Dwan and Others
| Jurisdiction | UK Non-devolved |
| Judgment Date | 03 February 2022 |
| Neutral Citation | [2022] UKFTT 36 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2022] UKFTT 36 (TC)
Judge John Brooks
Philip Turner, of Grade A Alternative, appeared for the appellants
James Henderson and Laura Ruxandu, both of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Income tax – Relief for gifts of shares to charity – Income Tax Act 2007 (ITA 2007), s. 431 – Market value of shares at dates of gifts – Taxation of Chargeable Gains Act 1992 (TCGA 1992), s. 272 – Appeals dismissed.
Concerning the market value of shares gifted to charity, the First-Tier Tribunal (FTT) accepted the lower valuation advanced on behalf of HMRC as it was broader and more thorough than that put forward by the appellants.
The five appellants each made gifts of shares in an AIM-listed company (Taskcatch plc) to various charities; the dates of the gifts were 31 March 2003 and 5 and 6 October 2004. The first appellant (Mr Dwan) made gifts on both 31 March 2003 and 5 October 2004, whereas the other four appellants made their gifts on 5 or 6 October only. They all claimed relief from income tax for the gifts under what is now ITA 2007, s. 431 based on a market value for the shares of 32.5p at 31 March 2003 (Mr Dwan only); 40p per share on 5 October 2004 (Mr and Mrs Dwan); and 39.75p per share at 6 October (the other appellants).
After conducting enquiries into the relevant tax returns of all the appellants, HMRC concluded that the claims for relief were excessive in all cases, on the basis that the market values of the shares were considerably lower, namely 10.35p on 31 March 2003 and 5.09p on 5 or 6 October (except in the case of one appellant – Mr Parkinson – for whom HMRC advanced a valuation of 5.82p as at 6 October).
Although there was broad agreement on the facts between the parties, there was some dispute over the acquisition date and price paid for the shares by the Dwans.
Taskcatch was incorporated on 3 January 2003 with an authorised share capital of 1,000 ordinary shares of £1 each. On 6 February 2003, the existing share capital was subdivided into 100,000 ordinary shares of 1p each and Taskcatch issued 4,999,900 ordinary shares of 1p each to 23 shareholders, including the first appellant, who obtained 500,000 shares (amending an earlier offer). A day later, the company re-registered as a plc and issued an offer for subscription for 10m ordinary shares at 7p per share. The company was to be a cash shell to attract businesses seeking admission to AIM, with a focus on small businesses with high growth potential. Subscribers would be locked in until the second anniversary of admission to AIM.
On 17 March 2003, Taskcatch issued a prospectus announcing a conditional agreement to acquire another company (Skylark) conditional on its admission to AIM. This took place on 31 March 2003 simultaneously with the acquisition in consideration for the issue of 15m shares to the vendors at an implied price of 7p per share.
On the same date, Taskcatch placed 375,000 shares with existing investors at 28p per share and a further placing of 321,750 shares to five additional shareholders at a price of 28p per share.
On 11 December 2003, Taskcatch acquired Soccercity Ltd for a cash payment of £450,000 and the issue of 1 million ordinary shares, valued variously in different documents. On 13 May 2004, it acquired another company, Three Lions Leisure Ltd, for consideration of £120,000. There were disposals of shares on 21 June 2004 and 4 October 2004 by shareholders for undisclosed prices (although the appellants' expert cited a price of 3.3p per share for the 4 October transactions in his report). There was a further placing on 5 August 2004 to private investors of 437,374 shares at a price of 32p per share.
In the period up to 5 October 2004, there were just four very small trades in the company's shares registered on AIM, at prices of 32.5p (31 March and 11 April 2003) and 40p (1 and 15 September 2003).
The expert report produced for the appellants (“the Hamilton report”) was written “in response to” the report relied on by HMRC during its enquiries into the returns (“the Ryan report”). The expert had not seen any of the exhibits to the Ryan report nor had he obtained copies of the original offer, amended offer or prospectus but had relied solely on their description in the Ryan report. He also considered that investors in a small parcel of shares, such as the appellants, would rely only on publicly available information and would not undertake any other type of valuation, verification or cross-check. Notwithstanding, his report did not even take into account all the publicly announced transactions but focused on the most recent AIM trades and private placings. In conclusion, he valued the shares at 32.5p as at 31 March 2003 and 32p as at 5 and 6 October 2004.
By contrast, the report commissioned by HMRC (“the Blower report”) began on the premise that the AIM listed prices (of 32.5p and 40p, respectively) did not provide a reliable indication of the value of the shares at those dates. The shares had been thinly traded; the arm's length transaction with Skylark on 31 March indicated a value of 7p per share; the March 2003 placing (at 28p per share) was not arm's length; and there had been an unexplained 400% increase in the value of the shares between the Skylark acquisition and that March placing, although both had taken place on the same day. Applying an earnings basis of valuation based on the application of a revenue multiple to maintainable revenue and then cross-checking with the average price paid (6.3p) for the 30,375,000 shares issued as at 31 March 2003, this yielded a value in the range from 8.2p to 9.5p. Using the same approach to the 5 and 6 October value, the Blower report arrived at a value in the range from 5.4p to 7.1p.
There was no dispute that the shares, being listed on AIM, were “qualifying investments” under [what is now ITA 2007, s. 432] and that the basis of valuation should be as provided under TCGA 1992, s. 272.
The principles to be adopted in such a valuation had been helpfully summarised by the FTT in McArthur [2021] TC 08186.
The sole issue was the determination of the shares' market value. In agreement with Green [2014] TC 03525, the issue of any tax avoidance was irrelevant to the question.
As stated in Netley [2017] TC 05904, share valuation was in many respects an art not a science and as stated in McArthur, it was a case of identifying the highest price a reasonably prudent purchaser would pay.
The Hamilton report for the appellants had been based heavily on the relevant AIM trade for the 31 March 2003 valuation and on the August 2004 placing for the October 2004 valuation. Furthermore, the report's premise that many investors would not consider even all the documents in the public domain (as admitted in cross-examination) was inconsistent with the long-established concept of the prudent purchaser as described in Findlay's Trustees v IR Commrs [1938] SVC 155, and the report's valuations were therefore unacceptable.
By contrast, the Blower report was measured and careful in its approach to methodology and valuation. Consequently, it was to be preferred and the Tribunal accepted its valuations. The market values of the shares at the respective dates would therefore be the mid-points of the two ranges – namely 8.35p at 31 March 2003 and 6.25p at 5 and 6 October 2004.
The appellants paid the price for commissioning a report that was manifestly superficial. But as with Nice (released 12 August 2021), why on earth is it taking nigh on 20 years for these cases to reach even first instance?
[1] The appellants, Mr Alfred Michael Dwan, Mrs Amanda Dwan, Mr Malcolm Terence Hunnisett, Mr Andrew Mark Openshaw-Blower and Mr Richard Parkinson, each made gifts of shares in Taskcatch plc (“Taskcatch” or the “Company”) to charity and claimed tax relief on the basis of the value of the gifted shares as at 31 March 2003 and 5 and 6 October 2004 (the “Gifting Dates”). HM Revenue and Customs (“HMRC”) contend that the values relied upon by the appellants in their respective gift relief claims is overstated and above the market value of the shares at that time.
[2] It is agreed that the sole issue in this appeal is the determination of the market value of the relevant shares as at the Gifting Dates. I should also add that in reaching my conclusions, although carefully considered, it has not been necessary to refer to each and every argument or authority cited by or on behalf of the parties.
[3] Although the appellants relied on the expert evidence of Mr James Hamilton FCA and HMRC on that of Ms Susan Blower FCA in relation to the value of the shares as at the Gifting Dates there was no statement of agreed facts and no witnesses were called to give factual evidence. However, Mr Philip Turner, who appeared for the appellants, confirmed that the following “Key Facts”, which I have taken from HMRC's “Note of Evidence” (prepared by Mr James Henderson and Ms Laura Ruxandu, both of counsel, who appeared for HMRC) and derived from the documentary and expert evidence were, in essence, not disputed:
(1) Taskcatch was incorporated on 3 January 2003 under the name Taskcatch Limited. On incorporation, the Company had an authorised share capital of £1,000 divided into 1,000 ordinary shares of £1 each, and one subscriber share issued to Britannia Company Formations Limited.
(2) On 6 February 2003, the subscriber share was transferred to a Mr Currie
(3) On 6 February 2003, Taskcatch sub-divided its existing share capital into 100,000 ordinary shares of 1p each. At the same time, the company's authorised share capital was increased to £1,000,000, comprising 100,000,000 ordinary shares of 1p each.
(4) On 6 February 2003, the Company issued 4,999,900 ordinary shares of 1p each at par to 23 shareholders including Mr Currie and a Mr Richard Hughes...
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