In Nicholas Close, Andrew Nuttall and Graham Chisnall v HMRC [2022] TC8518, the First Tier Tribunal (FTT) examined the market value of AIM listed shares gifted to charity, reducing them on the basis that there was little evidence of trading on what was an illiquid market.

  • The taxpayers subscribed for shares in Readybuy PLC for 12.2p per share around July 2003.
  • The funds raised by Readybuy were used to purchase a trading company (TradeCo), the shareholders of TradeCo received shares in Readybuy in exchange for their shares at a value of 12.1p per share.
  • Readybuy was listed on the Alternative Investment Market (AIM) in September 2003.
  • Following the listing, the taxpayers acquired further shares at the placing price of 48p per share. This was a condition of their initial subscription and represented a cost of 23% of the total investment.
  • In September and December 2003, the taxpayers' gifted shares in Readybuy Plc to charity and claimed Income Tax Relief based on the market value of the shares gifted.
  • The taxpayers claimed that the market value of the shares gifted was with reference to the prices at which the shares were traded on the Alternative Investment Market (AIM), which was in the region of 50p per share.
  • HMRC opened enquiries into the returns contending the market value of the shares was 8.05p.
  • The taxpayers appealed.

The FTT found that:

  • HMRC’s (uncontested) expert witness considered that:
    • The cost approach gave a value per share of 8.05p based on the net asset value after adjusting for transaction costs, no minority discount was applied. This was the methodology the expert witness preferred.
    • The income approach, which gave a value per share of 4.18p, was ruled out as it was based on information that would not have been available to a prudent purchaser.
    • The market approach was ruled out by the expert witness as there was insufficient reliable market evidence to offer a value due to the illiquid market and the limited number of market transactions.
  • The FTT went on to consider that:
    • The listing on AIM did not necessarily increase the marketability and value of the shares.
    • The expert could not explain the difference between the cost-based value of 8.4p and the market trades of 54p.
    • While there was no evidence to say AIM transactions were anything other than at arm's length, they should not be accepted at arm's length solely because there is no evidence to the contrary.
    • The market transactions were limited and indicated an illiquid market.
    • In the absence of no contrary evidence, HMRC’s expert was accepted.
    • Limited financial information would be available to a reasonably prudent purchaser, and the expert witness had considered that correctly.
    • Expert evidence is a proxy for a prudent purchaser, non-expert evidence from an actual purchaser cannot be used as a proxy for what the prudent purchaser would pay.

While accepting the expert’s methodology, the FTT decided on a valuation up to 12.1p more properly reflected the value given to the shares received in ReadyBuy by the owners of TradeCo on its purchase. This was an arm’s length arrangement and market evidence to suggest the value.

Useful guides on this topic

Valuations: 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 or 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 an 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

Nicholas Close, Andrew Nuttall and Graham Chisnall v HMRC [2022] TC8518

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