In Neil McArthur & Thomas Bloxham v HMRC [2021] TC08186  the First Tier Tribunal (FTT) determined the market value of shares that had been gifted to charity after discounting the valuations offered by two conflicting expert witnesses.

This case was a lead case with the common issue being the value of BBG shares at various dates. 

  • Dr McArthur (among others) subscribed for shares in a shell company for 27.6p each. The shell company was formed with a view to raise funds and purchase a business.
  • A suitable business was identified, the shell company was renamed Baa Bar Group Ltd (BBG) and purchased Baa Bar Limited (BBL) a well-established bar and pub operator.
  • BBG paid cash and deferred consideration totalling circa £12m as well as issuing shares to the management of BBL including Mr Bloxham.
  • BBG was then listed on the Channel Islands Stock Exchange (CISX) at a share price of 108p.
  • As part of his subscription agreement, Dr McArthur and the other investors subscribed for further shares in BBG at the subscription price. These shares represented circa 25% of the cost of their investment.
  • Over a number of years, both Dr McArthur and Mr Bloxham Gifted shares to charity and claimed Income Tax relief.
  • HMRC raised enquiries and issued closure notices claiming that the Market value of the gifts was significantly lower than the relief which was claimed.
  • The Closure notices were Appealed to the FTT.

The FTT considered the following in determining the market value of the shares at those dates as a preliminary issue to the lead case:

  • The market value is the price that would be paid by a reasonably prudent purchaser who is informed from the information available as to the relevant facts concerning the business, its present position and its future prospects.
  • Expert evidence is a proxy for the reasonably prudent purchaser.
  • The expert witnesses for both the appellant and HMRC had placed different weights on different factors. This had led to wide discrepancies between their valuations and it was up to the FTT to determine the market value.
  • Valuation should involve consideration of various different methods such as discounted cash flows, price-earnings ratios, multiples of earnings, net assets and comparable transactions.
  • The outcomes of these methods should then be weighted or adjusted, based on the information available to the purchaser to come up with a price.
  • Legislation is silent on the information that should be considered available to a reasonably prudent purchaser, however:
    • The purchaser would make all reasonable enquiries and receive true and factual responses to them.
    • Information that was made publicly available, even for a short time, would be available to the purchaser (in this case, it included documentation filed in respect of the floatation on CISX which was available for 14 days).
    • Information that would be released by a reasonable board of directors should be considered. This would not include information that the directors were not obliged to disclose and included a due diligence report produced in connection with the floatation.
    • A reasonable board of directors of a listed company would not volunteer information around directors’ remuneration to the purchaser of a minority shareholding.
    • It would not include confidential information.
  • Weight should be given to the value of the consideration shares granted to the management team as part of the transaction as they had good knowledge of the state of the business.
  • The market value of the shares would also reflect:
    • The listing on CISX gave the business added credibility in terms of corporate governance.
    • The additional finance secured following the transaction.
    • The strengthened management team following the transaction.
  • Adjustments should be made to Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) figures to reflect exceptional directors’ bonuses made prior to the business becoming listed.
  • Market capitalisation should be adjusted down to reflect a discount for a non-controlling minority shareholding.
  • A discount to the share value should also be applied to reflect the lack of liquidity of the shares, albeit that they were listed on CISX.

After considering the factors above, the FTT concluded the market values were as follows:

  • On 19 February 2007, the market value of a share was 31.5p (the expert witnesses considered the values at this date to be 8p (HMRC) and 108p (appellant)).
  • On 13 August 2008, the market value of a share was 16.5p, this was in line with HMRC’s expert (the appellant’s expert considered the value to be 41p).
  • On 16 October 2009, the market value of a share was 18p (the expert witnesses considered the value on this date to be 16.5p (HMRC) and 56p (Appellant)).

Useful guides on this topic

Valuation: Companies
When might a tax valuation be required? What are the main principles in valuing unquoted companies?

Gifts to Charity
Gifts to Charity: can you obtain tax relief on a gift to your local charity or community amateur sports club? What about gifts to your church, mosque, synagogue? Do you need to be a taxpayer? Are there any tax reliefs?

Closure notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights?

How to appeal an HMRC decision
Disagree with a HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

External links

Neil McArthur & Thomas Bloxham v HMRC [2021] TC08186


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