Valuation, it is often said, is not an art but a science. A recent case suggests that it is sometimes a mere shot in the dark.
Similar transactions had been considered in Halsall and others v. Champion Consulting Limited , concerning professional negligence and in a tax case Netley v. HMRC . All three cases involved investors subscribing for shares in an unlisted company (‘BBL’) which subsequently listed on a small stock exchange (the AIM, or in the present case, the Channel Island Stock Exchange (the ‘CISE’)) with an opening listing price greatly in excess of the investors’ subscription price. Shortly after the listing, the investors made gifts of the shares to charities and claimed charity gift relief from income tax based on the shares having a value equal to the opening listing price.
Under a charity shell scheme, if the tax advantage offered was to exceed the cost of the investment, there had to be a sudden and very substantial increase in the value of the shares between the subscription and the charitable gift.
In the present case, HMRC did not allege that Dr McArthur’s or Mr Bloxham’s investment were motivated by the availability of charity gift relief and the Tribunal Judge considered that whether or not the transactions could be characterised as constituting a charity shell scheme was simply irrelevant to the questions at issue which were solely matters of valuation. Expert witnesses were instructed by each party and both were extensively cross examined.
The shares of BBL to be valued were listed on the CISE on 21st November 2006 at a placing price of 108p.
Dr McArthur and Mr Bloxham between them had made charitable gifts of the shares on nine different dates. The Tribunal considered the values of the shares on three of those dates. The values put forward by Counsel for the taxpayer, by Counsel for HMRC and those finally decided upon by the Tribunal Judge were as follows:
|Date||Valuation by HMRC’s Expert||Valuation by the Taxpayer’s Expert||Value decided upon by Tribunal Judge|
|19th February 2007||8.0p||108.0p||31.5p|
|13th August 2008||16.0p||41.0p||16.5p|
|16th October 2009||16.5p||56.0p||18.0p|
It will be seen that if the taxpayer’s expert’s valuation had been correct there had been a precipitate fall in the value of the shares which had maintained their value against the placing price in the three months after the listing and had then lost 62% of their value at some point in the following year and a half.
Expert witnesses, of course, are not mouthpieces for the party by whom they are instructed but owe their primary duty to the court to exercise their expertise objectively. Yet the valuer appointed by HMRC valued the shares, as at 19th February 2007, at 25% of the amount finally decided upon by the Tribunal judge and the taxpayer’s valuer valued them at 343% of that amount. Is it a coincidence that the former valuation would, if it had been correct, have advantaged HMRC and the latter, the taxpayer?
The Tribunal Judge made no criticism of the expert witnesses for arriving at values which varied so greatly from each other and from the values which he finally determined.
If valuation really is an art it is clearly closer to the art of the ill-defined splodges of the Impressionists than to the precision of the Hyper-realists.