the tied house and retail shop with the PizzaExpress franchise emphasised that the issue was one of fact rather than law.
(4)	Counsel’s analogy with the partnership demonstrated that the ownership of goodwill depended upon the nature of the agreement between the parties.  This supported my finding that ownership of goodwill was one of fact which would require examination of the agreement between the franchisor and franchisee.
(5)	Counsel’s analogy with an employer and employee was a step too far. Under a franchise arrangement it was the franchisee that owned the business providing the goods or services, a position more akin to an employer rather than an employee.
195.	The Court of Appeal in Scandecor Development AB v Scandecor Marketing AB and another [1999] F.S.R Vol 26 , 26 decided that the ownership of a goodwill between a wholly owned subsidiary and its parent company was one of fact. The Court held at 29:
“There was no rule of law or presumption of fact that the goodwill generated by the trading activities of wholly-owned subsidiary belonged to the parent company or was the subject of an implied, if not express, licence in favour of the subsidiary”.
196.	I consider that a parent company and wholly owned subsidiary was a better comparator for a franchisor and franchisee than the example of employer and employee given by counsel.
197.	Implicit in counsel’s submission was a more subtle argument, namely, that the species of goodwill owned by the franchisee was either absorbed within the property valuation or consisted of personal goodwill which could not be sold as part of the business. Thus the only goodwill remaining in the franchisee’s business that could be separately assigned was that which could be directly attributed to the franchisor’s business format. The validity of this argument, in my opinion, is not determined by principles of law but by examination of the facts of the individual circumstances of the franchise arrangement and the transactions dealing with its sale.
Submission Four: Whether the Consideration paid to the Appellants by PizzaExpress was obtained for the Disposal of Goodwill within the meaning of TCGA 1992  or was the Consideration obtained to Compensate the Appellants for early termination of the Franchise Agreements?
198.	Submission four deals with the central issue in this Appeal. It involves consideration of a series of questions which overlap and do not fit into neat compartments. Ultimately it is a mixed question of fact and law.
199.	The Respondents did not challenge that part of the consideration allocated to property and fixtures and fittings respectively in the sales agreement between Pizza Express and the Appellants. Further the Respondents produced no evidence to contradict the Appellants’ submissions that the total consideration paid by PizzaExpress to each of the Appellants for their restaurant businesses was honestly reached following negotiations at arms length. It, therefore, follows that the Respondents cannot dispute  the value of  that part of the consideration  that exceeded the fair value for the identifiable assets of each restaurant. The dispute between the parties was whether that part of the consideration that exceeded the fair value for the identifiable assets constituted goodwill belonging to the Appellants or compensation for the early termination of the franchise agreement as asserted by the Respondents.
200.	The Appellants were of the view that the Respondents had failed to appreciate that goodwill was attached to the business. They owned their respective restaurant businesses and were entitled to receive payments for the goodwill built up from their successful trading activities. They were selling their businesses as going concerns. They were not selling their rights under the franchise agreements. PizzaExpress was paying for the businesses not for the termination of the franchise agreements. 
201.	The Respondents’ position relied upon Mr Watson, an expert witness and legal analysis. Mr Watson’s expert opinion based upon terms used by surveyors was that no value should be ascribed to goodwill owned by the Appellants which was not inherent in the properties. His opinion was that the value of the consideration price over and above the property, plant and equipment and the sums paid under the restrictive covenant was attributable to the franchise agreements which he considered to be valuable assets in their own right.  
202.	I need to consider first whether in fact and in law goodwill was attached to the Appellants’ restaurant businesses at the time of sale, and if yes whether that goodwill belonged to PizzaExpress or to the Appellants.
203.	I make the following findings of fact on whether goodwill existed in the restaurant businesses at the time of sale, and if yes on the ownership of the goodwill.
Trading History of the Restaurant Businesses
204.	The Appellants started up their restaurant businesses from scratch except for the Liverpool restaurant in which Balloon Promotions purchased Mr Gillingham’s share in the partnership about two years after it was opened. Martin Hovey, the other partner in the Liverpool restaurant with Balloon Promotions, was responsible with Mr Gillingham for setting up the restaurant.
205.	Appellant One had traded from its London (Victoria Street) restaurant for 16 years before it was sold to PizzaExpress. Appellant Two traded from their East Sheen restaurant for 16 years and 13 years from  their Islington restaurant. The London, East Sheen and Islington restaurants were established businesses at the time of sale to PizzaExpress. The Liverpool restaurant was less well-established than the other three restaurants. However it was not a new business, having been in existence for five years before being sold. Appellant One was a partner of the Liverpool restaurant for the latter three years of the five years of its existence prior to the sale to PizzaExpress.
206.	Throughout their trading history the restaurants were subject to the terms of the franchise agreement with PizzaExpress. The Appellants chose to enter into the agreements to provide their new businesses with a competitive edge. The value of the franchise agreement was fixed at four per-cent of the turnover.
Profitability of the Businesses
207.	Appellant Two started to produce a profit from the Islington restaurant after two years, and after three years in respect of the East Sheen restaurant. The final partnership return for the Islington restaurant demonstrated that it was a profitable enterprise, yielding gross profits of £1,012,818 and net profits of £627,268 albeit for a slightly longer period than the normal 12 months accounting period from 1 October 1995 to 10 November 1996. Likewise the East Sheen restaurant was profitable with gross profits of £263,468 and net profits of £65,083 for the shorter accounting period of 1 April 1996 to 10 November 1996.
208.	I am satisfied that the restaurant businesses belonging to Appellant One in London and Liverpool were profitable enterprises but not as profitable as the businesses belonging to Appellant Two. Mr Simson, a director of Appellant One gave direct evidence that they were profitable, which was not challenged. The Profit and Loss Account for Appellant One for the year ending 30 September 1996 indicated  that it had made a profit from its restaurant partnerships, albeit from three restaurants one of which was not subject of this Appeal. Mr Hovey, the other partner in the Liverpool restaurant, gave evidence that he suffered a huge tax loss from the venture but at the end the weekly turnover for the business was between £6,500 - £7,000 with £5,000 being the break even point. 
209.	PizzaExpress did not have a direct interest in the profitability of the restaurants. The payment of its franchise fee by the Appellants was dependent upon turnover of the businesses not the profits. 
The Turnover
210.	There was a wide range in the turnover for the four restaurant businesses despite all the restaurants having a similar number of covers and sharing the same menu except for the dish of the day. The weekly turnover ranged from £6,500 for the Liverpool restaurant to £30,000 for the Islington restaurant.
The Ownership of the Restaurant Businesses
211.	The Appellants held leasehold interests in the premises from which the restaurants operated. In the case of East Sheen, the leasehold interest of Appellant Two was for 125 years.
212.	The Appellants were responsible for choosing the site of the restaurants with the exception of Liverpool which was chosen by the original partners. 
213.	PizzaExpress had no involvement with choice of site and the acquisition of the leasehold interests.
214.	The Appellants owned the furniture, fixtures and fittings, tables, chairs and all the necessary equipment to carry out the restaurant business. They were required to install an oven approved by PizzaExpress.
215.	The Appellants provided the start up and working capital for the restaurants. 
216.	The Appellants owned the restaurant businesses.
217.	The franchise agreements between PizzaExpress and the Appellant stipulated that  PizzaExpress  was the proprietor of the trademarks, service marks and the design and copyright in the get up of the restaurant premises. PizzaExpress had under the agreements the exclusive reputation and goodwill in the PizzaExpress name. The value agreed by PizzaExpress and the Appellants for the use of the proprietary rights belonging to PizzaExpress was four per cent of the Appellants’ businesses’ turnover. The agreements did not give PizzaExpress proprietary interests in any goodwill that may be attached to the Appellants’ businesses or ownership rights of the restaurants themselves. 
The Operation of the Restaurant Businesses
218.	The Appellants sold the product and provided the services to the public.
219.	The Appellants were responsible for the standards of customer service within their restaurants.
220.	The Appellants were the employers of the staff engaged in the restaurants. 
221.	The Appellants purchased the raw materials for the meals, prepared and served the meals. 
222.	The Appellants paid for the design and fit out of their restaurants.
223.	The franchise agreements, in particular the schedule setting out the franchisee’s obligations, appeared to give PizzaExpress considerable control over the operations of the Appellants’ restaurant businesses. The contents of the franchise agreements, however, have to be weighed against the evidence of what actually happened in relation to the operation of the businesses. The Appellants gave compelling evidence that they exercised considerable discretion in how they ran their businesses. 
224.	The Appellants instructed and trained their staff, who did not wear uniforms prescribed by PizzaExpress. The Appellants effectively designed the lay out of their premises and decorated them accordingly. PizzaExpress did not provide them with detailed operating manuals for the preparation of the meals. The Appellants generally relied upon their own skill and experience for preparing the meals. The Appellants exercised freedom of choice in respect of purchase of materials except for the dough and tomato sauce which had to be purchased from PizzaExpress. They purchased their own wines provided the wines fell within broad categories of Italian wines. The main restriction placed upon the Appellants was the fixed menu, however, they were able to select their own dish of the day. Mr Hovey gave evidence that he would cook more than one special and that his prices were lower than other PizzaExpress restaurants. Also the Appellants introduced variations to the menu with the additions of side salads and garlic bread which resulted in PizzaExpress bringing out a separate menu for franchised restaurants. 
225.	PizzaExpress carried out inspections of the Appellants’ properties about every eight to ten weeks. I accept the Appellants’ evidence that the inspections were largely perfunctory affairs concerned largely with cleanliness of the properties. 
226.	Mr Watson’ statement that PizzaExpress was a soft brand provided corroboration for the Appellants’ evidence regarding their freedom to organise their businesses. PizzaExpress in its Annual Report for the year ending 30 June 1994 noted that each PizzaExpress restaurant was unique, designed to fit in with its environment. 
227.	I am satisfied on the evidence that the Appellants enjoyed considerable discretion in how their businesses were operated. Their restaurants were not part of a chain of PizzaExpress restaurants but different charms on a bracelet. 
The Reputation and Customer Recognition of the Restaurant Businesses
228.	The available evidence suggested that the PizzaExpress brand was not well known throughout the majority of the Appellants’ period of ownership of their restaurants. Appellant Two pointed out that when they opened their premises at East Sheen there were only seven PizzaExpress restaurants in the United Kingdom. Appellant Two had to educate their customers about pizzas in general, not just about the PizzaExpress Brand. In 1988 Appellant Two seriously contemplated exercising the five year break clause in the franchise agreements because they perceived that the franchise was not producing any real benefits for their businesses. Mr Hovey stated in his evidence that the PizzaExpress brand was not recognised in Liverpool when he opened the restaurant in 1991. In Mr Hovey’s opinion the lack of recognition of the PizzaExpress brand was a major contributory factor for the financial difficulties of the Liverpool restaurant in the early years. 
229.	The acquisition of PizzaExpress by the Star Computer Group and the conversion to a PLC in 1994 were the catalysts for the expansion of PizzaExpress and the hardening of its brand.  These changes were one of the principal reasons why the Appellants decided to sell their businesses.
230.	The structuring of the franchise fee also supported the conclusion that PizzaExpress was not a well-known brand. The Appellants were not required to pay an initial lump sum payment for the acquisition of the franchise. The fee remained at the same percentage of turnover, four per cent, throughout the term of the franchise agreements including renewal of the agreement. It was in only in the 1996 agreement which was not agreed that PizzaExpress signalled its intention to raise the fee to six per cent.   
231.	The variation in the turnovers of the respective restaurants despite sharing the same menus and a similar number of covers was indicative that there were other factors at play other than the PizzaExpress brand attracting customers to the Appellants’ restaurants.
232.	The Appellants displayed a notice in their premises that they were franchisees, which was required by the franchise agreements.
233.	PizzaExpress did not advertise the Appellants’ restaurants. The Appellants themselves conducted their own advertising.
234.	At least one of the partners for Appellant Two was always on site when their restaurants were open. In the case of Appellant One the evidence suggested that its other partner took an active role in the running of the restaurants.
235.	Appellant Two confirmed that many of its customers particularly at its East Sheen restaurant knew that they were owners of their restaurants. Their customers commented how much better their pizzas were when compared with those of other pizza establishments including PizzaExpress restaurants. Appellant One considered that the success of its London restaurant was due to the excellent customer service provided. Mr Muller, partner of Appellant One, stated that the customers knew the difference between their owner managed restaurant and the franchised restaurants. Their restaurant provided a better service.  
236.	The Appellants gave evidence that many of its customers were repeat customers. This was particularly so for Appellant Two in respect of their East Sheen premises where the loyal customer base was drawn from the nearby residential estates.
237.	The Respondents relied on the expert opinion of Mr Watson that PizzaExpress was a well-known brand and that customers resorted to PizzaExpress restaurants because of the standard business format. I formed the view that Mr Watson based his opinion on his general knowledge of the restaurant trade and the documentary evidence rather than the individual facts of this Appeal. Mr Watson did not have the benefit of the Appellants’ first hand experience of owning a restaurant with a PizzaExpress franchise in the period from 1980 to 1996.  
238.	I conclude from the available evidence that PizzaExpress did not become a well-known brand until after 1994. The Appellants established the reputation of their restaurants, which was based principally on the service they provided to their customers rather than the sale of PizzaExpress pizzas and its associated branding.
239.	When the facts found about the operation of the businesses and customer recognition are considered together I am satisfied that the customers resorted principally to the Appellants’ restaurants because of the good service provided by the Appellants and that the customers would hold the Appellants rather than PizzaExpress accountable for the quality of the product.
The Sale and its Accounting Treatment
240.	The sale agreement between PizzaExpress and the Appellants evidenced that the Appellants were selling their restaurant businesses as going concerns. The business was defined as “the pizza restaurant business now carried on under the name ‘PizzaExpress’ by the vendor under the franchise agreement”. The schedule of assets sold in the agreement explicitly referred to vendor’s goodwill in relation to the business.
241.	Each of the Appellants received differing amounts of consideration for the sale of their businesses. The consideration received was computed on the basis of their respective turnovers for their businesses.
242.	The sales agreements included an apportionment of the consideration which was broken down individually for each of the restaurants and included a substantial amount for goodwill. The Appellants were advised by their own accountants on the breakdown and were required to initial the individual apportionments. Prior to agreeing the apportionments, the accountants certainly for Appellant Two were aware from correspondence that HM Revenue and Customs were disputing the allocation to goodwill.
243.	In the Annual Accounts for Appellant One for the year ending 30 September 1996 its accountant recorded that Appellant One had disposed of its interest in the  London and Liverpool restaurants and the goodwills were disposed of for a total gross consideration of £270,427.
244.	PizzaExpress stated in its Annual Accounts for the year ending 30 June 1997 that they purchased goodwill in respect of the franchised restaurants. Counsel for the Respondents contended that PizzaExpress’ statement had no relevance for the disputed issue of the Appeal. He stated that PizzaExpress had no choice but to call it goodwill because it conformed with the accounting definition of goodwill, namely, the excess paid over and above the fair value of the tangible assets. Further he suggested that PizzaExpress had no interest in how the consideration was divided up. I disagree with Respondents’ counsel he overlooked the fact that PizzaExpress as a PLC and its accountants have a duty to give a fair and accurate description of their accounts. Also the fact that PizzaExpress’ accountants complied with the Statement of Standard Accounting Practice (SAP22) including disclosure of the accounting policy followed in relation to goodwill merited weight in my assessment of the facts determining this Appeal.
245.	 Mr Carmichael in his capacity as an expert accountant confirmed that the allocation of consideration to goodwill complied with standard accounting practice and the law as he understood it. Mr Carmichael had considerable experience of the Statements of Standard Accounting Practice and been involved with the original drafting of SAP22. Although he based his assessment on the current standard FRS10, he pointed out that there was no significant variation between the current and previous standards for identifying goodwill. Mr Carmichael also considered that the incorporation of the accountancy definition of goodwill in the Finance Act 2002 was confirmation of the accountants’ concept of goodwill which had remained unchanged for 50 years.
246.	  I have already decided that the accountancy definition of goodwill cannot determine whether the Appellants sold goodwill in the context of TCGA 1992. However, I do place weight on the fact that at least three sets of accountants at the time of the sale of the restaurants decided that the Appellants sold goodwill. According to Mr Carmichael their decisions complied with standard accountancy practice. I also give weight to Mr Carmichael’s expert opinion that Appellant One possessed goodwill in its restaurant businesses. Mr Carmichael was not instructed by Appellant Two but his observations on Appellant One applied equally in my view to Appellant Two.
247.	The Appellants entered into restrictive covenants with PizzaExpress preventing them from operating or managing a pizza restaurant for a period of two years anywhere in the United Kingdom. I find that the existence of such restrictive covenants was indicative that the Appellants had goodwill in their businesses and PizzaExpress by agreeing to the restrictive covenants were protecting the goodwill they purchased from the Appellants.
Applying the Legal Concept of Goodwill to the Facts Found
248.	I have previously set out my conclusions on the salient features of the legal concept of goodwill. My starting point is that the consideration paid for the Appellants’ business incorporated an amount representing the excess over and above the true and fair value of the tangible assets. The existence of that excess combined with the profitability of the businesses were indicative that the businesses had added value which is an essential characteristic of the legal concept of goodwill. The added value was inseparable from the businesses which were sold as going concerns. They were established businesses not new ones. The facts found demonstrated that the Appellants had made a significant contribution to the success of their businesses. They provided the start up and working capital. They developed a reputation for the businesses at a time when the brand name of PizzaExpress was not well-known. They developed a customer base through the customer service they offered, the maintenance of standards by their daily presence at the restaurants and their individual designs of their restaurants. They enjoyed considerable freedom in the way they ran their businesses. The Appellants owned the businesses. The businesses were sold with the benefit of the leasehold interests in suitably designed and equipped properties which enhanced the added value belonging to the businesses. 
249.	I conclude from the above analysis that the added value as represented by the excess consideration conforms with the salient features for the concept of goodwill as construed in TCGA 1992. The fact that the added value was attached to the businesses and the Appellants owned the businesses are persuasive that the Appellants had goodwill to sell to PizzaExpress. This goodwill was separate and distinct from the goodwill owned by PizzaExpress in its name and associated intellectual property rights. My conclusion is given added force when the facts found in relation to the accounting treatment of the transactions are taken into account together with   the requirement for the Appellants to enter into restrictive covenants to protect the PizzaExpress’ acquisition of the added value attached to the businesses.
Testing the Provisional Conclusion against the Respondents’ Submissions and Expert Evidence
250.	It is necessary, however, to test my provisional conclusion against the expert evidence of Mr Watson and the submissions of the Respondents’ counsel.
251.	Before considering the substantive points of Mr Watson’s expert evidence I intend to deal with the points raised by Counsel for Appellant Two challenging the relevance of Mr Watson’s expertise in the specific matters in dispute in this Appeal. I have earlier highlighted concerns generally with the RICS’ approach to goodwill. Counsel established from her cross-examination of Mr Carmichael that it was unusual to use the advice of chartered surveyors in valuations of goodwill not inherent in the property which was normally the province of accountants. Counsel also drew attention to guidance in the RICS GN1 Trade Related Valuations and Goodwill, part of the RICS Red Book, at paragraph 6.4 which stated that 
  “The goodwill element of a going concern includes intangible as well as tangible assets, and requires an overall appreciation of the business in question. The valuer of the property interest will therefore need to liaise with other consultants who have specialist knowledge of analysing the business’s financial performance, and valuing intangible assets, such as brands and trademarks”.
252.	Mr Watson accepted in his evidence that he had not liased with other consultants in relation to the disputed matters of this Appeal. He found the wording of paragraph 6.4 onerous and considered that he had the necessary expertise in this area. I consider that the challenges made by Counsel were well founded and that Mr Watson was unwise not to seek the advice of other experts, particularly in view of his admission that he was not as familiar with the concept of free separable goodwill which was one of the substantive issues in this Appeal.
253.	Mr Watson’s evidence consisted of two propositions which although inter-related also stood alone. The two propositions were that
(1)	The goodwill not inherent in the property was owned by PizzaExpress.
(2)	The excess consideration over and above the value of the tangible assets should be allocated to compensation for the termination of the franchise agreements with a nil apportionment to vendor’s goodwill.
Mr Watson’s First Proposition
254.	Mr Watson’s first proposition was derived principally from his analysis of the franchise agreement between PizzaExpress and the Appellants. He took at face value the statement in the franchise agreements that PizzaExpress was a chain of restaurants. He identified what he termed as the key question in this Appeal which was: “who has ownership and control of the PizzaExpress operating style and brand”.  I consider that Mr Watson addressed the wrong question. His key question was capable of only one answer, namely PizzaExpress. The issue of the ownership of the PizzaExpress operating style and brand was not in dispute in this Appeal. The Appellants accepted that PizzaExpress had the proprietary interest in its name and intellectual property rights. The disputed issue was whether Appellants’ businesses had their own goodwill over and above that goodwill attaching to the PizzaExpress name. Mr Watson failed to appreciate the extent of the legal concept of goodwill which required goodwill to be considered as a whole and extends beyond a name and a brand. Further he did not recognise that the Appellants’ businesses were businesses in their own right, not just part of a chain.
255.	  Mr Watson did not have the benefit of hearing the evidence before writing his report. I am satisfied that his methodology was flawed for determining the issue about whether the Appellants possessed goodwill in their businesses. I do not consider that his opinion upsets my findings of fact on the Appellants’ ownership of goodwill in their businesses.
256.	Counsel for the Respondents posed a more subtle argument. He suggested that the Appellants may well have personal goodwill and adherent goodwill but the personal goodwill could not be assigned as part of the business and the adherent goodwill was included in the property valuation. Thus the residue that was left constituted the PizzaExpress brand and operating style which did not belong to the Appellants. Therefore they had no goodwill in their businesses. His principal argument has been overtaken by my findings of fact that the Appellants did have goodwill in their businesses. However it is necessary to examine further his submissions regarding adherent goodwill which is of some significance for all the Appellants.
257.	Counsel contended that the distinction between inherent and adherent goodwill was irrelevant for present purposes. In his view they were simply part of the real property and cannot be disposed of separately from the property. The relevant asset for capital gains tax purposes was the real property, whether it be freehold or leasehold.  If the property was sold separately, at the same time as the business has moved elsewhere, the capital gain would be the increase in the value of the property since first purchased. Thus it would be incorrect to say that the proprietor has received £100,000 for the property and £30,000 for the adherent goodwill. The correct position would be that the proprietor has received £130,000.  Counsel applied this argument to the Appellants by suggesting that if their properties had adherent goodwill it would have been included in the value of the property not in the goodwill sold by the Appellants to PizzaExpress. 
258.	 I accept that adherent goodwill is associated with the property and will not be passed to the purchaser if the property is not sold with the business. However where the sale of the business incorporates the interest in the property it does not automatically follow that the value of the adherent goodwill would be subsumed within the value of the property. I say this because:
(1)	 I consider that Counsel has extended too far the ratio of Whiteman Smith Motor Co, upon which his proposition was based. Whiteman Smith Motor Co stated that net adherent goodwill will only arise if the property is sold with the business. Whiteman Smith Motor Co was not authority, however, for the proposition that the value of the net adherent goodwill in all circumstances would be subsumed within the property valuation. The value of the adherent goodwill was included in the property valuation in Whiteman Smith Motor Co because that was the requirement of the Landlord and Tenant Act which is not the statute under consideration in this Appeal. 
(2)	The present edition of the Respondents’ Capital Gains Tax Manual classifies adherent goodwill with separable free goodwill not with inherent goodwill which suggests that adherent goodwill will be valued separately from the property. Butler v Evans recognises this fact.
(3)	Counsel produced no evidence to support his proposition that PizzaExpress and the Appellants included adherent goodwill in their valuations of the leasehold interest transferred. The available evidence from the sales agreements suggested that the only type of goodwill not included in vendor’s goodwill was that inherent in the property.
Mr Watson’s Second Proposition
259.	Mr Watson’s second proposition was that the excess consideration should be allocated to compensation for the termination of the franchise agreements not goodwill. His second proposition still stood because it was not dependent upon whether the Appellants had goodwill in their businesses. Thus if I find that the franchise agreements were a valuable asset it would be necessary to make an appropriate apportionment of the excess consideration between termination of the franchise agreements and goodwill.
260.	Mr Watson’s expert opinion was that the potential benefits accruing from the right for the Appellants to trade in the style of a PizzaExpress restaurant and to benefit from the support provided by the PizzaExpress organisation was considerable. He took the view that if the Appellants’ restaurants were sold as fully equipped operational entities, trading under the name of PizzaExpress, a further uplift in the sale price would result from the price for a restaurant without the PizzaExpress name. The additional value would arise because the purchaser would be able to have direct regard to the actual trading performance of the business as a PizzaExpress restaurant, and would not incur expense in re-branding and re-establishing the business under a different name. Mr Watson, therefore, concluded that there was additional value in the business trading as PizzaExpress over and above inherent goodwill. 
261.	He based his opinion on the following factors:
(1)	PizzaExpress was a well established national brand. The Appellants’ restaurants trading as PizzaExpress would achieve significantly greater levels of sales than as restaurants offering a similar priced menu and product but without the PizzaExpress brand.
(2)	Under the terms of the franchise agreements, the franchisor PizzaExpress would be contracted to provide operating support, a full marketing strategy and a proven price structure which would be beneficial to the franchisee.
262.	The facts found seriously questioned Mr Watson’s assumptions about the level of operational and marketing support provided by PizzaExpress. However, leaving those concerns aside for a moment, I consider there was a more fundamental flaw in Mr Watson’s argument. His reasoning would make sense if the purchaser of the Appellants’ restaurant businesses was another prospective franchisee but in this Appeal the purchaser was the franchisor, PizzaExpress. Mr Watson has failed to explain why  PizzaExpress would pay more for a brand name that it already owned. Respondents’ Counsel pointed out in his submission that the franchise agreements did not prevent PizzaExpress from opening PizzaExpress restaurants next door to the Appellants’ premises and taking away the Appellants’ customers. Counsel’s submission in my view undermined Mr Watson’s opinion rather than supporting it. I fail to understand why PizzaExpress would pay significant sums of money for a name and intellectual property rights that it already owned, particularly as it could open with impunity other PizzaExpress restaurants in the immediate locality of the Appellants’ restaurants.
263.	Counsel for the Respondents further suggested that what PizzaExpress wanted to do was to be able to run PizzaExpress restaurants from the specified locations of the Appellants’ restaurants. PizzaExpress could not do that because it had granted franchises in respect of those locations. PizzaExpress had to terminate or buy out the franchise agreements, which were intangible assets belonging to the Appellants. I have difficulty in reconciling Counsel’s further submission with his earlier submission, why would PizzaExpress buy out franchise agreements if those agreements did not prevent PizzaExpress from opening with impunity other PizzaExpress restaurants in the immediate vicinity of the Appellants’ businesses.
264.	 The Respondents’ case that the franchise agreements had considerable added value was also undermined by the terms of the franchise agreements with Appellant Two. The agreements in force at the time of the sale contained a clause to the effect that either party may at anytime after the first anniversary of agreement terminate them by giving six months notice. Counsel for the Respondents conceded at the hearing that this being so the franchise agreements in respect of Appellant Two would have minimal value. PizzaExpress could simply give six months notice to terminate them rather than paying significant sums of compensation to buy out the franchises. 
265.	Despite his concession Respondents’ counsel maintained that it did not alter the Respondents’ position that the excess consideration represented compensation for termination of the franchise agreements because:
(1)	Appellant One did not have a similar termination clause in its franchise agreement with PizzaExpress. The agreement was for ten years with an option to renew on the same terms.
(2)	Appellant Two had not revealed the existence of the termination clause in their skeleton argument or their response to the agreed statement of facts.
(3)	The evidence suggested that PizzaExpress dealt with all the franchisees on the same basis, namely that the franchise agreements were for ten years with an option to renew.
(4)	It was not now open for Appellant Two to raise the break clause. They could not rely upon PizzaExpress’ mistake by failing to terminate the franchise agreements by six months notice instead of paying compensation. On a true construction of the sales agreement PizzaExpress was paying to terminate the franchise agreements. Appellant Two could not seek subsequently to re-allocate that consideration for tax purposes      ( EV Booth (Holdings Ltd) v Buckwell (HM Inspector of Taxes) [1980] STC 580). 
266.	I accept that it would have been preferable for Appellant Two to have identified the relevance of the termination clause in their exchanges with the Respondents prior to the Appeal hearing. However, I am satisfied there was no deliberate attempt on the part of Appellant Two to mislead or ambush the Respondents. The existence of the break clause did not alter the principal contention of Appellants Two that the payment was for goodwill not for compensation to terminate the franchise agreements.  They disclosed the franchise agreement for the Islington restaurant which contained the termination clause to the Respondents in good time for the hearing. Mr Watson based his expert opinion on the Islington franchise agreement for the four restaurants. My impression was that Counsel for Appellant Two did not fully appreciate the relevance of the break clause until after Mr Kidney had given his evidence. Equally Mr Watson, the expert called by the Respondents, failed to spot the significance of the break clause when compiling his report. 
267.	I consider that Respondents’ Counsel’s arguments for effectively ignoring the break clause have no substance. He assumed that PizzaExpress made a mistake in not terminating by notice the franchise agreements for Appellant Two because the evidence indicated that PizzaExpress negotiated with the franchisees on the basis of the standard franchise agreement. The evidence on my assessment strongly indicated that PizzaExpress was purchasing the goodwill of the Appellants’ business, in which case it did not matter to PizzaExpress whether or not the franchise agreements contained the break clause. PizzaExpress was treating all the franchisees equally in that it attached no significant monetary value to the franchise agreements.  
268.	I have difficulty in countenancing Respondents’ counsels’ inference that PizzaExpress overlooked the break clause, particularly if as counsel suggests that mistake cost PizzaExpress £2,100,000 (the value of the goodwill in Appellant Two’s business).  PizzaExpress was a PLC with its directors having a duty to safeguard its assets. Lawyers and presumably accountants advised PizzaExpress in its negotiations with the franchisees. I find it improbable that they missed the break clause in Appellant Two’s franchise agreement if it had the huge financial consequences for PizzaExpress implied by counsel. 
269.	I consider that the dictum in  Booth (HoldingsLtd) v Buckwell was not relevant to these particular circumstances. Appellant Two was not seeking after the event to re-allocate the consideration for tax purposes. Appellant Two has maintained throughout that the true construction of the sale agreement with PizzaExpress was that they sold goodwill.
270.	I am satisfied that Mr Watson’s second proposition about the added value of the franchise agreement had no validity in the specific circumstances of this Appeal. His proposition was flawed in that he failed to explain why the franchisor, PizzaExpress, would pay considerable sums of money for its own property. The break clause in the franchise agreements for Appellant Two also exposed the implausibility of his proposition. Respondents’ counsel was correct when he stated that PizzaExpress wanted to run PizzaExpress restaurants from the specified locations of the Appellants’ restaurants but in order to do that PizzaExpress had to buy the Appellants’ restaurant businesses not the franchise agreements. It was only by buying the businesses that PizzaExpress could occupy the specified locations.  
271.	In this regard I approve the expert opinion of Mr Carmichael who said that
“The termination payment could not have been to take back the Trade mark/Brand name since that always belonged to PizzaExpress PLC or the relevant member of its group.
In my opinion, there is a fundamental error in the argument of the Inspector of Taxes. He has failed to understand that goodwill is attributable to a business …..
The goodwill attached to the name PizzaExpress remained throughout the term of the franchise agreement with PizzaExpress PLC or a member of its group. It is part of the goodwill attached to the business of PizzaExpress PLC or the relevant member of its group.
The goodwill attached to the business of the franchisee was derived from the running of the restaurant.
In my opinion the excess of the total payment by the franchisor over the assets less liabilities purchased is correctly described as goodwill”.
272.	The terms of the sales agreements between PizzaExpress and the Appellants reflected the accurate contractual position between them.  Under the agreements PizzaExpress purchased the Appellants’ businesses as going concerns. One of the assets purchased by PizzaExpress was the Appellants’ goodwill in relation to the business. Under the agreements the parties terminated the franchise and wholesale agreements for nominal amounts. 
273.	Respondents’ counsel contended that the Appellants had provided no expert evidence to support the valuations of the various assets detailed in the sales agreements. I do not understand the relevance of his contention. The Respondents have not challenged the accuracy or the bona fides of the total consideration paid by PizzaExpress to each of the Appellants. There was no evidence to suggest that the agreements were a sham. The available evidence supported the conclusion that the total consideration was honestly reached at arms length between the parties. The Respondents have specifically stated that they did not challenge the values ascribed by the parties to the leaseholds transferred and the values ascribed to plant and equipment. Thus the Respondents were not in a position to challenge the valuation of the consideration in excess of the value ascribed to the properties and the plant and equipment because they have accepted the value of the excess consideration by their admissions on the other constituent parts of the total consideration. The contested issue was whether either all or part of the excess consideration should have been allocated to compensation for the early termination of the franchise agreements. I have decided that the value of the franchise agreements was nominal. Thus the question whether there should be a re-apportionment of the consideration allocated to the Appellants’ goodwill in the business does not arise.
Summary of my Conclusions under Submission Four
274.	I have found as fact:
(1)	  The consideration paid for the Appellants’ businesses by PizzaExpress incorporated an amount representing the excess over and above the true and fair value of the tangible assets.
(2)	The Appellants owned their own restaurants which were established businesses not new businesses.
(3)	The Appellants’ businesses were profitable.
(4)	The Appellants provided the start up and working capital for their businesses and invested considerable amounts of their own time to make the businesses profitable.
(5)	PizzaExpress had no direct interest in the profitability of the Appellants’ restaurants. Its franchise fee was a fixed percentage of the turnover of the Appellants’ businesses.
(6)	The turnovers for the four restaurants varied enormously despite having the same menus and similar level of restaurant covers.
(7)	The Appellants held leasehold interests in their restaurant premises which was surrendered to PizzaExpress in conjunction with the sale of the Appellants’ restaurant businesses as going concerns. The premises were suitably equipped and designed by the Appellants for the purposes of a restaurant.
(8)	PizzaExpress owned the exclusive goodwill in the name “PizzaExpress” and in the associated intellectual property rights. The franchise agreement did not give PizzaExpress ownership of the goodwill attached to the Appellants’ restaurant businesses.
(9)	The Appellants had considerable discretion in the running of their businesses. They provided the product and services to the customer. They employed and trained their own staff. They paid for and designed the interior and get up of their premises. The Appellants generally relied upon their own skill and experience for preparing the meals. They exercised freedom of choice in respect of purchase of wines and foodstuffs except  the dough and tomato sauce. Thus they did not work to a prescribed business format which was corroborated by Mr Watson’s statement that PizzaExpress was a “soft” brand”.
(10)	The Appellants were responsible for the standards of customer service within their restaurants.
(11)	The available evidence suggested that the PizzaExpress brand was not well known throughout the majority of the Appellants’ period of ownership of their restaurants. PizzaExpress did not advertise the Appellants’ restaurants. The Appellants themselves conducted their own advertising. The Appellants established the reputation of their restaurants, which was based principally on the service they provided to their customers rather than the sale of PizzaExpress pizzas and its associated branding.
(12)	I am satisfied that the customers resorted principally to the Appellants’ restaurants because of the good service provided by the Appellants and that the customers would hold the Appellants rather than PizzaExpress accountable for the quality of the product.
(13)	  The accountants involved in the sale, including those instructed by PizzaExpress complied with standard accountancy practice when allocating part of the consideration to goodwill belonging to the Appellants’ businesses.
(14)	The restrictive covenants indicated that the Appellants had goodwill in their businesses and PizzaExpress were protecting the goodwill they purchased from the Appellants by agreeing to the restrictive covenants.
275.	I concluded from my analysis of the facts found against the salient features for legal concept of goodwill that the added value as represented by the excess consideration was properly described as goodwill within the context of TCGA 1992. Further the goodwill was attached to the businesses and as the Appellants owned the businesses they had goodwill to sell to PizzaExpress. The goodwill did not attach to the PizzaExpress brand.
276.	I rejected Mr Watson’s first proposition that PizzaExpress owned the goodwill not inherent in the leasehold properties. I concluded that Mr Watson’s proposition did not fit with the facts found. PizzaExpress was not a chain of restaurants but a bracelet with different charms on it with the Appellants owning their restaurant businesses. Further Mr Watson addressed his mind to the wrong question namely “who has ownership and control of the PizzaExpress operating style and brand” which precluded him from considering the disputed issue in this Appeal; whether goodwill was attached to the Appellants’ businesses.
277.	I held that Mr Watson’s second proposition, namely, that the excess consideration should be allocated to compensation for the termination of the franchise agreements instead of goodwill, was without foundation. Mr Watson failed to explain why PizzaExpress would pay significant sums of money for a name and intellectual property rights that it already owned, particularly as it could open with impunity other PizzaExpress restaurants in the immediate locality of the Appellants’ restaurants. Further his second proposition was undermined by the terms of the franchise agreements with Appellant Two. The agreements contained a clause that either party may terminate them by giving six months notice. Counsel for the Respondents conceded at the hearing that this being so the franchise agreements in respect of Appellant Two would have minimal value.
278.	I found no evidence to support Respondents’ Counsel proposition that PizzaExpress and the Appellants included adherent goodwill in their valuations of  the leasehold interest transferred. The available evidence from the sales agreements suggested that the only type of goodwill not included in vendor’s goodwill was that inherent in the property.
279.	The value of the franchise agreements was nominal. The valuation of the consideration in excess of the value placed on the tangible assets was not in dispute. Thus the Respondents’ grounds for re-apportionment of the consideration allocated to the Appellants’ goodwill in the business fails and the issue of re-apportionment, therefore, did not arise. 
My Decision on Submission Four
280.	The Appellants have satisfied me on the balance of probabilities that they sold goodwill to Pizza Express in the following amounts and that the nominal value allocated by them to the termination of the franchise agreements was correct. 
	Appellant One 
London Premises (£)	Appellant One 
Liverpool Premises (£)	Appellant Two 
East Sheen Premises (£)	Appellant Two 
Islington Premises (£)	
Goodwill not inherent in the property	405,113	107,000	624,451	1,179,498	
Personal Goodwill	Nil	Nil	85,000	200,000	

281.	The goodwill met the requirements of Class 4, section 155 TCGA 1992.
282.	I reached this decision from my findings of fact, the analysis of those findings against the salient features of the legal concept of goodwill, and my assessment of the Respondents’ submissions and expert opinion which I found to be flawed and not persuasive.
283.	I note that Appellant Two has restricted its dispute to the amount allocated to “goodwill not inherent in the property”.
My Decisions on the Questions for Determination
284.	My decisions on the questions for determination are based upon my rulings set out under submissions one, two, three and four.
The Questions for Determination for Appellant One
285.	The questions for determination are as follows:
(1)	Whether any part of the consideration obtained by Balloon Promotions Limited pursuant to two written agreements with Pizza Express 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, section 155 TCGA 1992, thereby allowing the gain on any such disposal to qualify for rollover relief subject to the requirements of sections 152-154 TCGA 1992 on an application of that consideration to an acquisition of “new assets”.
My decision: I am satisfied that the consideration obtained by Balloon Promotions Limited pursuant to two written agreements with Pizza Express dated 16 October 1996 amounting to £405,113 and £107,000 respectively 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 rollover relief subject to the requirements of sections 152-154 TCGA 1992 on an application of that consideration to an acquisition of “new assets”. 
(2)	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 section 52(4) TCGA 1992.
My decision: I find that no apportionment of the total consideration is necessary.
(3)	In the event of a finding that an apportionment of the consideration obtained by Balloon Promotions Limited under the Agreement 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.
No decision is required in view of my answer to question 2.
(4)	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?
My decision: I have received no direct evidence regarding the computation of the chargeable gains for the said accounting period. I direct that the parties resolve this dispute by agreement based upon my decisions in 1 and 2 above, and notify the Office of Special Commissioners that the disputed matter has been settled by agreement. If no agreement has been reached within six months from the date of release of this decision I direct that the disputed matter be listed before me for final determination. 
I, therefore, allow the Appeal of Appellant One in principle
 The Questions for Determination for Appellant Two
286.	The questions for determination in principle were as follows:
A    Whether any part of the consideration obtained by
(i) Mr Edward Kidney, Mr Natalie Lucibello and Mr Alonso Vela Castro pursuant to a written agreement with Pizza Express (Restaurants) Ltd, Pizza Express PLC and Pizza Express (Soho) Ltd dated 16 October 1996 (“Agreement 1”) amounting to £1,379,498 and
(ii) Mr Edward Kidney and Mr Natalie Lucibello pursuant to a written agreement with Pizza Express (Restaurants) Ltd,  and Pizza Express 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 “Rollover Relief”, subject to the requirements of sections 152 – 154 TCGA 1992, on an application of that consideration to an acquisition of new assets.
My decision: I find that that part of the consideration representing the goodwill not inherent in the property amounting to £1,179,498 for the Islington Property and £624,451 for the East Sheen property was obtained by Mr Edward Kidney, Mr Natalie Lucibello and Mr Alonso Vela Castro and Mr Edward Kidney and Mr Natalie Lucibello respectively for the disposal of “Goodwill” within the meaning of Class 4, section 155 TCGA 1992. Thus allowing the gain on any such disposal to qualify for “Rollover Relief”, subject to the requirements of sections 152 – 154 TCGA 1992, on an application of that consideration to an acquisition of new assets.
Further I was not required to make a decision on that part of the consideration representing the personal goodwill amounting to £200,000 (Islington) and £85,000 (East Sheen)  obtained by Mr Edward Kidney, Mr Natalie Lucibello and Mr Alonso Vela Castro and Mr Edward Kidney and Mr Natalie Lucibello respectively because Appellant Two had indicated through their counsel that these amounts were not the subject of the dispute.
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 of section 52(4) TCGA 1992.
My decision: I find that no apportionment of the total consideration is necessary by virtue of 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. 
No decision is required in view of my answer to question B.
I, therefore, allow the Appeal of Appellant Two in principle on the basis of the amended amounts in Question A 
287.	I note that I have not been required to make a final determination on the amount of chargeable gains for the said accounting period. The bundle of documents contained a letter from D Rawlings, Inspector of Taxes, dated 22 March 2005 which indicated that there were still outstanding matters affecting the computation of chargeable gains which were not directly related to the disputed matters in this Appeal. I direct that the parties resolve the outstanding matters by agreement based upon my decisions in A and B above, and notify the Office of Special Commissioners that the outstanding matters have been settled by agreement. If no agreement has been reached within six months from the date of release of this decision. I direct that the outstanding matters be listed before me for final determination. 
Costs
288.	I note that the skeleton argument for Appellant Two contained an application for costs if they were successful with the Appeal. I did not invite applications for costs at the end of the hearings because my power to award costs in Special Commissioner hearings is restricted to those circumstances set out in Regulation 21(1) of the Special Commissioners Regulations 1994.  Regulation 21(1) does not incorporate the general rule that costs follow the event.
289.	If any of the parties wishes to make application for costs, he made do so provided he makes a written application setting out clearly the amount claimed and the reasons why Regulation 21(1) applies supported by authorities where necessary and served on the other party within one month from release of the decision. The other party will have a right of response within one month of receipt of the application. The Applicant will a have a right of reply restricted to the points made in the response by the other party. The Applicant will serve a consolidated bundle of the Application and responses together with any authorities cited on the Office of the Special Commissioners within three months from release of the decision. If no application is received within the stipulated period I will formally determine that there has been no application for costs. If an Application is received supported by the consolidated bundle I will determine the Application for costs without a hearing unless I direct otherwise or one of the parties applies for a hearing. 
290.	I  wish to thank the respective Counsel and those instructing them for their considerable assistance with the Appeal 

Michael Tildesley OBE

SPECIAL COMMISSIONER
RELEASE DATE: 3 March 2006

SC 3037/2005
SC 3038/2005
SC 3039/2005
SC 3073/2005

££Balloon Promotions Ltd & Ors v  Revenue and Customs [2006] UKSPC SPC00524 (03 March 2006)