Company share valuations can be a notoriously tricky area and the legislation offers little guidance as to appropriate methods of arriving at open market valuations.  Case law has often formed the basis of such considerations, but there are relatively few cases on the subject.

A recent case was heard at the First-tier Tribunal (Green v HMRC; TC03525) which may provide some further clarity to taxpayers as it considered a number of relevant factors for valuing shares.

Background and Facts

A taxpayer made gifts to two charities of 118,750 shares each in the company in question.  The company was called Chartersea Limited and was formed as part of a deal to acquire an existing trading company, Warwick Development (North West) Limited (WDL).  WDL was a manufacturer and supplier of uPVC windows, doors, sealed glazed units and conservatories.

Following Chartersea’s acquisition of WDL the shares were listed on the Official List of the Channel Islands Stock Exchange (“CISX”), which is a recognized stock exchange for the purposes of the relevant tax legislation.

The gift of shares could therefore qualify for income tax relief, and Mr Green claimed relief of £237,500 under ITA 2007, s 431, based on a market value of £1 a share.

Mr Green argued that trades carried out on the day of the gift to charity, with a mid-point of £1 a share, showed the correct market value to use.

HMRC became aware that the trades were carried out by persons who were likely associated with the other parties involved and was not therefore indicative of the open market value.  Whilst the shares were listed on a recognised stock exchange, the legislation on valuation only included reference to The Stock Exchange Daily Official List as being indicative of market value.  As such, the open market value had to be ascertained.

They restricted the amount of relief to £71,250, valuing the shares at 30p each.

The taxpayer appealed.

Tribunal Findings

Both parties at the First-tier Tribunal presented expert share-valuation reports. HMRC’s expert used a discounted cash flow valuation of the company, which the Tribunal noted was rarely used in practical share valuations.  He also used revenue and earnings projections that would not have been available to the open market.  His valuation found that the shares were worth between 25p and 30p

The Tribunal followed previous case law (Lynall deceased: Lynall & another v CIR [1972]) confirming that only information available to the open market should be used in such valuations.  In our experience, HMRC have recently been trying to side-step this case law and as such the Tribunal’s stance may be helpful.

The taxpayer’s report used a price/earnings (P/E) technique to value the shares, although it was noted that there were numerous confusing contradictory terms within the report. It concluded that the shares’ value was between 88p and 93p.

The tribunal found that the taxpayer’s valuation method was more appropriate, however the P/E multiples used had overvalued the shares.  Instead they used HMRC’s expert’s secondary value which was based on a lower P/E ratio, giving a value of 35p a share, resulting in relief of £83,125.


The case is perhaps most interesting in confirming the previous case law that only information available to the open market should be taken into account when valuing minority holdings.  It also highlights the difficulties in arriving at open market valuations which are always likely to be subjective in their nature.

Eaves and Co have extensive experience of share valuations and negotiations with HMRC on valuation, in particular for tax transactions such as EMI schemes.  If you would like any more information please feel free to get in contact with us.

We wrote previously regarding the First-Tier Tribunal case of McLaren Racing Ltd v HM Revenue & Customs, where the Tribunal found that the fine relating to spying on Ferrari (which amounted to around £34m) was deductible because the act in question was wholly and exclusively for the purposes of trade and no laws were broken.

HMRC appealed the case to the Upper Tribunal who found that the fine had been incurred because McLaren engaged in conduct not in the course of its trade.  The penalty was found therefore to be a disbursement or expense, but not paid wholly and exclusively for the purposes of the company’s trade. It was therefore not an allowable deduction against their profits for corporation tax.

The outcome of the original Tribunal case was somewhat surprising, and this decision therefore appears to be more in line with previous case law.  This is a shame as the First-Tier Tribunal case had suggested that the scope of the “wholly and exclusively” rules might have been wider than previously thought.  Bearing in mind the amount of tax at stake, it is possible however, that McLaren could seek to appeal the decision.

The saga of HM Revenue and Customs seeking penalties at the slightest provocation continues, as a recent case on reasonable excuse demonstrates.

In Spink [2014] a taxpayer:

  1. Received advice from the Department of Work and Pensions about receipt of a pension lump sum which they described as having had tax deducted.
  2. The taxpayer included it on her tax return on the basis that tax had already been paid.
  3. HMRC said that they had to check with DWP about the tax status.  This took some months, with HMRC finally telling the taxpayer on 14 August 2013 that they had now been informed by DWP that no tax had been deducted.  On the same date DWP told the taxpayer this conclusion was reached because they no longer had the relevant documentation, because the papers had been destroyed apart from a ‘note on file’.
  4. The taxpayer, on returning from holiday paid he tax due in full on 3 September 2013.
  5. HMRC sought to levy a 10% penalty for ‘late filing’ and took the case to Tribunal because they did not feel the taxpayer had a ‘reasonable excuse’.


Fortunately for the taxpayer, the judge accepted it was ‘reasonable’ for the taxpayer to believe the tax was not payable until the actual tax status had been established.  Therefore the penalty was discharged.

The mind boggling thing about the case is that HMRC felt it worth putting the taxpayer through the stress of a Tribunal hearing (with all the taxpayers’ resources that such a step will have cost on their side too) despite the fact that the bulk of the delay was down to a fellow Government Department.

Logically, it suggests they believed the taxpayer’s behaviour was ‘unreasonable’ and a 10% fine was proportionate to satisfy the expectations of the compliant majority.  Personally, my view, as part of the compliant majority, would be that HMRC’s grasp for penalties represented an unfair and unreasonable impost.  It does not seem to be behaviour which is either civil, nor, when combined with the DWP role in the matter, to be providing an appropriate level of service.  Ms Spink won, after fighting.  However, how many other taxpayers have been bullied into agreement, through pressure and lack of professional advice?

A recent tribunal case (F Berrier v HMRC – TC03584) involved the use of a relatively little known aspect of the legislation, namely that HMRC have the power to reduce penalties, “if they think it right because of special circumstances” (FA 2007, Sch 24, para 11).  The more cynical might suggest that HMRC might never think it right to reduce a penalty, but a recent case showed that the courts may have the power to apply such reductions as well.

Background and Facts

The taxpayer began working for a securities broker in 2009 and received a sum of £25,000 in addition to his starting salary.  He claimed to believe this was a “golden hello”, but his employers were treating it as a “forgivable loan”, as noted in his employment statement.

The loan was subsequently written off in February 2011, and it included on his P11D as a taxable benefit for the 2010/11 tax year.  He was also provided with a note telling him to include the amount in his tax return for the year.

One completing his return, however, he did not include the loan. HMRC amended the return to include the £25,000 and levied a penalty for carelessness.

The taxpayer appealed the penalty, as he had referred to the sum in his 2009/10 return.

Tribunal Decision

The First-tier Tribunal agreed that the sum was a loan, and therefore the taxpayer was liable to income tax when the loan was written off under ITEPA 2003, s.62 and on the beneficial interest rate (i.e. 0%) under s.175. The charges were applicable to the 2010/11 tax year.

The tribunal found that the taxpayer should have shown this income on his 2010/11 return and agreed that the omission was careless.  He did not have reasonable excuse, as his claim that his wife had tidied away the P11D only made matters worse.  He should have gathered together the necessary documents before preparing his return.

However, as the taxpayer had referred to the loan on his 2009/10 return and therefore drawn HMRC’s attention to it, the tribunal felt that there were special circumstances under FA 2007, Sch 24 para 11 and that HMRC’s decision not to apply a reduction under this provision was incorrect.  The tribunal therefore applied a 25% reduction to the penalties.

The facts of this case were perhaps quite unusual, however it demonstrates the importance of pursuing all aspects of the legislation that could provide taxpayers with a reduction on penalties; seeking reductions due to special circumstances could well be another option where the a “reasonable excuse” cannot be applied to entirely wipe out a penalty.