TC03525: Nicholas Green
| Jurisdiction | UK Non-devolved |
| Judgment Date | 28 April 2014 |
| Neutral Citation | [2014] UKFTT 396 (TC) |
| Date | 28 April 2014 |
| Court | First Tier Tribunal (Tax Chamber) |
[2014] UKFTT 396 (TC)
Judge Malcolm Gammie CBE QC, Mr Richard Thomas
Patrick Way QC and Michael Firth, counsel, instructed by Afortis Limited appeared for the Appellant
Daniel Margolin 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 - Whether arrangement designed to enhance relief or create artificial tax losses - Market value of shares on initial listing - Whether company's main asset acquired shortly before listing at a reduced price - If so, impact on value of listed shares - Relevance of market transactions on first day of listing - Basis of valuation to be adopted - Determination of market value - Appeal allowed and disallowance of relief on claim re-determined.
In an appeal against a closure notice, the First-tier Tribunal determined the market value of a holding of shares listed on a recognised stock exchange which had been gifted to a charity and relief had been claimed under Income Tax Act 2007 (ITA 2007), Income Tax Act 2007s. 431.
On 4 April 2008 the taxpayer gifted a holding of shares in Chartersea Ltd, a company listed on the Channel Islands Stock Exchange to two charities and subsequently claimed relief under s. 431 on the basis that their market value at the date of the gift was £1 per share. The shares had cost him 25.5p per share less than a month earlier. Prior to the gift Chartersea had acquired the entire share capital of Warwick Developments (North West) Ltd ("WDL") for around £4m, when it was claimed to have been worth around £8m. This "bargain purchase" was said to be the underlying reason for the increase in value of the Chartersea shares. On the first day of listing on the Channel Islands Stock Exchange two recorded bargains were carried out at 101p and 100p although it was suggested by counsel for HMRC that, as the vendors in these cases were known to the taxpayer, there were serious doubts as to whether those could be properly characterised as bargains at arm's length.
The Tribunal held that the sole question before them was "what was the market value of the gifted shares at 4 April 2008?" It was accepted that the shares were listed on a recognised stock exchange as required by s. 431 but they were not quoted in The Stock Exchange Daily Official List, therefore the "quarter up" and "recorded bargains" rules in section 272 subsec-or-para 3TCGA 1992, s. 272(3) did not apply. The valuation required was that prescribed by section 272 subsec-or-para 1TCGA 1992, s. 272(1) being the price which might reasonably expected to fetch on a sale in the open market. For the taxpayer valuations where produced claiming a value of 88p to 93p per share on the basis of maintainable earnings and a Price Earnings Multiple. The expert for HMRC argued for a value of 25p to 30p based upon the average cost of the Chartersea shares to its investors, the price paid by Chartersea for WDL (assuming the amount paid was a true reflection of WDL's value and, finally, a discounted cash flow valuation.
The Tribunal discounted the two transactions on the first day of listing as not representing significant evidence of open market value and, as such, would have been ignored by a prudent hypothetical purchaser. Furthermore, that purchaser would have been aware that Chartersea had only recently purchased the share capital of WDL for £4m and there was no credible evidence that the vendors of WDL had sold at the undervalue suggested.
The Tribunal accepted the methodology adopted on behalf of the taxpayer, but felt the Price Earnings Multiple was too generous and reduced this on the basis of an actual third party sale on 27 March 2008, of a related company in the same sector as WDL.
The value was determined at 35p per share thereby allowing the taxpayer's appeal in part.
Although this case simply involved determining the open market value of a particular holding of quoted shares at a particular date, it is perhaps more interesting for what it did not involve. Avoidance schemes designed to generate relief under, what is now, s. 431 made the headlines in 2006 when a number of celebrities were reported to have used them to save tax. Because relief is based upon the value of the shares at the date of gift, rather than the cost of the shares to the donor, the schemes were designed to produce a market value of the gifted shares well in excess of their original cost. This appears to be one such scheme, although HMRC did not challenge it on the basis of any Ramsey argument. Instead they simply contested the value put forward by the taxpayer. Steps to counter these schemes were introduced by Finance Bill 2010 with effect from 15 December 2009.
[1]This is an appeal by Mr Nicholas Green against a Closure Notice dated 27 June 2011 under section 28Asection 28A Taxes Management Act 1970 ("TMA") amending his self-assessment return for the year 2007/08. The amendment disallowed in part his claim for relief in respect of two gifts of 118,750 shares of 0.1p each in Chartersea Limited ("the Gifted Shares" and "Chartersea" respectively) to each of the National Eczema Society and the Alzheimer's Society on 4 April 2008. Mr Green had claimed relief under section 431section 431 of the Income Tax Act 2007 ("ITA") of £237,500 based on a market value of £1.00 per Gifted Share. The Respondents' officer did not accept that this amount reflected the market value of the Gifted Shares at that date. She considered that their market value was only 30p per Gifted Share. She restricted Mr Green's claim for relief to £71,250 (a disallowance of £166,250) and amended his return on that basis.
[2]Mr Green appealed the amendment on 13 July 2011. He did not seek a review of the officer's decision and transmitted the appeal to the Tribunal on 2 August 2011. His grounds of appeal are that the Respondents ("HMRC") had provided no support for their valuation, that the price paid for the Gifted Shares was £1 per share, that the Gifted Shares were quoted on a Recognised Stock Exchange at a mid-market price of £1 at the time of the gift and that a value of £1 per Gifted Share was supported by an independent valuation obtained at HMRC's request. It was common ground before us that the only question for our determination is: what was the market value of the Gifted Shares on 4 April 2008?
[3]In addition to the documents that the parties placed before us we heard factual evidence from Mr Green, and on his behalf from Geoffrey Dallimore, Gavin Johnson and Keith Salisbury. Stephen Johnson, an Inspector of Taxes in HMRC's Specialist Investigations team, gave evidence of certain matters for HMRC. We also had the benefit of expert valuation evidence from Lee Teste and Michael Ruse.
[4]HMRC summarised the factual background in their amended Statement of Case. Mr Dallimore confirmed that the summary was accurate and there was no dispute as to the basic transactions involved.
[5]Chartersea was incorporated on 6 November 2007. Its authorised share capital on incorporation was £1,000 divided into 1,000 ordinary shares of £1 each. A single subscriber share was issued and on 24 January 2008 it was transferred to Keith Salisbury. Chartersea was the corporate vehicle chosen for the potential acquisition of the business of Warwick Development (North West) Limited ("WDL"). WDL had been formed in 1998 and had operated since then as a manufacturer and supplier of uPVC windows, doors, sealed glazed units and conservatories.
[6]On 1 February 2008 it was resolved that each ordinary share (issued and unissued) of Chartersea should be subdivided into 1,000 ordinary shares of 0.1p each and that the authorised share capital be increased from £1,000 to £25,000 by the creation of 24,000,000 ordinary shares of 0.1p each. Chartersea proceeded to issue 999,500 ordinary shares to Geoffrey Dallimore and 999,500 ordinary shares to Mr Salisbury, in each case at 0.1p (i.e. at par).
[7]On 4 February 2008 Chartersea issued a private placing memorandum to raise up to £50,000 before expenses (estimated to be £40,000 net) through the issue and allotment of up to 5,000,000 new shares of 0.1p each at 1p per share. The closing date was 27 February 2008 (subject to the directors' right to extend the placing or close it at any earlier date). The new shares were to be issued by 17 March 2008 and share certificates were to be despatched by 31 March 2008.
[8]On 29 February 2008, Chartersea issued 1,000,000 new shares at 0.1p to Brian Johnson. Brian Johnson was the acting managing director of WDL. He was the brother of Gavin Johnson who, with his wife, owned 100 per cent of WDL's holding company, Warwick Management Limited ("WML").
[9]On 10 March 2008, as a result of the private placing, Chartersea issued 4,998,529 new shares to a total of 13 subscribers, including Mr Green. Mr Green subscribed for 279,412 ordinary shares of 0.1p for a total consideration of £2,794 (i.e. 1p per share). The subscribers for the private placing shares were invited to subscribe for a rights issue and, on 12 March 2008, a further 1,649,541 shares were issued at £1 per share. As a result Chartersea's issued share capital became 9,648,043 ordinary 0.1p shares. Under the rights issue Mr Green subscribed for a further 92,206 ordinary shares for a total consideration of £92,206 (i.e. £1 per share). He therefore held 371,618 Chartersea shares in total, amounting to approximately 3.85 per cent of the issued share capital, at a total cost of £95,000. In his valuation report Mr Ruse noted that, ignoring Chartersea's promoters and Brian Johnson, Chartersea's shareholders paid an average price for their shares of 25.6p each.
[10]On 18 March 2008, Chartersea purchased the shares in WML for £4,112,267.90 (plus an amount of up to £235,567.32 in respect of book debts to be collected by WDL after completion). In addition to the equity that it had raised (£9,649 paid up share...
To continue reading
Request your trial
-
Dwan and Others
...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 ......
-
Nice and Another
...2005 do not represent significant evidence of open market value; the FTT had reached a similar conclusion in the case of Green (Green [2014] TC 03525; Mr Lygo was a more convincing witness than Mr Bowes; he answered the questions put to him whereas Mr Bowes was unable to answer many questio......
-
Boardman
...nor was market value necessarily the same as an arm’s length price. Nevertheless, on the basis of the authorities summarised in Green[2014] TC 03525, an arm’s length price would be what a hypothetical purchaser acting reasonably and with access to the necessary documentation might be prepar......