.png)
.png)
KEY POINTS
- Shares and Assets Valuation should concentrate on large cases.
- Checklist for advisers.
- Publish an index of business valuation guidelines.
- Reform the Fiscal Forum to encourage attendance.
Over many years Shares and Assets Valuation (SAV) has shrunk. In its Shares Valuation Division embodiment it was involved in many tax situations, some of which have been withering on the vine – e.g. 6 April 1965 and 31 March 1982 rebasing for capital gains tax – or which disappeared as a result of relief – e.g. the widening of the inheritance tax business property regime – or as a result of abolition: e.g. the ending of stamp duty on gifts.
So is SAV’s future confined to dealing with employment related and investment company valuations? Well, possibly not if governmental necessity to collect more tax is anything to go by.
Cost effectiveness
What is odd about SAV’s current role is that much of its employment related activity in connection with enterprise management incentive (EMI) valuations brings in not a penny of tax.
Rather, by seeking to increase EMI exercise prices, potential capital gains tax is reduced while at the same time increasing potential FA 2003, Sch 23 corporation tax deductions.
Contrast this to the position before the introduction of approved share incentives when the inevitable consequence of SAV negotiations was more tax.
The current political climate is such that, at least in the short to medium term, HMRC will be trying to boost receipts.
To this end, SAV could deploy its expertise effectively by directing greater concentration towards large cases that are attractive in terms of what is at stake.
However, contrary to this way of working I have noted some valuations that should on grounds of size and potential tax logically at least have been questioned, if not challenged, but which were passed without comment from SAV.
In a previous article, Time For A Makeover, I suggested, and suggest again, that SAV start logging the time spent on every case from which they could calculate, by applying different notional charge rates for each grade of staff involved, an approximate total notional input cost. This concept is not new to HMRC as the Valuation Office (an executive agency of HMRC) already costs its involvement in property valuations.
If SAV were to operate in this way the reduction from 140 staff in 2000 to less than 100 staff in 2009 might go no further. Indeed, by demonstrating its efficiency in helping to boost tax receipts, the department might even start to grow.
Preparing to negotiate
In negotiations SAV holds two strong cards:
- it has experienced staff who deal with share valuation full time; and
- it holds a wealth of accumulated information about unquoted companies, shares and business assets.
The department has the reputation for being difficult to deal with, but it seems to me this is not justified in as much as proper preparation always helps prevent problems during negotiations.
The main advantages taxpayers and their professional advisers may have over SAV are close knowledge of the company or business in question, coupled with direct commercial exposure.
The importance of these advantages was highlighted in that old but still most informative of fiscal unquoted share valuation cases Re Holt [1953] 2 AER 1499, in which evidence was heard on behalf of the taxpayer from a chartered accountant, the chairman of the company, the chairman of another company operating in the same arena, a merchant banker and a stockbroker.
As a result, the taxpayer won the case, with the judgment revealing the following influences on the valuation:
- the industry and its relationship to the company’s business;
- economic and political factors;
- profit history and trend;
- dividend history and trend;
- the management;
- the spread of customers and suppliers;
- gearing and liquidity;
- commitments;
- premises and their tenure;
- other fixed assets and investments;
- current assets and liabilities;
- exceptional revenue and outgoings;
- non-trading items and anything else.
These factors can be used as a general checklist. Having gone through this list, it is quite easy to prepare a worksheet comprising an analysis of performance over, if in point, at least the last three years with the current year budget, and any forecasts, plus:
- details of the share capital;
- details of share rights and, for non-controlling interests, other relevant provisions in the articles; and
- the basis of valuation and the reasons for it having regard to the technical rules of engagement on information standards.
Following these procedures can give the taxpayer an initial lead over SAV in that they enable a valuation submission readily to be drafted in a comprehensive, cohesive and persuasive format.
Trade based rules of thumb
It would be a boon both to SAV and professional advisers if through joint effort an index of business valuation guidelines on formulae, i.e. trade-based rules of thumb, were agreed, published and reviewed perhaps every 18 to 24 months.
There are many business sectors that would be inappropriate for inclusion in such an index and the guidelines for those included (whether expressed through net asset value, revenue, earnings or unit or whatever measure) should, in the interests of realism and to avoid the criticism of being too precise, be stated using relatively wide ranges.
Trade-based rules of thumb are commercially driven and adjust with changes in market conditions. I am sure there would be support and help forthcoming from some trade associations.
SAV Fiscal Forum
The Fiscal Forum began in 2001 to allow practitioners and SAV to exchange views and opinions on technical and practical issues. Meetings were originally held twice a year but are now held only once a year.
The idea is good and was one which I floated unsuccessfully with SAV in 1995, with an offer of secondment from SAV into the top ten accountants at which I was then a partner.
Interestingly, time has also caught up with the offer of secondment in that Dave Hartnett in his Hardman lecture on 12 November 2009 made an impassioned plea for tax advisers to take secondees and announced HMRC would be writing to leading firms asking them to commit to a much broader programme of secondments.
Minutes of the meetings are published online. From these it strikes me that, as constituted, the forum produces little which is of real help.
Possibly the SAV joint chairman Colin Gibson was of like mind on 25 January 2007 when he cancelled the meeting provisionally set for July 2007 saying there was no point in people taking time to attend if there was nothing on the agenda.
The forum needs to be improved to encourage more people to attend and participate. For example:
- Matters should be identified and agreed on both sides of the counter as worthy of open debate by nominated individuals (perhaps three persons from SAV and three from outside); and
- Discussion should take place on how to report on areas of joint co-operation where there is mutual benefit, e.g. the compiling of an index of trade-based rules of thumb.
With these objectives the result should be greater genuine interest in a more worthwhile forum.
Wise final words: ‘A long dispute means both sides are wrong’ – Voltaire
Mick Ruse is contactable at M H Ruse LLP, 32 Warren Street, London W1T 5PG: tel. 020 7387 4515 or email.
