Nice and Another
| Jurisdiction | UK Non-devolved |
| Judgment Date | 12 August 2021 |
| Neutral Citation | [2021] UKFTT 285 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 285 (TC)
Judge Nigel Popplewell, Miss Susan Stott
Charlotte Brown instructed by Taxology LLP, appeared for the appellant.
Sadiya Choudhury instructed by the General Counsel and Solicitor to HM Revenue & Customs, appeared for the respondents.
Income tax – Relief for gift of shares to charity – Income and Corporation Taxes Act 1988 (ICTA 1988), s. 578B (now Income Tax Act 2007 (ITA 2007), s. 431) – Value of shares listed on Channel Islands Stock Exchange at date of gift.
The FTT determined the valuation of shares for the purposes of gift relief from income tax, taking into account the parties' submissions and expert evidence but arriving at different valuations from those submitted by either party.
The appellants had both acquired shares in a new company (Mount (York) Ltd – “Mount”) in November 2005 in two tranches. The first tranche was allotted to them at a price of 1p per share. The second tranche was allotted by way of a rights issue, for which they paid £1 per share. The total price paid by the first appellant for her 97,765 shares was £25,000. The total price paid by the second appellant for his 586,778 shares was £150,000, an average price in both cases of 25.6p per share.
Shortly afterwards, Mount acquired the entire issued share capital of two engineering companies and on 21 December 2005, Mount became listed on the Channel Islands Stock Exchange (CISX), in respect of its entire share capital consisting of 15,500,000 ordinary 0.1p shares.
A limited amount of shares (10,000) was traded on CISX on 21 and 22 December 2005, at an average price of £1.05 per share.
On 11 January 2006, both appellants donated their entire shareholdings in Mount to charities chosen by them and claimed relief from income tax by way of deduction from their total income under ICTA 1988, s. 578B (now ITA 2007, s. 431) in respect of those gifts in their 2005–06 tax returns, valuing the shares at £1.05.
HMRC opened an enquiry into the first appellant's return in October 2007, concluding it (but not until April 2013) by reducing the relief to an amount corresponding to a valuation of 25.6p per share. This conclusion was upheld by review, which took another four years, being concluded in November 2017. HMRC opened an enquiry into the second appellant's return in December 2007, which was not concluded until May 2013. As with the first appellant, the relief was reduced in accordance with a valuation of 25.6 per share. The review into HMRC's decision, which upheld it, was concluded only in October 2017. Both appellants notified their appeals to the Tribunal in November 2017.
Both parties commissioned independent experts' valuations. The appellants' expert valued the shares at £1.05 as at the date of gift – the value they had used in their claims for relief. The expert commissioned by HMRC, on the other hand, valued the shares at 39p as at the date of gift, which value HMRC accepted.
Under ICTA 1988, s. 578B (as it stood at the date of gift), the amount of relief was fixed at the market value of the shares donated, as indeed ITA 2007, s. 431 provides now. That market value was to be determined under the CGT rules in TCGA 1992, s. 272, which at that time defined “market value” as the price that the asset in question might reasonably be expected to fetch on the open market.
Both parties had agreed that the value had to be established according to s. 272 and that TCGA 1992, s. 273 had no direct relevance because CISX was a recognised stock exchange.
The appellants' expert took the view that, since the shares were listed on the CISX, their market value could be determined as their listed price (£1.05), unless exceptional circumstances were present. The conventional approach was to use the PE methodology, applying a suitably adjusted multiple derived from broadly similar listed companies to the maintainable post-tax profits of Mount.
Using that approach, he applied PE ratios of 18.32 to the profit before tax and 26.17 to the profit after tax, using figures from a confidential financial due-diligence report (“the FDD report”) commissioned by Mount with a view to obtaining a bank loan. This yielded a midpoint valuation of £1.32. If a discount should be applied for lack of liquidity, which he did not think appropriate, a 30% discount would result in a median valuation of 93p. He also compared a transaction-multiples approach, which yielded an average of £1.18 per share. He considered the two subsidiaries had been acquired at low prices, offering a great opportunity to Mount to grow their value. It was an “unfortunate coincidence” that his valuations came out close to the transaction price.
HMRC's expert considered that the traded price of £1.05 was not a reliable guide as the shares had been traded too thinly to establish a proper market price. He regarded it as highly unlikely that the FDD report would have been made available to a prospective purchaser. The appellants had purchased their shares less than one month before the listing at an average price of 25.6 per share. Even given that one of the subsidiaries may have been acquired at below market value, a fourfold increase in Mount's share price on admission to CISX was unrealistic. The best approach would be the PE or earnings basis. He estimated the notional earnings per share for 2005 to be 5.5p and the most appropriate price-earnings ratio on a discounted basis to be in the range 5.2 to 7.6. Applying the mid-point of that range yielded a value of 39p per share. Compared to the 16p price based on Mount's net-asset value prior to listing, this gave an uplift of 142%, whereas the uplift implied by the appellants' expert's valuation was 558%, which he considered entirely unrealistic.
The Tribunal made it clear from the outset that it was not bound by either expert valuation – it was for the Tribunal to decide what the market value of the shares was on the relevant date. This meant it had to identify the highest price a reasonably prudent purchaser would have been prepared to pay.
The Tribunal decided to follow the principles laid down by Judge Cannan in the recent FTT decision in McArthur [2021] TC 08186. This case also involved the valuation for the purposes of ITA 2007, s. 431 of CISX-listed shares gifted to a charity.
The Tribunal agreed with HMRC that the FDD report would not have been made available to an enquiring purchaser.
The appropriate approach was the PE method. However, given the difficulty in coming up with relevant comparables, the purchaser would have switched the primary method and considered the multiples on which the two subsidiaries had been bought, and then applied the best multiple so derived to Mount's maintainable post-tax profits. The purchaser would also have taken into account that companies that paid dividends were more likely to trade on a higher multiple than those that did not. A prudent purchaser would also have recognised that shares listed on the CISX would not be as readily resalable as those listed on the London Stock Exchange and would thus have applied a discount to any values obtained by reference to shares traded in London.
Armed with these conclusions, the appropriate weighted average multiple based on the purchases of the two subsidiaries was 6.56. This needed to be uplifted by 30% to reflect the uplift on listing, giving a PE ratio of approximately 8.4. Compared to the industrial-engineering sector PE of 25.28, this represented a discount of approximately 65%, which, in the Tribunal's view, the prudent purchaser would have considered to be appropriate. Applying this to the post-tax profits resulted in a price per share of 46.5p. This was a 180% uplift on the acquisition price of 25.6p, whereas the price being put forward by the appellants, 105p, would be an uplift of 558%. The prudent purchaser would not have considered that justified on the basis of buying one of the subsidiaries cheaply, synergies, a strong management team and listing on the CISX.
The Tribunal therefore determined the market value of the shares as at 11 January 2006 to have been 46.5p per share.
It is generally said that valuation is an art and not a science. It is nevertheless astonishing that two experts, using the same essential (and recognised) approach, should have produced such wildly divergent results.
It is surely also unconscionable that the end result of a claim for relief should not have been finally determined until more than 15 years had elapsed after it was made.
Since the facts in this case, regulations (SI 2015/616) now provide that where securities are listed on a foreign stock exchange (a recognised stock exchange in a territory outside the UK on which securities or strips are traded), the market value is:
- the closing price shown in the foreign exchange list (any publication performing a function similar to that performed by the Stock Exchange Daily Official List) for that day, or if more than one price is shown, the lower price plus one-half of the difference and
- if the exchange is closed on that day, the equivalent value on the last previous day that it was open
(SI 2015/616, reg. 3(1)).
However, the regulations apply only for the purposes listed in reg. 3(1), none of which includes relief under ITA 2007, s. 431. In a case occurring today, therefore, the valuation methods followed in this case and McArthur would still be relevant.
[1] This case concerns income tax and in particular the quantum of the “relevant amounts” for each appellant which they can deduct from their taxable income under section 587B Income and Corporation Taxes Act 1988 (“section 587B”) following gifts of shares by each appellant to charities on 11 January 2006 (“the relevant date”). This requires a determination of the value of the net benefit to the charities of the shares gifted to them. As the shares in question were quoted, their value is determined under the basic valuation...
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