Mr and Mrs Dyer had acquired some shares in a company. They claimed that the shares had become worthless and they sought tax relief for the diminution in value. HMRC asserted that the shares had not “become” worthless as required by the legislation but that they had always been worthless. The dispute between the Dyers and HMRC therefore resolved itself into the question of the value of the shares when they were acquired.
The company was a family company. Its value (if any) at the relevant time depended upon its ability to secure the continued services of a key individual (who happened to be the daughter of Mr and Mrs Dyer) and access to certain intellectual property (trademarks and the like) owned by her. There was evidence (or, to put it at its lowest, it might have been the case) that with these requirements properly tied up, the company would have had some significant value. Without them, the company was valueless.
The Dyers had two lines of argument. The first was that, although there was no formally documented arrangement with regard to the relevant rights, such informality was only to be expected in the light of the close connection between the parties concerned – Mr and Mrs Dyer and their daughter were the only shareholders and she was the only executive. They asserted that it was possible on the facts of the case to infer the existence of the appropriate contractual arrangements. The Upper Tribunal held that that was a question of fact and that the decision of the First-tier Tribunal that the facts simply did not support such an inference was a reasonable one with which they could not interfere. In particular the “de facto contract” referred to in the agreed statement of facts presented to the First-tier Tribunal was a creature unknown to English law and HMRC’s acquiescing in the use of the term had had the unfortunate effect of leading the Dyers to believe what was not the case, namely that HMRC had conceded that a contract existed.
The second line of argument was rather more interesting and of wider application. This was to the effect that in assessing market value for tax purposes one should take into account any steps that the vendor could and would have taken in the real world in order to maximise the price. In the present case, it was clear that since any real-world purchaser contemplating acquiring shares would have required the company first to secure the services of the daughter and the use of her IP, this would have been done in advance of any real-world sale. Thus the statutory valuation fiction should also assume that these steps had been taken, resulting in a significant value to be attributed to the shares.
Again, the Tribunal rejected the line of argument. What had to be valued was what was actually owned at the valuation date in the condition it then was. As the Tribunal put it – “the asset, in this case the shares, must be valued as it is on the relevant date, and not as it might be if certain steps were taken.” Since the necessary rights had not in fact been secured at the valuation date, it was not appropriate to value the shares as if they had been.
(Roger Dyer and Jean Dyer v HMRC [2016] UKUT 381 (TCC))