Marks v HM Revenue and Customs
| Jurisdiction | UK Non-devolved |
| Judgment Date | 01 April 2011 |
| Neutral Citation | [2011] UKFTT 221 (TC) |
| Date | 01 April 2011 |
| Court | First Tier Tribunal (Tax Chamber) |
[2011] UKFTT 221 (TC)
John F Avery Jones CBE (Tribunal Judge) (Chairman), Sandi O'Neill
Ian Morgan, Morgan & Co, chartered accountants, for the Appellant
Michael Gibbon QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
Capital gains tax - share valuation - 1982 valuation - two companies carrying on related business owned by same person - whether valued separately or together - owner considered as hypothetical purchaser of other company for valuation purposes but with knowledge limited to that of prudent prospective purchaser - valuation of each company to assume continued trading, management and finance provided by the other
The First-tier Tribunal considered the historic valuation for capital gains tax purposes of two companies which were run as one.
During the five years ended 5 April 2005, the taxpayer made disposals of shares in a listed public company. In November 2009 HMRC issued closure notices to amend inter alia the chargeable gains reported in the taxpayer's self-assessment returns in respect of those disposals. He appealed against the closure notices and amendments to his self-assessment returns for those five years.
The issue in the appeals was the valuation for capital gains tax at 31 March 1982 of the taxpayer's shares in the companies comprising the French Connection business, of which he was the founder. At that date he held all of the shares in two separate groups, SMHL, which was the UK group, and FCO which was the overseas sales group. The two groups were run as one. The taxpayer was the sole shareholder and director of both; SMHL took over FCO on a share for share exchange before its flotation on the Unlisted Securities Market in October 1983. The taxpayer would not have sold the companies at 31 March 1982 when their growth was at an early stage. The taxpayer's expert valued SMHL and FCO combined at £8.425m. HMRC put a value of £3.1m on SMHL and a nominal £100 on FCO.
The correct valuation of the shares for CGT purposes.
The First-tier Tribunal (Judge John F Avery Jones and Sandi O'Neill) determined the value of the shares at £3,709,000 for SMHL and £443,000 for FCO.
On 31 March 1982 the taxpayer beneficially owned 100 per cent of the shares in SMHL and 100 per cent of the shares in FCO. Immediately before the flotation, the FCO shares were exchanged for further shares in SMHL (later renamed and re-registered as a plc).
Considering the relevant provisions of the Taxation of Chargeable Gains Act 1992 relating to reorganisations, immediately after the share for share exchange the taxpayer owned the original SMHL shares and the new SMHL shares which had two separate base values. The assets held on 31 March 1982 were the original SMHL shares and the FCO shares (which from the exchange were to be treated as the same asset as the new SMHL shares). There was nothing to say that the original SMHL shares and the new SMHL shares were to be treated as one asset. The provisions of the Finance Act 1988, Sch. 8, para. (5) were inapplicable. The taxpayer held two separate assets on 31 March 1982, which on their deemed disposal on that date were to be valued separately. The cases on death duties had no application to capital gains tax. The issue of pooling was an entirely different one that concerned computation.
Both experts agreed that there was no really comparable quoted company.
The statutory hypothesis implied the existence of a hypothetical purchaser but did not require one to ignore the characteristics of any actual potential purchasers. There was no need to exclude an actual potential purchaser from the market. The actual owner's information about the asset being valued was bound to be greater than the information that a prudent prospective purchaser might reasonably require. However, there was no theoretical difficulty in assuming that that the actual owner could not use any information beyond that reasonably required in deciding how much to offer.
The presence of the taxpayer, with his knowledge treated as limited to what a prudent prospective purchase would reasonably require, would not affect the value of each company viewed in isolation because all potential purchasers would use a similar valuation method based on a multiple of earnings.
The valuation should be on the basis that the business of the two companies would continue as before, as would the management. Only information actually available was assumed to be provided.
1.Mr Stephen Marks appeals against closure notices and amendments to his self-assessment returns for the years ended 5 April 2001, 2002, 2003, 2004 and 2005.
2.The issue in these appeals is the valuation for capital gains tax of the Appellant's shares in a company or companies comprising the French Connection, of which he is the founder, at 31 March 1982. More precisely at that date he held all of the shares in two separate groups, Stephen Marks Holdings Limited ("SMHL"), which was the UK group, and French Connection Overseas Limited ("FCO") which was the overseas sales group, the purchases being made by a company within the SMHL group. The valuation is a particularly difficult one because first, one has to value something nearly 30 years ago when recollections are poor or non-existent and documents no longer available, to say nothing of the completely different economic scene then applying (for example that clearing banks base rate was 13% at 31 March 1982); secondly, it makes no commercial sense to view the two groups separately when they were run as one, the Appellant being the sole shareholder and director of both; they were put together on the flotation on the Unlisted Securities Market in October 1983, immediately before which SMHL took over FCO on a share for share exchange: the first issue will be whether they can be treated as one or whether a separate valuation of each is required by the tax legislation; thirdly, the Appellant would not have sold the companies at 31 March 1982 when their growth was at an early stage (as we know with hindsight from the fact that they were floated in October 1983 at which time the profits had increased enormously since 31 March 1982); and fourthly the experts are far apart in their valuations: £8.425m for SMHL and FCO combined by the expert called by the Appellant and £3.1m for SMHL and an nominal £100 for FCO by the expert called by HMRC.
3.We had an agreed statement of facts as follows:
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(2) Abbreviations used in this statement:
BMB
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Barclays Merchant Bank Limited.
Euphorbus
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Euphorbus BV, a "company" incorporated in the Netherlands.
the Company
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French Connection Group PLC, a company incorporated in England Wales.
FCO
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The French Connection Overseas Limited, a company incorporated in England and Wales.
(3) On 20 April 1978, FCO was incorporated with company number 01364202. FCO was incorporated with an authorised share capital of £10,000 divided into 10,000 ordinary shares of £1 each. 2 subscriber shares were allotted to the Appellant, fully paid. On 10 May 1978 a further 98 ordinary shares of £1 each were issued at par to the Appellant for cash consideration. In August 1978, FCO acquired the whole of the issued share capital of Euphorbus BV, a company incorporated in the Netherlands.
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(4) On 1 January 1979, the Appellant owned beneficially the entire issued share capital of seven companies, all incorporated in England and Wales, which carried on businesses variously involving the design, manufacture and marketing of ladies' wear and men's wear, as follows:
Company
Principal activity
Date of Incorporation
Company No.
Trading Companies (6)
French Connection Limited (then The French Connection Limited)
Marketing of ladies' fashion clothing
01.09.1972
1069342
Stephen Marks (London) Limited
Marketing of men's fashion clothing
10.12.1970
996609
The French Connection No. 2 Limited
Marketing of men's fashion clothing
30.12.1975
1238909
French Connection No. 3 Limited (then Tomeden Limited)
Marketing of children's fashion clothing
25.09.1973
1135953
Stephen Marks Manufacturing Limited
Manufacturer of fashion clothing
10.03.1978
1357014
French Connection Retail Limited (then Lilajoy Limited)
Retailer of fashion clothing
08.08.1975
1222335
Investment Company (1)
The French Connection Overseas Limited (FCO)
Holding company for subsidiaries incorporated, and conducting business, outside the UK
20.04.1978
1364202
(5) On 19 January 1979 the Company was incorporated under the name Stephen Marks Holdings Limited with company number 01410568. The Company was incorporated with an authorised share capital of £150,000 divided into 150,000 ordinary shares of £1 each. 2 subscriber shares were allotted to the Appellant, fully paid.
(6) On 26 January 1979 a further 101,300 ordinary shares in the Company of £1 each were allotted to the Appellant in exchange for the share capital of the 6 trading companies listed in the table in paragraph 3.
(7) As a result of this "share for share" exchange, the Appellant became the beneficial owner of 101,302 ordinary shares of £1 each, fully paid, at this time representing the entire issued share capital of the Company.
(8) In October 1979, the Company acquired an off-the-shelf company: Leychap Limited (Company No 1452171), as the vehicle to acquire from the Receiver of Bus Stop (Chelsea) Limited (which changed its name to Leypil Limited (Company No 1454966)) the leases of twenty-eight "Bus Stop" shops.
(9) On 31 March 1982 the Appellant owned the entire issued share capital of the Company and FCO which owned, directly or indirectly, a number of trading subsidiaries. The position at this date is illustrated in Diagram 1 below:
(10) In September 1983 the Appellant gifted an aggregate 10,000 ordinary shares of £1 each, fully paid, in the Company, to members of his family and the trustees...
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