Marks v Sherred (Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 23 June 2004 |
| Date | 23 June 2004 |
| Court | Special Commissioners (UK) |
special commissioners decision
Colin Bishopp
Carol Fraser, solicitor, for the appellant
Michael Gibbon, of counsel, for the respondent
CAPITAL GAINS TAX - valuation of shares - Taxation of Chargeable Gains Act 1992 section 35 subsec-or-para 2 section 55 subsec-or-para 1 section 272 subsec-or-para 1TCGA 1992 ss 35(2), 55(1), 272(1), (2),Taxation of Chargeable Gains Act 1992 section 273 273 - small unquoted company - nature of material hypothetical purchaser would take into account - approach to be adopted
1. I am required in this appeal to determine the market value, at 31 March 1982, of the taxpayer's shares in Ross Marks Ltd ("RML") which later became Ross Group plc. That value is relevant to the taxpayer's liability to capital gains tax for the years of assessment 1992/3 to 1995/6 on his disposals of the shares but I am not required at this stage to determine the amount of his liability, nor to decide some other matters which have arisen during the course of the appeal. The only matter before me is the 31 March 1982 value of the shares; the taxpayer is deemed by sections 35(2) and 55(1) of the Taxation of Capital Gains Act 1992 to have sold the shares on that day and have reacquired them immediately at their market value.
2. On that date the taxpayer, Ross Marks, owned 66% of the shares in RML. His mother and brother owned a further 30%, and the general manager of the company, who was also a director but not a member of the taxpayer's family, owned the remaining 4%. I was asked to take no account of any possible premium or discount which might have arisen by reason of the taxpayer's holding a controlling shareholding on the one hand, or his having to take into consideration the interests of minority shareholders on the other, but instead to value the entire company and to determine the value of the taxpayer's shares at 66% of the resulting figure.
3. What is meant by "market value" is defined by section 272(1) and (2) of the 1992 Act in these terms:
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(1) In this Act 'market value' in relation to any assets means the price which those assets might reasonably be expected to fetch on a sale in the open market.
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(2) In estimating the market value of any assets no reduction shall be made in the estimate on account of the estimate being made on the assumption that the whole of the assets is to be placed on the market at one and the same time.
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(3) For the purposes of a determination falling within subsection (1) above, it shall be assumed that, in the open market which is postulated for the purposes of that determination, there is available to any prospective purchaser of the asset in question all the information which a prudent prospective purchaser of the asset might reasonably require if he were proposing to purchase it from a willing vendor by private treaty and at arm's length
4. The taxpayer's evidence was that RML was incorporated in July 1972 as a private company, and it was still a private company (and correspondingly unquoted so as to come within section 273) in March 1982. The taxpayer was at all material times its managing director and, for all practical purposes, its controlling mind. Its principal business was the import and sale within the United Kingdom of small electronic equipment for the domestic consumer market, and especially headphones, although in total it dealt in about 350 different products. They were sold under the brand name "Ross"; the company had obtained some fairly limited formal trademark protection by 1982 but I accept that, even where there was no formal protection, the company had a recognised trade name and (as later events showed) it was able to procure further protection without difficulty. I am satisfied that RML was not vulnerable to the abuse by others of its trading name.
5. Only limited financial records for the period before 1982 survive. Such as remain show that RML's turnover increased quite strongly during the 1970s. In the year to 31 March 1981, the last year for which audited accounts were available on 31 March 1982, it achieved turnover of £1,496,006. Its gross profit in that year was £594,220, just short of 40% of turnover, and its net profit before tax, after allowing for directors' emoluments, was £160,074, or 10.7% of turnover. In preceding years, those percentages had been somewhat different but there had nevertheless been steady growth in net profit. No dividends were declared in any year and the accumulated net profit was carried forward.
6. In the year to 31 March 1982, the audited accounts show, RML's turnover increased to £1,884,100 (an improvement of almost 26% on the preceding year) and gross profit was £621,264, or just under 33% of turnover although gross profit was depressed by an increase in stock. Net profit after directors' emoluments but before tax was diminished by a significant increase in overheads and, at £54,311, was a mere 2.9% of turnover.
7. It may be remembered that at that time, there was considerable speculation in the currency markets. During the early 1980s sterling fell quite sharply against most major currencies including in particular the US dollar. RML's products were almost entirely manufactured in the Far East, mainly in Hong Kong and Taiwan, and were priced (and had to be paid for) in US dollars. The sterling cost of the goods therefore increased quite considerably. In earlier years, the taxpayer said, RML had obtained some protection against currency movements by buying dollars forward but in 1981 its broker, obviously taking an optimistic view of sterling's future prospects, advised the taxpayer that RML should no longer continue that practice. The taxpayer told me he followed that advice with adverse consequences for RML's profitability, which was reflected in the reduction in gross profit as a percentage of turnover. I mention in passing that currency movements do not explain the substantial increases in overheads which were responsible for the significant fall in net profit. Within these overheads, directors' remuneration fell, but other expenditure increased, sometimes by large amounts.
8. Despite the setback in the year to March 1982, the taxpayer remained very optimistic for RML's future prospects and was, he said, already contemplating flotation on the unlisted securities market ("USM"), as it then was, within the following five years - that is, by 1987. He had also decided to protect RML from some of the adverse currency movements which had afflicted it by embarking on the manufacture of some of the company's products within the United Kingdom.
9. The taxpayer's recollection, he said, was that he had already taken advice about a possible flotation, and had also taken the first steps towards establishing a United Kingdom manufacturing base. I take into account the fact that RML did float on the USM in 1987, and that it did begin manufacturing within the UK, though a subsidiary, at some time between 1982 and 1987 - the taxpayer was vague on this point as he was in much of his evidence, though I recognise that he was giving evidence 20 years and more after the relevant events. I came to the conclusion, after listening to his evidence, that the taxpayer was able to recall the good points about RML rather more easily than he could recall the bad, and that he was inclined to play down the difficulties which RML underwent as a result of the depreciation of sterling and to ignore altogether the other factors which had depressed its net profits in the year to 31 March 1982. I concluded too that although both flotation and UK manufacturing were, by that date, very much in the taxpayer's mind, no active steps towards achieving those objectives had been taken. It was clear that he was of an optimistic disposition, and he was certainly optimistic about RML's prospects in 1982, although it can be said in his favour that his optimism was largely borne out by subsequent events.
10. In 1982 RML did not have management accounts or any equivalent, nor did it undertake budgeting or forecasting. Properly audited annual accounts were produced, in the usual way, after the year end, but as each year proceeded, the taxpayer relied upon information provided informally to him by the company's bookkeeper, on the company's bank statements and on his own feel for how the business was progressing. I do not find it surprising, nor a matter for adverse comment, that a comparatively small company, controlled on a day to day basis by its majority shareholder, was run at that time in such an informal manner.
11. Each of the parties called an expert witness, who had already provided a report. For the appellant, I heard from...
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