Tax scams can cast a long shadow. There is sometimes a risk that the shadow may fall where it shouldn’t.
A decade ago, a couple of tax advisers were jailed for cheating the public revenue. The crime involved claiming tax relief on gifting shares to charity but fraudulently inflating the relief by reference to an illusory market value based on contrived transactions.
Before the First-tier Tribunal in the recent case of Nicholas Close and others v HMRC [2022] UKFTT 193 (TC), HMRC did not allege that the taxpayers were involved in anything underhand. But it seems likely that both the delay in progressing the case (it concerned events occurring in 2003) and HMRC’s interest in the matter may have been to some extent influenced by a suspicion (initially at least) that here was more of the same.
The taxpayers subscribed at some 12p a share for shares in a ‘cash shell’ company. In the case of at least two of the taxpayers, the decision to invest was made by discretionary fund managers and the taxpayer had no prior knowledge of the investment.
The company intended to use the cash to find and acquire a company in need of funding and to obtain an AIM listing. It did so – ostensibly, as far as the evidence before the Tribunal shows, on a commercial arm’s length basis.
At the time of listing, the taxpayers bought some more shares in a placing, at 48p per share. Over the following few months, shares were traded at around that price or a little more; and on gifting most of their shares to charity, the taxpayers claimed relief by reference to the value at which those trades took place, claiming that to be the market value of the shares.
HMRC adduced expert evidence as to the market value of the shares. Their expert ignored the trades and based his valuation solely on the company’s net assets on listing (including the value attributed in the prospectus to the company acquired) which resulted in a value (after an adjustment made by the Tribunal) of 12.2p per share.
The expert accepted that ‘ordinarily, market transactions would be a very significant factor in valuation to which he would give significant weight’ but he disregarded them in this case. The trades accounted for only some 2% of the company’s capital (so he did not regard that as a liquid market); he ‘could not understand how the business might be considered to have increased in value to such an extent following the flotation’; and ‘the indicative price could not be reconciled to the publicly available information in the Prospectus.’
Although there was no evidence to suggest that the market trades were not arm’s length transactions, there was, equally, no evidence to suggest that they were. Ultimately the Tribunal considered that it had to rely on the evidence of the only expert who had given evidence: ‘Mr Strickland is an expert valuer. His evidence was that in the circumstances it is not appropriate to take into account the market transactions.’
Was this the ‘right’ decision? There was evidence in the form of a letter from an independent financial adviser that ‘early so called “family and friends rounds” often occur at a substantial discount to the eventual flotation value, in some cases at 25% of the float value.’ One of the taxpayers, described as an experienced investor, was ‘not surprised that there was a four-fold increase in the value of the Readybuy shares on flotation compared with the amount he had paid when subscribing for shares. The decision to purchase shares and which shares should be gifted was made by his advisers.’
Given that the case came before the Tribunal nearly 20 years after the event, it was always going to be difficult to establish the precise circumstances in which the shares came to be traded at four times what HMRC thought they were worth. Was that fair? The taxpayers thought not: one of them framed his appeal in terms both that ‘delay on the part of HMRC meant that it was impossible for him to have a fair hearing’, and that ‘HMRC have treated him as a tax avoider but have engineered the dispute as being one of valuation.’
Slightly unsatisfactory all round, we think.
For more information, please get in touch with your usual BKL contact or use our enquiry form.
