McArthur and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 28 June 2021 |
| Neutral Citation | [2021] UKFTT 237 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 237 (TC)
Judge Jonathan Cannan
Mr Michael Firth of counsel instructed by way of direct access appeared for the appellants
Mr James Henderson and Mr Thomas Chacko of counsel instructed by HM Revenue & Customs Solicitor's Office and Legal Services appeared for the respondents
Income tax – Relief for gifts of shares to charity – ITA 2007, s. 431 – Preliminary issue – Market value of shares at three valuation dates – TCGA 1992, s. 272.
The FTT determined the valuation of shares at three valuation dates taking into account the parties' submissions and expert evidence but arriving at different valuations from those submitted by either party.
This was a lead case concerning the market value of shares in Baa Bar Group plc as at 19 February 2007, 13 August 2008 and 16 October 2009.
The Baa Bar Group plc (BBG) had been admitted to the Channel Islands Stock Exchange (CISX) in November 2006 and had at the same time acquired the entire share capital of Baa Bar Limited (BBL), which carried on a well-established business in North West England, operating seven bars and pubs. The appellants had acquired their shares in different circumstances.
Dr McArthur had acquired shares in BBG in August 2006, when BBG had raised £1.9m through the issue of ordinary shares, with an equivalent cost per share of 26.76 pence. BBG had been established by a corporate financier, Mr Currie, who had considerable experience in establishing shell companies (via a corporate finance house (Zeus) that he had co-founded) to raise finance. The shell companies would then acquire an existing business, the aim being to generate significant additional value for the shareholders because of the finance and management team introduced by Zeus. In the case of BBG, Mr Currie estimated a placing price of 108 pence per share on CISX and had set the subscription price to achieve an uplift of three to four times over the amount subscribed. The shareholders were subject to a two-year lock in and had committed to invest a further 25% of the initial subscription. BBG then acquired BBL for total consideration of £13.6m, to be satisfied in cash, deferred consideration and BBG shares. The value attributed to the BBG shares in the acquisition agreement was 26.04p per share, and the shares were subject to a two-year lock-in.
The second appellant (Mr Bloxham) was one of the founder shareholders of BBL to whom shares were issued on BBG's acquisition of BBL.
Between February 2007 and October 2009, both appellants made a number of gifts of BBG shares to charity and claimed income tax relief under ITA 2007, s. 431. The market value attributed to the shares gifted ranged between 90–115 pence per share. HMRC later enquired into both appellants' self-assessment returns and issued a closure notice amending the value to 31.5 pence.
Both parties were agreed that the value had to be established according to TCGA 1992, s. 272 and that s. 273 had no direct relevance because CISX was a recognised stock exchange.
The Tribunal therefore turned to the expert evidence. Valuations on behalf of the appellants were 108p (Feb 2007), 68p (August 2008) and 49p (October 2009). Corresponding HMRC valuations were 8p, 16p and 16.5p. On behalf of the appellants, the valuation had been made by using different methodologies (discounted cash flow, P/E ratios of comparables, EBITDA multiples, net asset value and (where possible) transaction prices) and giving weight to all. HMRC's valuer used a transaction-based approach for the February 2007 valuation (using the November purchase of BBL by BBG in late 2006), and an EBITDA multiple approach for the later two valuations.
The values put forward (by Counsel) for the appellants used EBITDA multiples to arrive at a valuation and then deducted net debt to arrive at an enterprise value (giving values of 108p, 41p and 56p respectively). Although these values differed from the expert evidence, the Tribunal considered that the appellants were entitled to adopt a valuation method considered by both experts but based on different inputs. The values put forward by HMRC were those arrive at by their expert valuation.
The Tribunal considered the general approach to the valuation of BBG shares, noting in particular:
- in applying the principle established in Re Lynall that the market value is what the highest bidder would have offered for the asset in the hypothetical sale, it was not a question of adopting the methodology that gives the highest price but rather of identifying the appropriate methodology and using this to determine the highest price that could reasonably be obtained;
- in determining the information that would be available to a prospective purchaser, it should be assumed that confidential information would not be available, but information that had been in the public domain in the past for a limited period (e.g. the listing document that was available for inspection for 14 days) should be considered available;
- it was appropriate to use a discount for lack of control (DLOC) when using comparable listed companies because the market capitalisation includes a control premium. A discount for lack of marketability (DLOM) should also be applied even though the BBG shares were listed on CISX because there had been no trades and there was no evidence as to CISX's role as market maker. This meant they were effectively illiquid.
The Tribunal arrived at the valuations as follows:
This should take into account the acquisition of BBL by BBG (consideration less net debt gave a value per share after DLOC/DLOM discounts of 8p), the acquisition agreement value of 26.04p, and an EBITDA value after discounts of 55p. On balance the hypothetical purchaser would take an average of the 8p and 55p, result 31.5p
Both values should use EBITDA multiples and DLOC/DLOM discounts. At 13 August this was 16.5p (after adjusting for a small mathematical error by HMRC's valuer) and at 16 October (after adjusting the multiples suggested by the expert valuers) this was 18p.
The FTT were also required to consider the value of shares gifted to charity in Netley [2017] TC 05904, a case that also involved a shell company established by Zeus (and was also a lead case). However, the Tribunal did not consider that HMRC's view that there was a “charity shell scheme”, ( a reference to similar schemes, including Netley, in which investors expecting a substantial increase in share price sought to obtain charity gift relief in excess of the amount invested) was relevant in establishing the value of BBG's shares (which was the question they were being asked to determine).
[1] These appeals are lead cases pursuant to rule 18 of the Tribunal Procedure (First-tier)(Tax Chamber) Rules 2009. The common or related issues of fact or law concern the market value of shares in Baa Bar Group Plc as at 19 February 2007, 13 August 2008 and 16 October 2009. The lead case directions provide that issues of valuation on these dates shall be determined as preliminary issues in the appeals.
[2] Baa Bar Group Plc (“BBG”) was the subject of a placing of shares and admission to the Channel Islands Stock Exchange (“CISX”) on 21 November 2006. At the same time, BBG acquired the entire share capital of Baa Bar Limited (“BBL”). BBL's business was a well-established bar and pub operator, which at that time operated 7 bars and pubs in North West England.
[3] The appellants acquired their shares in BBG in different circumstances. The first appellant, Dr McArthur invested in BBG in anticipation that it would purchase a business with the shares in BBG then being floated on a stock exchange. His holding amounted to 631,863 shares at the time of flotation.
[4] The second appellant, Mr Bloxham had originally started the business of BBL in Liverpool in 1991. Mr Bloxham was a director and shareholder in BBL and in 2006 he and the other shareholders wished to sell the business. I set out below details of the deal. Briefly at this stage, the shares in BBL were sold to BBG for some £12m in cash, deferred consideration of £250,000 together with a number of shares in BBG being issued to Mr Bloxham and the other shareholders in BLL. Mr Bloxham's holding in BBG amounted to 1,551,608 shares at the time of flotation.
[5] Since the flotation, both appellants have gifted shares in BBG to charity and have claimed income tax relief on those gifts based on what they contend was the market value of the shares at the time of the gifts. I understand that the relevant gifts with the price and value on which the appellants claimed relief are as follows:
Dr McArthur
No of Shares
Price p
Value £
3 Apr 2007
36,863
97
35,846
4 Apr 2007
234,632
97
228,156
13 Aug 2008
360,368
90
324,311
Mr Bloxham
19 Feb 2007
250,000
110.5
276,250
11 Dec 2007
250,000
110.5
276,250
5 Aug 2008
250,000
115
287,500
3 Sept 2008
150,000
115
172,500
23 Jun 2009
200,000
115
230,000
16 Oct 2009
450,000
115
517,500
[6] HMRC opened enquiries into Dr McArthur's tax returns for 2006–07 and 2008–09, and into Mr Bloxham's tax returns for 2006–07, 2007–08, 2008–09 and 2009–10. Closure notices were issued to Dr McArthur on 9 March 2016 and to Mr Bloxham on 22 February 2016. The closure notices amended the returns to reflect HMRC's view that the shares were valued 31.5p at each gifting date.
[7] On the basis of the evidence in this appeal the parties invite me in their closing submissions to value the shares at the dates under consideration as follows:
Holding being valued %
Appellants' Valuation p
Respondents' Valuation p
19 Feb 2007
1.44
108
8
13 Aug 2008
2.08
41
16
16 Oct 2009
2.60
56
16.5
[8] It is not a binary choice and subject to...
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