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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
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Lord Osborne
Lord Kingarth
Lord Mackay Of Drumadoon
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[2009] CSIH 11
OPINION OF LORD OSBORNE
in Appeal under the Taxes Management Act 1970,
Section 56A
by
GRAY'S TIMBER
PRODUCTS LIMITED
Appellants
against
THE COMMISSIONERS FOR HER
MAJESTY'S REVENUE AND CUSTOMS
Respondents
against
A Decision of the Special
Commissioners dated 21 March 2007
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Act: Ghosh,
Biggart Baillie
Alt: D E L
Johnston, Q.C.; Acting Solicitor (Scotland) HM Revenue & Customs
13
February 2009
The
Background Circumstances
[1] On 9 December 1999, a Mr G was allotted 14,465 ordinary
£1.00 shares in Gray's Group Limited, for a consideration of £50,000. After that share issue, Mr G's holding
represented 5% of the issued ordinary share capital of Gray's Group
Limited. Mr G acquired a further
258 shares in Gray's Group Limited on 16 May 2000 at a cost of £864. These shares were acquired from another
shareholder who had offered his shares for sale, pursuant to the Articles of
Association of Gray's Group Limited. On 8 November 1999, Mr G had taken up employment
with Gray's Timber Products Limited, the appellants, a wholly owned subsidiary
of Gray's Group Limited. Mr G had also
entered into a Subscription and Shareholders' Agreement, "the Subscription
Agreement", with certain other shareholders, who, including Mr G, held
84.6% of the issued ordinary shares in Gray's Group Limited. Clause 4 of the Subscription Agreement
provided, amongst other things, that, in the event of a change in control of
50% or more or the issued ordinary shares of Gray's Group Limited, the other
parties to the Subscription Agreement were to procure that Mr G's original
shareholding be purchased, either by Gray's Group Limited, or by the purchaser
of that portion of the issued ordinary shares of Gray's Group Limited. The terms upon which Mr G's shares were
to be so purchased were to depend upon the timing of the change of
control. Clause 4.2.1 was to apply
in respect of such a disposal of shares taking place on or after the second
anniversary of "the Completion Date", as defined in the Subscription
Agreement.
[2] In
order to deal with the allotment of shares in Gray's Group Limited to Mr G
and certain other matters, on 9 December 1999, Gray's Group Limited
held an extraordinary general meeting at which two special resolutions and two
ordinary resolutions were passed. The
two special resolutions were in the following terms:
"1. That
the entering into by the company of the Subscription and Shareholders'
Agreement among the company, Mr G and certain shareholders of the company
in the form annexed hereto for identification purposes be and is hereby
approved.
2. That the regulations contained in the document headed 'new Articles
of Association' annexed hereto be and they are hereby adopted as the Articles
of Association of the Company to the exclusion of all existing Articles
thereof."
The Subscription Agreement itself was undated, but the
last shareholder to execute it did so on 18 December 1999.
[3] By
Clause 2.3 of the Subscription Agreement, Mr G was to enter into, and
Gray's Group Limited was to procure that their subsidiary, the appellants,
entered into a service agreement with Mr G and that Mr G should be
appointed a director of Gray's Group Limited and the appellants.
[4] In
terms of Clause 4.2.1 of the Subscription Agreement, in the event of a
disposal of shares in Gray's Group Limited of the kind previously referred to
taking place after the second anniversary of the completion date, Mr G was
entitled to receive payment for the shares allotted to him in accordance with
the formula set forth in that Clause.
The broad effect of that arrangement was that, in that event, Mr G
would become entitled to an agreed enhanced payment, in addition to the return
of his original investment, disproportionately greater than the amounts
received by other shareholders or his percentage of the equity shares of Gray's
Group Limited.
[5] On 29 November 2003, the entire share capital
of Gray's Group Limited was sold to an unconnected third party, Jewson
Limited. The total consideration paid
was £5,903,219, of which a total of £1,451,172 was paid to Mr G, pursuant
to a contract between all shareholders in Gray's Group Limited and
Jewson Limited, the Agreement for the sale and purchase of the entire
issued share capital of Gray's Group Limited, "the Sale Agreement". Prior to this sale of Gray's Group Limited,
the existence and content of the Subscription Agreement had been disclosed to
Jewson Limited.
[6] Against
the foregoing background of fact, an issue has arisen between the appellants
and the respondents concerning the taxation consequences of the disposal by
Mr G of his shares in Gray's Group Limited. The respondents have contended that those
shares, as employment- related securities, and sold as part of the sale of the
whole share capital of Gray's Group Limited, were sold for more that their
market value. Consequently, they have contended
that the sale occasioned a charge to income tax, determined under Part 2
of the Income Tax (Employment & Pensions) Act 2003, by virtue of
Chapter 3D of Part 7 of that Act.
If the disposal in question did occasion a charge under the Income Tax
(Employment & Pensions) Act 2003, the amount of the income charged by
virtue of Section 446Y of that Act was to be treated as though it had been
a payment of income to Mr G by the appellants. They would then be required to account for
tax in respect of that notional payment under the PAYE provisions, as though it
had been an actual payment. By contrast,
the appellants maintained that the shares in question were sold for their
market value, so that the whole of the consideration received by Mr G fell
to be brought into computation of his capital gain on the disposal under the
Taxation of Chargeable Gains Act 1992.
Thus the fundamental dispute between the parties is as to the market
value of the shares concerned in Gray's Group Limited and how that value is to
be determined.
[7] The
issue between the parties was the subject of a determination by the respondents
issued on 3 March 2004. By letter dated 30 March 2004, the appellants appealed
against that determination. The appeal
was heard on 29 November 2006 by a Special Commissioner. In a Decision released on 21 March 2007, the Special Commissioner dismissed
the appeal, making certain directions in relation to the determination under
appeal, as appears from paragraphs 49 and 50 of his Decision. The appellants, being dissatisfied in point
of law with the decision of the Special Commissioner, have now appealed to this
Court under Section 56A of the Taxes Management Act 1970.
The
Legislative Framework
[8] The
legislation relevant to the circumstances of this case is to be found in
Part 7 of the Income Tax (Earnings & Pensions) Act 2003 and in
Part VIII of the Taxation of Chargeable Gains Act 1992. The relevant parts of Chapters
1 and 3D of Part 7 of the 2003 Act provide as follows:-
"Chapter 1
Section 417 Scope of Part 7
(1) This Part contains
special rules about cases where securities...are acquired in connection with an
employment.
(2) The rules are contained in-...
Chapter 3D (securities disposed of for more than market value),
Chapter 4 (post-acquisition benefits from securities),
(3) The following make provision for amounts to count as employment
income-
Chapters 2 to 6..."
Section 420
"Meaning of 'securities' etc
(1) Subject to subsections (5) and (6), for the purposes of this
Chapter and Chapters 2 to 5 the following are "securities"-
(a) shares in any body corporate
(wherever incorporated)..."
Section 421
"Meaning of 'market value' etc
(1) In this Chapter and Chapters 2 to 5 "market value" has the same
meaning as it has for the purposes of the Taxation of Chargeable Gains
Act 1992 by virtue of Part 8 of that Act."
Section 421A
"Meaning of 'consideration'
(1) This section applies for determining for the purposes of
Chapters 2 to 5 the amount of the consideration given for anything.
(2) If any consideration is given partly in respect of one thing
and partly in respect of another, the amount given in respect of the different
things is to determined on a just and reasonable apportionment..."
Section 421B
"Application of Chapters 2 to 4A
(1) Subject as follows (and to any provision contained in Chapters
2 to 4A) those Chapters apply to securities...acquired by a person where the
right or opportunity to acquire the securities...is available by reason of an
employment of that person or any other person.
(2) For the purposes of subsection (1)-
(a) securities are...acquired at
the time when the person acquiring the securities...becomes beneficially entitled
to those securities...(and not, if different, the time when the securities are....conveyed
or transferred), and
(b) 'employment' includes a
former or prospective employment.
(3) A right or opportunity to acquire securities...made available by
a person's employer or by a person connected with a person's employer, is to be
regarded for the purposes of subsection (1) as available by reason of an
employment of that person unless-
(a) the person by whom the right
or opportunity is made available is an individual, and
(b) the right or opportunity is
made available in the normal course of the domestic, family or personal
relationships of that person...
(8) In this Chapter and Chapters 2 to 4A-
"the acquisition", in relation to employment-related securities, means
the acquisition of the employment-related securities pursuant to the right or
opportunity available by reason of the employment,
'the employment', in relation to employment-related securities, means
the employment by reason of which the right or opportunity to acquire the
employment-related securities is available ("the employee" and "the employer"
being construed accordingly unless otherwise indicated), and
"employment-related securities" means securities...to which Chapters 2 to
4A apply...
Section 421C
"Associated persons
(1) For the purposes of this Chapter and Chapters 2 to 4 the
following are 'associated persons' in relation to employment-related
securities-
(a) the person who acquired the
employment-related securities on the acquisition,
(b) (if different) the employee,
and
(c) any relevant linked person.
(2) A person is a relevant linked person if-
(a) that person (on the one
hand), and
(b) either the person who
acquired the employment-related securities on the acquisition or the employee
(on the other),
are connected or, although not connected, are members of the same
household."
Section 421D
"Replacement and additional securities
and changes in interests
(1) Subsections (2) and (3) apply where an associated person is
entitled to employment-related securities (the 'original securities') and
either-
(a) ...,
(b) by virtue of that person
being entitled to the original securities, that person or another associated
person acquires other securities...(the "additional securities").
(2) The additional securities are to be regarded for the purposes
of section 421B(1) (securities acquired pursuant to a right or opportunity
available by reason of an employment) as acquired pursuant to the same right or
opportunity as the original securities.
(3) ...
(4) Subsections (2) and (3) apply whether or not the replacement
securities, or the additional securities, were acquired for consideration..."
Chapter 3D
"Securities
disposed of for more than market value
Section 446X Application of this
Chapter
This Chapter applies if-
(a) employment-related securities
are disposed of by an associated person so that no associated person is any
longer beneficially entitled to them, and
(b) the disposal is for a
consideration which exceeds the market value of the employment-related
securities at the time of the disposal.
Section 446Y
"Amount treated as income
(1) Where this Chapter applies the amount determined under
subsection (3) counts as employment income of the employee for the
relevant tax year.
(2) The 'relevant tax year' is the tax year in which the disposal
occurs.
(3) The amount is-
CD - MV - DA
where-
CD is the amount of the consideration given on the disposal,
MV is the market value of the employment-related securities at the time
of the disposal, and
DA is the amount of any expenses incurred in connection with the
disposal."
Section 446Z
"Definitions
(1) In this Chapter 'market value' has the meaning indicated in
section 421(1).
(2) For the purposes of this Chapter sections 421(2) and 421A
apply for determining the amount of the consideration given for anything.
(3) In this Chapter-
'the employee', and
'employment-related securities',
have the meaning indicated in section 421B(8).
(4) In this Chapter 'associated person' has the meaning indicated
in section 421C."
[9] The Sections of the Taxation of
Chargeable Gains Act 1992 relevant to the circumstances of this case are
to be found in Part VIII thereof.
They are in the following terms:-
"Section 272
Valuation: general
(1) In this Act 'market value' in relation to any assets means the
price which those assets might reasonably be expected to fetch on a sale in the
open market.
(2) In estimating the market value of any assets no reduction shall
be made in the estimate on account of the estimate being made on the assumption
that the whole of the assets is to be placed on the market at one and the same
time."...
Section 273
"Unquoted shares and securities
(1) The provisions of subsection (3) below shall have effect in any
case where, in relation to an asset to which this section applies, there falls
to be determined by virtue of section 272(1) the price which the asset
might reasonably be expected to fetch on a sale in the open market.
(2) The assets to which this section applies are shares and
securities which are not quoted on a recognised stock exchange at the time as
at which their market value for the purposes of tax on chargeable gains falls
to be determined.
(3) For the purposes of a determination falling within
subsection (1) above, it shall be assumed that, in the open market which
is postulated for the purposes of that determination, there is available to any
prospective purchaser of the asset in question all the information which a
prudent prospective purchaser of the asset might reasonably require if he were
proposing to purchase it from a willing vendor by private treaty and at arm's
length."
The Submissions of the
Appellants
[10] Counsel
for the appellants characterised the issue in the appeal as simple, being one
concerning a sale of shares to an unconnected third party. The shareholding had been 5% of the whole issued
share capital of the company, but under an agreement, the vendor was entitled
to 25% of the proceeds. The question was
whether taxation of the proceeds was properly as income or chargeable
gain. There was a statement of agreed
facts, which set out the relevant chronology, already narrated. There was no question but that the bargain
with the unconnected third party, Jewson Limited, was a transaction at arms
length. The payment made by Jewson
Limited was governed by the Sale Agreement.
There were two critical documents in the case:
(1) The Subscription Agreement (B3) and
(2) The Sale Agreement, dated 29 November 2003, (B11).
Counsel
went on to draw attention to certain features of the Subscription Agreement,
which were of importance. In
clause 2 it dealt with "Completion", which was related to Mr G taking
up employment with the appellant and becoming a Director of Gray's Group
Limited and the appellant. On the
Completion Date certain steps were to be taken, including the subscription by
Mr G for the shares which he was to acquire. In that connection reference was made to
clause 2.2.2. A critical part of
that Agreement was clause 4, which related to disposal of shares. That was defined as a disposal of 50% or more
of the total voting rights conferred by all the shares. Clause 4.1.1 dealt with such a disposal
prior to the second anniversary of the completion date, with which the court
was not concerned. However, clause 4.2.1
did operate on the acquisition of the share capital by Jewson Limited and
contained the formula which yielded what was paid to Mr G for his
shares. It was not necessary to consider
that formula in detail; it had been
designed to confer upon Mr G a benefit in respect of the increase in value
of the shares of the company after his entry to it. The obligation created by
that clause lay upon the company, Gray's Group Limited, or the purchaser in
terms of the Shares' Disposal. Counsel
submitted that the critical point was that the money for the purchase came from
the purchaser. It was that which gave
Mr G's shares their value to him.
The appellants' submission was that what was provided for in
clause 4.2.1, under the relevant authorities, gave the market value to
Mr G's shares; that was the sum
which had to be paid by the purchaser to step into his shoes. There would have been no dispute if the
formula contained in clause 4.2.1 of the Subscription Agreement had been
incorporated in the Articles of Association of Gray's Group Limited. The concept of market value did not postulate
a deemed sale; it focused on the value
to the holder of the asset. The test was
not what the market would do, but what Mr G could expect to realise. It was not necessary to track the
consequences of an actual sale.
[11] Clause 4.4 of the Subscription Agreement
was designed to protect the arrangement established in clause 4.2.1. Likewise clauses 6.1 and 6.4 were
designed to fortify clause 4.2.1.
Clause 9 provided that the agreement and the rights and obligations
under it were not to be assignable. The
shares themselves were not assignable under the Articles of Association. Clause 11.2 of the agreement provided
that the provisions of the agreement should prevail over the Articles of
Association of Gray's Group Limited, providing that if there was any conflict
between the provisions of the agreement, they should prevail to the exclusion
of any conflicting provisions in the Articles of Association.
[12] Counsel for the appellants went on to
consider in detail the terms of the Sale Agreement. Clause 2 contained the basic obligations
of the parties. Clause 3.1.1 had
been misunderstood by the Special Commissioner.
Clause 3.2.1 was of limited effect.
Clause 3.4 provided that the vendors should be entitled to the
consideration in the amounts set out in column 3 of schedule 1. That schedule showed the consideration that
Mr G was entitled to receive. The
consideration, of course, came from Jewson Limited. The Subscription Agreement had been disclosed
to them.
[13] Summarising the factual
position, Counsel said that there had been a sale of each and every
shareholders' shares by virtue of the agreement with Jewson Limited. The warranties were not relevant, nor were
details of payment of the sums due. He contended
that the outcome of the case would depend on what was being valued, whether it
was the right to step into Mr G's shoes, or whether it was a valuation of
the consequences of a deemed sale. If it
were the latter, then the appellants would lose. The latter was an unintelligible
approach.
[14] Counsel for the appellants next embarked
upon a consideration of the relevance of the statutory provisions which we have
already quoted. There was no doubt that
the conditions found in section 446X(a) of the 2003 Act were
satisfied. The live issue arose out of
the terms of section 446X(b). The
terms of section 272(1) of the Taxation of Chargeable Gains Act 1992
were crucial to the decision in the case.
[15] Counsel submitted that if, as was the
case, Jewson Limited had paid £1,451,172 for Mr G's shares, that was
self-fulfillingly their market value;
that was what the market had yielded for them in an arms-length
transaction. That sum was paid because
of the provisions of the Subscription Agreement, which had had the same
consequence as comparable provisions in the Articles of Association would have
had. Even if one ignored the actual
price realised for the actual shares in the market, looking at the provisions
of section 272(1) and 273 of the 1992 Act, Mr G did not get more
than market value because it was necessary to take account of the rights vested
in him under the Subscription Agreement.
Certain propositions of principle were relevant;
(i) Sections 272(1) and 273 of the 1992 Act did not
postulate a deemed sale; there was a
valuation mechanism to measure the value of a particular asset in the hands of
Mr G. There was no deemed sale.
(ii) The sale contemplated in section 272(1) was a notional
sale to a notional purchaser in the open market.
(iii) What the Courts meant by a notional sale is the acquisition of a
right to step into the vendor's shoes.
[16] Certain propositions of application had to
be noticed;
(1) The market price of an asset was a matter of fact;
(2) Under the relevant legislation, certain factors were to be
ignored, for example, any reduction in price by the swamping of the
market.
(3) It was necessary to take account of the actual circumstances of
the taxpayer and the asset.
(4) It was necessary to impute to the prospective purchaser the
right to step into the shoes of the vendor;
all of the information which a prudent prospective purchaser of the
asset might reasonably require was to be attributed to the purchaser. Following this approach, the market value of
Mr G's shares was the sum which he received for them; £1,451,172.
[17] Counsel for the appellants
then proceeded to draw attention to authorities which he contented supported
his submissions. The first of these was Stanton v Drayton Commercial Investment Company
Limited [1983] 1A.C.501. That case
had been concerned with market value. A
particular price for shares had been the product of an arms length transaction.
Where a price emerged in that way it was to be seen as the market value. Reference was made to the observations of
Lord Fraser of Tullybelton at page 512. In the present case the shares of Mr G
had been identifiable as a separate class of shares, as they would have been if
their status had been reflected in the Articles of Association. Further, Jewson Limited knew of the
particular status of those shares; they
had been identified as different from those of other shareholders; and, in any event, under section 273(3)
of the purchaser was deemed to know a range of information which would have
included the status of those shares. It
made no difference whether shares were identified as different in Articles of
Association, or, as here in other equivalent material. It followed that there were two market values
for shares in Gray's Group Limited relating to the shares of Mr G and the
other shares.
[18] Counsel next founded on the Duke of Buccleuch & Another v Inland Revenue Commissioners [1967] 1
A.C.506, which was concerned with the valuation of property for the purposes of
ascertaining estate duty payable in consequence of a death. Section 7(5) of the Finance Act 1894 was
in substantially the same terms as Section 272(1) of the 1992 Act. The observations of Lord Guest at
page 541 were pertinent; he spoke,
in relation to market value, of "what the purchaser would have paid to be put
into the shoes of the deceased." That
was the test for valuation. It did not
involve a deemed sale.
[19] Walton
v Inland Revenue Commissioners [1996] S.T.C.68 was concerned with the valuation of a share in a farming partnership
for capital transfer tax purposes.
Section 38 (1) of the Finance Act 1975 was involved, which required
the ascertainment of the price which the asset "might reasonably be expected to
have fetched on a sale in the open market".
Counsel relied upon what had been said at page 76 by the Lands
Tribunal in its decision, which had subsequently been affirmed by the Court of
Appeal. What emerged from what was said
in the case was that there was no deemed sale.
The mode of valuation was by reference to a form of transaction which
was notional. In the latter type of
transaction the purchaser assumed the identity of the vendor. He stepped into his shoes. The question was what would the vendor pay to
achieve that. Reference was made to the
observations of Peter Gibson L.J. at pages 85 to 86.
[20] Counsel for the appellants went on to rely
on Inland Revenue Commissioners v Gray (Fox's Executor) [1994] S.T.C.
360. It involved an issue of valuation
in relation to section 38 of the Finance Act 1975, which referred to
the "price which the property might reasonably be expected to fetch if sold in
the open market"...to show an omission.
Reliance was placed on the observations of Hoffmann L.J., who gave
the judgement of the Court of Appeal, at pages 371 to 374 and 378. The approach was that what was involved was
an hypothetical transaction, a notional sale but not a deemed actual sale.
[21] Counsel for the appellant then turned to
consider Commissioners of Inland Revenue
v Crossman [1937] A.C.26, a case
involving section 7(5) of the Finance Act 1894, which required the
ascertainment of "the price which...such property would fetch if sold in the open
market...". It related to the valuation of
shares in a company, the Articles of Association of which imposed rigid
restrictions upon the alienation and transfer of the shares in the
company. The House of Lords held that,
in the notional sale, it had to be assumed that the purchaser would be entitled
to be registered and to be regarded as a holder of the shares, but subject to
the provisions of the Articles of Association, including those relating to
alienation and transfer of shares. At
page 49, it was emphasised that the property, the value of which was to be
ascertained, was the whole property brought into charge by the Act, and not a
part of it only.
[22] Lynall
v Inland Revenue Commissioners [1972] A.C.680 was another case concerned with the application of section 7(5) of
the Finance Act 1894. Counsel
relied particularly on what was said at page 693. That passage affirmed the correctness of the
"step into the shoes test". That had
been affirmed in Commissioners of Inland
Revenue v Gray (Fox's Executor)
in that case the partnership interest could not have been sold, but it's existence
had to be taken into account.
[23] Counsel for the appellants then turned to
consider Hawkings-Byass v Sassen [1996] S.T.C. (S.C.D.) 319, a
case concerned with the identification of market value of an asset for Capital
Gains Tax purposes. The Special
Commissioners took into account the fact that a purchaser would be entitled to
appoint a director of the company in question.
That reflected the fact that the hypothetical market existed in the real
world.
[24] Counsel went on to discuss in detail the
issue of information presumed to be available to the hypothetical
purchaser. He referred again to the
terms of section 272(3) of the Act of 1992 and to the cases of Caton v Couch [1995] S.T.C.(S.C.D.) 34 and Clark v Green [1995] S.T.C.(S.C.D.)
99 in the present case the Subscription Agreement had to be disclosed to the
purchaser because of the splitting of the price paid as between
shareholders. It therefore fell into the
category of information that would be reasonably required by the purchaser.
[25] Finally Counsel for the appellant drew
attention to Short & Others v Treasury Commissioners [1948] 1 K.B.116, a case concerned with the compulsory acquisition of shares in a
company in terms of Defence (General) Regulations 1939 (St.R.& O.1939,
No.927), regulations 78(5). The
issue related to the value of shares involved in a hypothetical transaction "as
between a willing buyer and a willing seller".
At page 123, giving the judgement of the Court of Appeal Evershed
L.J.,
Said
that it was necessary to take into account the value of what each shareholder
possessed. Possession of a controlling
interest might confer additional value on the holding of such a
shareholder.
[26] Counsel for the appellants then turned his
attention to the decision of the Special Commissioner. Commenting on the submission of the
Commissioners of the Inland Revenue, narrated in paragraph 29, he
submitted that the points made were misconceived. Counsel supported what had been submitted to
the Special Commissioner on behalf of the appellants narrated in
paragraph 31. The Special
Commissioner's characterisation of the effect of the Subscription Agreement and
the Sale Agreement as resulting in a composite transaction was
inappropriate. The Special Commissioner's
analysis of the events described in paragraph 33 of the decision was also
misconceived. The timing of the
Subscription Agreement was not relevant, since it was truly in place when the
issue of the transaction with Jewson Limited arose. Further, the Special Commissioner's
observations in paragraph 34 were beside the point, since Counsel was not
saying that the Subscription Agreement was to be read into the articles. Counsel went on to criticise what the Special
Commissioner said relating to the effect of the Subscription and Shareholders'
Agreement in paragraph 35 of the decision.
The contents of paragraph 37 of the decision were incomprehensible
and apparently wrong.
[27] Counsel emphasised that he was advancing
three fundamental propositions. First,
market value was what was yielded by the market. Second, even if one ignored that proposition,
section 272(1) of the 1992 Act did not deem a sale to take
place; in it, it was assumed that such a
thing had taken place; value had to be
ascertained on the basis of the "stepping into the shoes of the vendor"
test. Third, the vendor was to be assumed
to be selling, not just the bare asset, but also anything that gave it
"marriage value", if no undue expense or effort was required to achieve
that.
[28] Reverting to the terms of the Special
Commissioner's decision, paragraphs 39 and 42 appeared to be the
foundation for his decision.
Paragraph 39 was irrelevant and not an answer to the appellant's
case. Paragraph 42 was wrong having
regard to the contents of schedule 1 to the Sale Agreement. The appellants' position was that all of the
shareholders in Gray's Group Limited received market value for their
shares. The shares of Mr G were
different from those held by other shareholders and accordingly it was not surprising
to find that they possessed a different market value. What was being valued was the asset
notionally sold by the vendor. It did
not matter that the special characteristics of Mr G's shares flew off on
the sale. The valuation of Mr G's
holding had to be as it stood in the hands of the vendor.
[29] As regards the distinction drawn by the Special
Commissioner between the Articles of Association and the Subscription
Agreement, Counsel drew attention to the provisions of sections 9 and 378
of the Company's Act 1985.
Section 9 provided that, subject to the conditions there mentioned,
a company might by a special resolution alter it's Articles of Association. A majority of 75% was required to pass such a
resolution. Accordingly what the special
commissioner said in paragraph 35 of his decision was wrong. The Subscription Agreement had been
subscribed by the holders' of 83.8% of the shares of Gray's Group Limited. The Special Commissioner appeared to have
ignored the implications of that.
[30] The decision of the Special Commissioner
was unsound for the reasons given. The appeal should be allowed.
Submissions For Her
Majesty's Revenue & Customs
[31] Senior Counsel for the
respondents began his submissions by considering the statutory test applicable
to this case, in association with relevant decided cases. Dealing first with Commissioners of Inland Revenue v Crossman [1937] A.C.26, he pointed out that section 7(5) of
the Finance Act 1894 was involved which spoke of the "open market". He drew attention to the speech of
Lord Hailsham at pages 38 to 44.
That made the point that there had to be disregarded any restrictions on
sale in the hands of the seller, otherwise an asset, the sale of which was
restricted would have no market value, or an artificially low market value,
which was absurd. Looking at the
observations of Lord Blanesburgh at pages 49 to 50, it was apparent
that the matter of valuation involved the realm of a hypothetical vendor; the personal characteristics of the actual
vendor were to be ignored. The
recipients in the hypothetical sale in an open market were also to be
ignored. What this case really concerned
was the significance of restrictions on sale, as appeared from the
headnote. The assumption was made that a
purchaser was entitled to be registered under the articles, but subject to the
restrictions on transfer contained therein.
The case did not suggest that it was necessary to deem that the
purchaser was identical with the vendor.
[32] The Senior Counsel next turned to Duke of Buccleuch & Another v Inland Revenue Commissioners [1967] 1
A.C.506. Looking at the judgements of Lord
Reid and Lord Morris of Borth-Y-Gest, it was to be observed that there was
no reference to "shoes".
Lord Hodson at page 538 emphasised that what was envisaged by
section 7(5) of the 1894 Act was a notional sale. There was no issue about that in the present
case at all. At page 541
Lord Guest used the expression "what the purchaser would have paid to be
put into the shoes of the deceased".
That meant no more than what the buyer would have paid to acquire the
property sold. Indeed at page 545
Lord Wilberforce said that the Act did not require valuers to step, as it
were, into the shoes of the deceased or his executors. So looking at the several speeches in the
case, they did not support the "shoes" concept.
It was a question of identifying the price of the property notionally
sold. Senior Counsel then turned to
discuss Lynall v Inland Revenue Commissioners [1972] A.C.680. In that case Inland Revenue Commissioners v Crossman
had been challenged but approved. He
referred to the observations of Lord Reid at page 693. It was reading too much into that passage to
recognise the "shoes" doctrine.
Lord Morris of Borth-Y-Gest followed the same approach at page 698. The essence of the respondents' submission
was that it was inappropriate to make any assumption regarding the personal
characteristics of the particular vendor.
What was in issue was the market price for the vendor's property.
[33] At this point in the argument Senior
Counsel referred to Lynall v Inland Revenue Commissioners, in the
Court of Appeal, reported in 47 T.C. at page 389; [1970] Ch. 138. What was emphasised by Cross L.J. at
page 402 was that, in considering the hypothetical vendor, it was
necessary to endow him only with the characteristics which necessarily belonged
to all hypothetical vendors, namely that of owning the block of shares in
question. Senior Counsel also referred
to Inland Revenue Commissioners v Gray (Fox's Executor) at pages 371
to 372. The rights which were the
subject of the notional sale in the present case should be seen only as the
rights attaching to Mr G's shares under the Articles of Association, not
under the Subscription Agreement. At
page 371 Hoffmann L.J. spoke of the "rights attached to the property
at the relevant date", not the value attached to being the vendor. The question was whether the rights of the
actual vendor should be brought into consideration. The answer was only if they affected what an
hypothetical purchaser would pay for the property in question.
[34] Senior Counsel submitted that what was
important about the Subscription Agreement was that it bound only the parties
to it, not all shareholders.
Clause 11.2 of that Agreement was significant, but had the holders
of the relevant majority of shares wished to reflect Mr G's position in
the Articles of Association, that could have been done. Counsel for the appellants had submitted that
whether Mr G's position was reflected in the Subscription Agreement or the
Articles of Association made no difference.
The respondents' submission was that it did make a difference, because
it was the shares that had to be valued, not the rights attached to them by
Mr G. Those rights were personal to
him. They had been given to him in
connection with his service contract.
That view was confirmed by the terms of several clauses of the Agreement,
in particular to, 3, 6.1 and 7.1.
Looking at the whole circumstances of the Subscription Agreement, it was
plain that the rights which Mr G enjoyed beyond those as a shareholder
were personal rights which he enjoyed exercisable against other parties to the
Agreement, but did not attach to his shares.
[35] Endeavouring to summarize his position,
Senior Counsel accepted that the hypothetical sale under consideration was one
which must be assumed to take place in the real world, in which the
hypothetical vendor was selling what he had.
In this case, Mr G's shares were identical to the other shares held
by other shareholders. Mr G's
rights under the Subscription Agreement did not affect the price that a
hypothetical purchaser would be prepared to pay, because they were specific and
personal to him and non-assignable; they
would not be valuable to an hypothetical purchaser of the company. In short, Mr G's shares were not worth
more than any other shares. That view
was reflected in the Special Commissioner's decision at paragraph 45.
[36] Turning to the issue of market value
itself, the Special Commissioner had been right to reach the conclusion that he
did in paragraph 45 of his decision.
The only evidence available was that £6m had been paid for the full
share capital of Gray's Group Limited, under certain deductions, as appeared
from paragraph 16 of the decision of the Special Commissioner. However, there was no evidence of market
value of Mr G's shares in particular, or that Jewson Limited paid
more for them than the others. Reference
was made to paragraphs 39 and 40 of that decision. When pressed by the Court regarding the
implications of schedule 1 to the Sale Agreement and clauses 2.1 and
3.4 thereof, he contended that what they contained simply indicated what
Jewson Limited was prepared to pay for the whole company. There was a single transaction. There were no separate negotiations with each
vendor. If there had been an agreement
between the purchaser and the vendors separately, the price agreed might
require to be accepted as the market value.
However, that was not the case.
The present case was comparable to the subject matter of the decision in
Guinness Plc v Inland Revenue Commissioners [1994] S.T.C. 86.
[37] The approach to the determination of
market value of the shares of Gray's Group Limited adopted by the Special
Commissioner in paragraph 49 of his decision was legitimately used to
identify the market value of Mr G's shares, which were identical to all
the other shares of that company for this purpose. A proportion exercise was carried out which
was correct.
[38] Commenting on certain authorities relied
upon by the appellants, senior counsel said that Stanton v Drayton Commercial
Investment Company Limited [1983] 1 A.C.501 contained certain remarks
by Lord Fraser of Tullybelton concerning market value at
page 512. Those remarks were obiter, or in any event in relation to
legislation with wording different from that involved here. As regards Short & Others v Treasury
Commissioners [1948] 1 K.B.116, the case did not assist in the present
situation. There had been two different
types of shares and two transactions.
The case was a very special one, it gives no guidance concerning any
general principals. Finally senior
counsel drew attention to Barclays
Mercantile Business Finance Limited v Mawson
76 TC 446. Reliance was placed particularly
on paragraphs 28-33 of the Judgement of the House of Lords, which outlined
the proper approach to interpretation of taxation statutes. That process should be undertaken by the
application of general principles of interpretation.
[39] The legislation under consideration in the
present case was plainly endeavouring to capture the difference between
consideration received and market value in relation to some particular
asset. It was too easy, but erroneous,
to say that Mr G had received only market value for his shares. He had received a certain consideration which
was payment, not only in respect of the market value of his shares, but also in
respect of certain personal rights which he enjoyed. In all the circumstances the appeal should be
refused.
Reply by Counsel for
the Appellants
[40] As
regards the market value of the holding of Mr G, the only evidence
relating to it was to be derived from clause 2.1 and schedule 1 of
the Sale Agreement. The clause provided
that each vendor should sell his holding.
In terms of clause 3.4 each vendor was entitled to the
consideration specified against his name in schedule 1. As regards the "step into the shoes test" it
had been approved in Lynall v Inland Revenue Commissioners [1972] A.C.680 in the House of Lords in the judgment of Lord Reid at
page 693. The contention that the
rights enjoyed by Mr G to a consideration for his shares, calculated in
accordance with clause 4 of the Subscription Agreement, were personal
rights, which did not affect the market value of the shares, was unsound. The arrangements made in the Subscription
Agreement affected the company because they were enforceable against the
company. The present case was a fortiori of Inland Revenue Commissioners v Gray
(Fox's Executor). A partnership was personal, separate and non-assignable,
yet it was taken into account in that case.
Senior Counsel for the respondents had not criticised the decision in
that case in his determination here, the Special Commissioner had ignored the
Subscription Agreement, which amounted to an error of law.
The Conclusion
[41] The
issue which the Special Commissioner had to decide in this case can indeed be
simply stated. It was to identify the
market value of the shareholding of Mr G in Gray's Group Limited, which,
along with other holdings, was sold to Jewson Limited in terms of the Sale
Agreement dated 29 November 2003. The significance of that issue is clear from
the relevant statutory provisions which I have quoted. If the disposal by Mr G of his holding
was for a consideration which exceeded the market value at the time of the
disposal, then, in terms of section 446X of the 2003 Act,
Chapter 3D of the Act would apply, with the result that a portion of the
consideration would be treated as the income of Mr G in the relevant tax
year. Otherwise, the provisions of the
1992 Act would be applicable to bring about the taxation of a chargeable
gain generated by the transaction.
[42] In these circumstances, attention must be
focused upon the expression "market value" where it is used in
section 446X (b) of the 2003 Act.
On account of the provisions of sections 446Z(1) and 421(1) of the
2003 Act, the expression is to be taken as defined in section 272(1)
of the 1992 Act, as meaning "the price which (an asset) might reasonably
be expected to fetch on a sale in the open market." Since the present case involves the disposal
of unquoted shares, the provisions of section 273(3) of the 1992 Act
operate.
[43] Against this background it is appropriate
to consider such authorities as maybe thought to bear upon the issue just
identified. Commissioners of Inland Revenue v Crossman was concerned with the application of section 7(5) of
the Finance Act 1894, which provided that "the principal value of any
property" which passed on the death of a person "shall be estimated to be the
price which, in the opinion of the Commissioners, such property would fetch if
sold in the open market at the time of the death of the deceased." Thus the case was concerned with the
ascertainment of the open market value of the property involved. The particular issues in the case arose out
of the valuation of shares in a company, as regards which there were
restrictions on alienation and transfer.
The decision was to the effect that the hypothetical purchaser should be
entitled to be registered, regardless of those restrictions, and to be regarded
of the holder of the shares, but should take and hold them subject to the
provisions of the Articles of Association including those relating to alienation
and transfer of shares in the company.
For the present purposes, it is pertinent to note the observations of
Viscount Hailsham L.C. at pages 41 to 42, where he emphasised that it
was necessary to include all the valuable rights enjoyed by the holder of the
shares in coming to a view about the open market value of them. There he referred to "all these various
rights and privileges go to make up a share and form increments in its
value." Later he rejected the view
entertained by the Court of Appeal to the effect that any property which could
not be sold in the open market would escape estate duty altogether. It was necessary "to assume that the property
which is to be valued is being sold in the open market and to fix its value for
estate duty purposes upon that hypothesis."
Lord Blanesburgh at
pages 49 to 50 echoed the view that the property to be valued was the "whole property brought into charge by the Act,
and not a part of it only."
[44] In Duke
of Buccleuch & Another v Inland
Revenue Commissioners, once again the issue involved the approach to
valuation of property for the purposes of section 7(5) of
Finance Act 1894. The problem
for decision in the case related to the approach to valuation of a number of
landed estates. However, the case contained
certain observations which I consider to be helpful in the context of the
present case. At page 541, Lord
Guest referred to the operation of the process of valuation required for the
purposes of section 7(5) of the 1894 Act. Referring to the words "price the property
would fetch" he interpreted them as meaning what the purchaser would have paid
"to be put into the shoes of the deceased".
I take this to be an emphasis on the need to take into account all of
the various rights held by the hypothetical vendor. That same view was expressed in Lynall v Inland Revenue Commissioners [1972] A.C.680. Once again section 7(5) of the Finance
Act 1894 was involved in the case. Commissioners of Inland Revenue v Crossman was challenged but
approved. The observations of Lord Reid
at page 693 are important in the present context. Having affirmed the decision of the majority
in Commissioners of Inland Revenue v Crossman, he quoted with approval the
observations of Holmes L.J. in the Court of Appeal at page 239 in the
case of Attorney General v Jameson [1905] 2 I.R. 218, again in
relation to an issue under section 7(5) of the Finance Act 1894:
"The Attorney-General and the defendants agree in saying that in this
case there cannot be an actual sale in open market. Therefore, argues the former, we must assume
that there is no restriction of any kind on the disposition of the shares and
estimate that (sic) would be given therefore by a purchaser who upon
registration would have complete control over them. My objection to this mode of ascertaining the
value is that the property bought in the imaginary sale would be a different
property from that which Henry Jameson held at the time of his death. The defendants, on the other hand, contend
that the only sale possible is a sale at which the highest price would be £100
per share, and that this ought to be estimated value. My objection is that this estimate is not
based on a sale in open market as required by the Act. Being unable to accept either solution, I go
back to my own, which is in strict accordance with the language of the
section. I assume that there is such a
sale of the shares as is contemplated by article 11, the effect of which
would be to place the purchaser in the same position as that occupied by
Henry Jameson."
Inland Revenue
Commissioners v Gray (Fox's Executor) was concerned with the valuation of assets
for the purposes of capital transfer tax.
Section 38 of the Finance Act 1975 was involved. It provides:-
"Except as otherwise provided by this Part of this Act, the value at any
time of any property shall for the purposes of capital transfer tax be the
price which the property might reasonably be expected to fetch if sold in the
open market at that time..."
Thus
again the concept of open market value was involved. The facts of the case are far removed from
those of the present, involving as they did the valuation of the deceased's
interest in tenanted land and her interest in a partnership which was the
tenant of that land. However, the
observations of Hoffmann L.J. at page 371 are illuminating in
relation to the issue of open market value, where he said:
".....the only express guidance which section 38 offers on the
circumstances in which the hypothetical sale must be supposed to have taken
place is that it was 'in the open market'.
But this deficiency has been amply remedied by the courts during the century
since the provision first made its appearance for the purposes of estate duty
in the Finance Act 1894.
Certain things are necessarily entailed by the statutory hypothesis. The property must be assumed to have been
capable of sale in the open market, even if in fact it was inherently
unassignable or held subject to restrictions on sale. The question is what a purchaser in the open
market would have paid to enjoy whatever rights attached to the property at the
relevant date (see I.R.C. v Crossman [1937] A.C.26). Furthermore, the hypothesis must be applied
to the property as it actually existed and not to some other property, even if
in real life a vendor would have been likely to make some changes or
improvements before putting it on the market (see Duke of Buccleuch v I.R.C.
[1967] 1 A.C.506 at 525). To this
extent, but only to this extent, the express terms of the statute may introduce
an element of artificiality into the hypothesis."
I
consider that this passage succinctly describes the approach which requires to
be taken in relation to the matter of valuation in the present case. In the course of the arguments before us
reliance was placed on Walton v Inland Revenue Commissioners. However, I do not find anything in that case
which goes beyond the observations in the other cases to which we have
referred.
[45] In the light of the guidance derived at
from these cases, I now consider, first, the terms of the Subscription
Agreement, and, second, the Sale Agreement.
Of the former, it is to be noted that the Agreement was between Gray's
Group Limited, Mr G and the persons listed in part 1 of the schedule
thereto holding 83.8% of the issued equity shares of the company. That percentage, in my opinion, is
significant, because it exceeds the 75% of the issued equity share capital of
the company which would require to be voted to pass a special resolution under
section 378(2) of the Companies Act 1985. Such a resolution would, of course, be
necessary in terms of section 9(1) of that Act to effect an alteration in
the Articles of Association of the company.
Having regard to those circumstances, it is no surprise to find that in
clause 11.2 of the Agreement it is provided as follows:-
"This Agreement supersedes any previous Agreements amongst the parties
in relation to the matters which it deals and represents the entire
understanding among the parties in relation to those matters. The provisions of this Agreement shall
prevail over the Articles (and any other Articles of Association of the Company
subsequently amending or replacing the same) such that if there is any conflict
between the two the provisions of this Agreement shall prevail and rule to the
exclusion of any such conflicting provisions of the Articles or such other
Articles of Association."
Plainly,
the persons listed in part 1 of the Schedule to the Agreement, holding
83.8% of the issued equity share capital, as they did, had it in their power to
make any change in the Articles of Association necessary to render them in
conformity with the provisions of the Agreement.
[46] It appears to me to follow from the state
of affairs described that the provisions contained in this Agreement relating
to the price to be paid for Mr G's shares were such that they would
inevitably receive effect. No attempt
was ever made to challenge those provisions.
Those arrangements are of course described in detail in
clause 4.2.1 of the Agreement. What
occurred in this case was a "Shares Disposal", as defined in clause 1.1 of
the Agreement, involving as it did the acquisition of a relevant interest in
50% or more of the total voting rights conferred by all the shares. In these circumstances, I consider that the
formula as described in clause 4.2.1 of the Agreement must be seen as conferring
rights on Mr G's shares as regards the payment to be received on a shares
disposal. After all, clause 4.2.1
provides that the shareholders are to procure that the purchaser in terms of
the shares disposal "shall purchase Mr G's shares at a price equal to the
aggregate of the sums calculated in accordance with (i) and (ii) below...". The Agreement purports to confer certain
rights as to the price to be paid for Mr G's shares on a shares disposal
after the second anniversary of the completion date which, having regard to the
parties to the Agreement, must inevitably have been given effect.
[47] It is also worth mentioning that, in
clause 6.1 of the Agreement, it is acknowledged on behalf of the
shareholders, the holders of 83.8% of the issued equity share capital of the
company, that Mr G would, "in accordance with clauses 3 and 4, be
entitled to an agreed extra payment in addition to the return of his initial
investment and, on such a sale, disproportionately greater than the amounts
received by other shareholders or his percentage of the equity share capital of
the Company."
[48] I turn now to consider the terms of the Sale
Agreement of 29 November 2003. In terms of that Agreement,
Jewson Limited was designated as the purchaser. The vendors are defined as the persons whose
names and addresses are set out in Schedule 1 to the Agreement. Mr G was, of course, one of the vendors
in respect of the 14,723 one pound ordinary shares held by him. In terms of clause 2.1 of this Agreement
it was provided that each of the vendors should sell and transfer the number of
shares set opposite the vendor's name in Schedule 1, which the purchaser
would purchase. Clause 3.4 of this
Agreement provided that:-
"The Vendors shall be entitled to the Consideration in the amounts set
out in column (3) of schedule 1.
The part of the Consideration payable under clause 3.2.1 shall be
allocated to the vendors in accordance with column (5) of
schedule 1".
[49] Thus, on the basis of these arrangements, the
purchaser specifically agreed with each and every vendor that the payments
specified would be made to the appropriate vendor. Schedule 1, of course, provides for the
payment to Mr G of the sum of £1,451,172 which it is agreed was paid
to him in terms of the statement of agreed facts and referred to in column (5)
of Schedule 1 to this Agreement against the name of Mr G.
[50] Reverting to the concept
of market value which I have considered in the light of the foregoing authorities,
I conclude that, upon the shares disposal, Mr G received no more and no
less than the market value for his shares.
That is what the Sale Agreement provided for in what is acknowledged to
have been an arms-length transaction. To
the extent that the Special Commissioner reached a different view, in my
opinion, he erred in law.
[51] Having reached the conclusion that I have,
it is appropriate to comment in more detail upon the decision of the Special
Commissioner. In his decision, in the
early paragraphs, he sets out the agreed facts in the case and the law which he
considers to be relevant to them. In
paragraphs 27 to the end, he narrates the submissions made to him and the
conclusions which he has reached. It is
perhaps unfortunate that his narrative of the submissions made to him and his
conclusions are intermingled. However,
it is possible without too much difficulty to identify the reasons he expressed
for his conclusions.
[52] Paragraph 27 of his decision itself amounts
to a narrative of the background.
Paragraph 28 is the account of a submission made on behalf of the
appellants. Paragraph 29, likewise,
is the narrative of a submission made on behalf of the respondent. In paragraph 30, the Special
Commissioner narrates that 14,465 ordinary £1 shares in the appellants were
allotted to Mr G on 9 December 1999. He also states that, at that date, the
Subscription Agreement had not been entered into. There is no statement to that
effect in the Statement of Agreed Facts and accordingly it is not clear upon
what basis the Special Commissioner so concluded. However, what appears to me to be important
is that the Subscription Agreement had been concluded well before the issue of
the sale of the whole issued share capital of Grays Group Limited arose.
[53] In paragraphs 31 and 32, the Special
Commissioner reverts to a narrative of the submissions made on behalf of the
appellants. However, in
paragraph 33, he seems to disclose some part of his reasoning. He states that the passing of the first
special resolution at the extraordinary general meeting of the appellants held
on 9 December 1999
did not constitute a shareholder becoming a party to the Subscription
Agreement. No doubt that is true. He then continues: "All that the first special resolution did
was to authorise the 'entering into' of the Subscription Agreement; it gave no vires for it." I have to say
that I do not find that statement comprehensible. The special resolution passed on that
occasion was:
"That the entering into by the Company of the Subscription and
Shareholders' Agreement among the Company, [Mr G] and certain shareholders
of the Company in the form annexed hereto for identification purposes be and is
hereby approved."
It
appears to me that that resolution means exactly what is says and authorised
the entering into of the agreement referred to.
The Special Commissioner observes that the passing of the resolution did
not necessarily mean that the Subscription Agreement would ever be entered
into. Once again, no doubt that is true,
but the fact of the matter is that it was entered into. The fact that it was entered into by, among
others, the holders of 84.6% of the issued ordinary shares in the appellant
company, meant that it would inevitably be given effect. That state of affairs was reflected in the
terms of paragraph 11.2 of the Agreement itself. That aspect of the matter appears to have
been overlooked by the Special Commissioner.
[54] In paragraph 35 of his decision, the
Special Commissioner narrates further submissions on behalf of the appellant
company, but then reverts to the expression of his own conclusions, appearing
to reiterate the view he had expressed in paragraph 33. In paragraph 36, the Special
Commissioner again returns to a narrative of the submissions made to him on
behalf of the appellants, then proceeding to express a view on a matter which
does not appear to me to bear on the fundamental issue. In paragraph 37 of the decision, the
Special Commissioner expresses a number of views with which I cannot
agree. In the first place he observes
that
".... in my judgment, Company, [Jewson Limited] could not have acquired
the benefit of the Subscription Agreement for, on completion of the sale of
company B's shares, it ceased to exist. (see paragraph 5.7 of the disclosure
letter)."
In
my opinion, that statement demonstrates a fallacious approach to the
matter. Plainly it is true that the
Subscription and Shareholders' Agreement ceased to have any significance
following the sale of the entire share capital of the appellants, but that does
not appear to me to be to the point. In
terms of such cases as Commissioners of
Inland Revenue v Crossman, Duke of Buccleuch &c v Inland Revenue Commissioners and Lionel
&c v Inland Revenue Commissioners,
the proper approach is to envisage an hypothetical notional sale of an asset,
in the exercise of reaching a conclusion as to its open market value. What is not envisaged, in this connection, is
an actual sale; accordingly it is not of
assistance to examine the consequences of such a sale. What has to be envisaged is an hypothetical
transaction in terms of which the purchaser would be placed in the same
position as that occupied by the person the market value of whose assets is
being assessed. Thus in this case, it
has to be envisaged that the hypothetical purchaser would be placed in the same
position as that occupied by Mr G, in other words "in his shoes". Plainly, upon the basis of the provisions of
the Subscription Agreement the hypothetical purchaser would have the benefit of
the additional value created in his shares by the Agreement. Finally, I have to observe that I do not find
what is being said in the last sentence of paragraph 37 of the decision
comprehensible.
[55] Paragraph 38 does not appear to me to
contain anything upon which it is appropriate to comment. In paragraph 39 the Special Commissioner
observes that no evidence was adduced to show that Jewson Limited paid any more
for the appellant company as a result of the existence of the Subscription
Agreement than it would otherwise have done.
No doubt, there was no such evidence, but, once again, that appears to me
to be quite beside the point. As I have
already narrated, in the Sale Agreement, Jewson Limited purchased the shares in
the company from the vendors, in terms of clause 2.1 of that
contract. In terms of clause 3.4, the
vendors became entitled to the consideration set out in detail in
Schedule 1 to the contract. In
terms of what is provided in that Schedule, Mr G had a contractual
entitlement to the sum which he in fact received. Thus it is beyond argument that Jewson
Limited did pay to Mr G a sum in respect of his shares proportionately in
excess of the price at which they purchased the shares of other shareholders in
the company. For the same reason, I find
what is said in paragraph 40 of the decision erroneous. In paragraph 42 of his decision the
Special Commissioner comments on the Sale Agreement. I cannot agree with the view expressed there
regarding the effect of clause 3 of that Agreement. The view which the Special Commissioner takes
of that clause appears to me to be in conflict with the other provisions of the
contract to which I have just referred.
For that reason I reject it.
[56] In paragraphs 43 and 44 of the decision,
the Special Commissioner reverts to a narrative of the submissions made on
behalf of the respondents to him. He
does not go beyond saying that, in his opinion those submissions were correct. In paragraphs 46 and 47, the Special
Commissioner gives further narrative of the submissions made to him on behalf
of the appellants. In paragraphs 48 and
49, the Special Commissioner simply expresses his conclusions which logically
follow from the view that he took regarding the open market value of the shares
in question.
[57] In all these
circumstances I conclude that Mr G did not dispose of his shares for more
than their market value; thus, in my
view, chapter 3D of the 2003 Act has no application to the
circumstances of this case. Accordingly,
I would have moved your Lordships to allow the appeal; however, since I have the misfortune of
having reached a conclusion that your Lordships do not share, on the contrary, the
appeal must be refused.
|
EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
|
Lord Osborne
Lord Kingarth
Lord Mackay of Drumadoon
|
[2009] CSIH 11
OPINION OF
LORD KINGARTH
In Appeal under the Taxes
Management Act 1970, Section 56A
by
GRAY'S TIMBER PRODUCTS
LIMITED
Appellants
against
THE COMMISSIONERS FOR HER
MAJESTY'S REVENUE AND CUSTOMS
Respondents
against
A Decision of the Special
Commissioners dated 21 March
2007
_______
|
Act: Ghosh,
Biggart Baillie
Alt: D E L
Johnston, Q.C.; Acting Solicitor (Scotland), HM Revenue & Customs
13
February 2009
[58] The
short question to which this appeal gives rise is whether the disposal of
Mr G's shares, which were employment-related securities within the meaning
of the 2003 Act, were for a consideration which exceeded "the market value
of the employment-related securities at the time of disposal" (Section 446
X(b)). By virtue of Section 421(1)
of the Act market value has the same meaning as it has for the purposes of the
Taxation of Chargeable Gains Act 1992, namely "the price which those
assets might reasonably be expected to fetch in a sale in the open market."
[59] It is
clear from authority, and was not disputed before us, that in order to
determine market value it is necessary to postulate a notional sale. The parties appeared to differ, however, in
relation to certain additional questions, essentially bearing on the parties
to, and on the subject matter of, that notional sale. For my part, I have come to the view, having
regard to the apparent purpose of Chapter 3D of the 2003 Act, and on
consideration of the certain authorities (albeit authorities dealing with the
concept of market value in different statutory contexts), that what falls to be
considered is a notional sale between a hypothetical willing seller and a
hypothetical willing buyer (the personal characteristics of the actual vendor
being, for these purposes, ignored), the question being what the hypothetical
purchaser would pay to acquire the rights attaching to the share at the
relevant date (being the rights obtained on registration, and provided for in
the Articles of Association of the relevant company), and that any personal
rights which the actual vendor might in addition have acquired (particularly,
but not only, as reward for employment) fall to be disregarded. What, in short I consider requires to be
valued is the shares and not all interests which the actual vendor may have had
in them.
[60] In Commissioners of Inland Revenue v Crossman it was held by the majority
that the principal value of a deceased's shares for the purposes of estate duty
(namely the price which, in the opinion of the Commissioners, such property
would fetch if sold on the open market at the time of the death of the
deceased - Finance Act 1894, Section 7(5)) - was the price which
the shares would fetch if sold in the open market on terms that the purchaser
would be entitled to be registered and to be regarded as the holder of the
shares and should take and hold them subject to the provision of the Articles
of Association, including those relating to the alienation and transfer of
shares in the company.
Viscount Hailsham LC at page 41 stressed
"The right to receive the
price fixed by the articles in the event of a sale to existing shareholders
under sub-cl 14a is only one of the elements which went to make up the
value of the shares. In addition to that
right, the ownership of the share gave a number of other valuable rights to the
holder, including the right to receive the dividends which the Company was declaring,
the right to transmit the share in accordance with art 34, sub-cls 1,
2 and 3, and the right to have the shares of other holders who wished to
realise offered on the terms of art 34, sub-cl 14a. All these various rights and privileges go to
make up a share and form ingredients in its value. They are just as much part of the share as
the restriction upon the sale. The
construction placed upon the statute by the Court of Appeal seems to me to
ignore all these elements in the value of the share, and to treat as its value
what, in truth, is only the value of one of the factors which go to make up
that share."
[61] It is
further clear from the speech of Lord Blanesburgh in that case that he
understood the notional sale involved a hypothetical vendor, the personal
characteristics of the actual vendor being ignored. At p.50 he said:
"If the duty of the
Commissioners is, as I think, to estimate the price which the 'property' as at
the time of the deceased's death would fetch in the open market, were it there
to be offered for sale, it is unnecessary to inquire by whom the property would
hypothetically have to be offered"
[62] The
view of the majority in that case was approved by the House of Lords in Lynall v Inland Revenue Commissioners.
It is to be noted that Lord Morris of Borth-Y-Gest, in asking what
information should be assumed to be available at the time of the notional sale,
said
"In the present case it is
clear that the information contained in what have been called the
"category B" documents would be highly relevant, but the question arises
whether that information would be available.
In particular, the question arises whether that information would be
available not just to some possible purchasers and vendors but whether it would
be available to hypothetical purchasers and vendors "in the open market". This must mean whether it would be openly
available to all potential purchasers and vendors in the market or markets in
which the relevant purchases and sales take place."
[63] In the
Court of Appeal in the same case Cross LJ, although reaching, in the
event, a different conclusion from that which later found favour in the House
of Lords, said, of the general underlying approach (at pages 401
to 402):
"The case in favour of the
published information test, which was cogently argued by Mr Bagnall,
started from the premise - which I think is correct - that one must
not envisage a vendor who is a director as well as a shareholder. Of course, the hypothetical vendor may be a
director, but he equally well may not be a director. One must, therefore, only endow him with the
characteristic which must necessarily belong to all hypothetical vendors,
namely, that of owning the block of shares in question."
[64] Although
Lord Reid in the House of Lords quoted with approval a passage from the
judgment of Holmes LJ in Attorney
General v Jameson (which included
the sentence "I assume that there is such a sale of the shares as is
contemplated by article 11, the effect of which would be to place the
purchaser in the same position as that occupied by Henry Jameson." - on
which sentence counsel for the appellants strongly founded in this
appeal -) it would, in my view, be wrong to take from that any more than
that what was to be assumed was a sale which would put the purchaser in the
same position, on registration, as the actual vendor. Similarly, in my opinion, when
Lord Guest in Duke of Buccleuch and
Another v Inland Revenue
Commissioners used (at p.541) the expression "what the purchaser would have
paid to be put into the shoes of the deceased", it seems clear in context (and
having regard to all the speeches delivered in that case), that he should not
be taken to have meant more than that what the notional buyer would have paid
to acquire the property sold. Indeed, at
page 545, Lord Wilberforce said that the Act did not require the
valuers to step, as it were, into the shoes of the deceased or his
executors. In my opinion, neither what
was said by Holmes LJ or by Lord Guest (nor anything said in a case of
Walton v Inland Revenue Commissioners (on which counsel also founded in this
connection) supports any contention that the notional purchaser is to be
regarded as succeeding to all rights possessed by the holder of the asset in
question, including non-assignable personal rights.
[65] In Inland Revenue Commissioners v Gray (Fox's Executor), where what was at
issue was the valuation, for capital transfer tax purposes, of a deceased's
interest as freehold owner of an estate, Hoffman LJ said at page 371
"The only express guidance
which Section 38 offers on the circumstances in which the hypothetical
sale must be supposed to have taken place is that it was 'in the open
market'. But this deficiency has been
amply remedied by the courts during the century since the provision first made
its appearance for the purposes of estate duty and the Finance
Act 1894. Certain things are
necessarily entailed by the statutory hypothesis. The property must be assumed to have been
capable of sale in the open market, even when in fact it was inherently
unassignable or held subject to restrictions on sale. The question is what a purchaser in the open
market would have paid to enjoy whatever rights attached to the property at the
relevant date (see IRC v Crossman ...). Furthermore the hypothesis must be applied to
property as it actually existed at the appropriate date and not to some other
property .... To this extent, but only to
this extent, the express terms of the statute may introduce an element of
artificiality into the hypothesis.
In all other respects, the theme which runs through the
authorities is that one assumes that the hypothetical vendor and purchaser did
whatever reasonable people buying and selling such property would be likely to
have done in real life. A hypothetical
vendor is an anonymous but reasonable vendor, who goes about the sale as a
prudent man of business, negotiating seriously without giving the impression of
being either over anxious or unduly reluctant.
The hypothetical buyer is slightly less anonymous. He too is assumed to have behaved reasonably,
making proper enquiries about the property and not appearing too eager to buy..."
[66] Although
counsel for the appellants sought to derive some assistance from this case in
so far as it decided that it was reasonable to suppose that the freehold
interest and the deceased's interest in a partnership which held a tenancy on
it would be sold together (and thus that in assessing the value of the freehold
interest in the estate it was reasonable to assess an aggregate value achieved
by sale of both, and to make a relevant deduction), it does not, in my opinion,
afford such assistance. Both the
freehold interest and the interest in the tenancy were parts of the property of
the deceased which passed on death and had to be valued for capital transfer
tax purposes. The only assets which
require to be valued in this case are the shares held by Mr G.
[67] In the
present case, the rights attached to the shares in the company were those
provided for in the Articles of Association adopted by special resolution on 9 December 1999.
In particular, Article 5 provided "The rights attaching to the
respective classes of shares shall be as follows", and then described the
relevant rights under the headings of Income, Capital and Redemption. Despite what could have been done, the rights
which attached to the shares allotted to Mr G as provided for in the
Articles of Association were not altered by the Subscription Agreement. Instead, it was expressly acknowledged in
that Agreement (Clause 6.1) that, in certain circumstances - including
those which in the event transpired, as described in Clause 4, - and
in consideration of Mr G's "efforts as such an executive director," he
would be entitled to
"an agreed extra payment
in addition to the return of his initial investment and, on such a sale,
disproportionately greater than the amounts received by other shareholders or
his percentage of the equity share capital of the Company"
Although the Subscription Agreement gave Mr G
valuable and effective personal rights, enforceable against the other parties
to it, it did not bind all the shareholders.
It was only enforceable against the parties to it. It was not assignable (Clause 9). Clause 11.2, in my view, afforded no
more than protection to Mr G against any potential claim by the other
parties to the Subscription Agreement that they were not bound by it in so far
as it conflicted with the Articles.
[68] In
these circumstances, I agree with counsel for the respondents that the rights
which Mr G enjoyed beyond those as a shareholder were personal rights
which he enjoyed exercisable against other parties to the Subscription
Agreement, but which did not attach to his shares. Mr G's shares were identical to the
other shares held by the other shareholders.
His rights under the Subscription Agreement did not affect the price
that a hypothetical purchaser would be prepared to pay, because they were
specific and personal to him and non-assignable; they would not be valuable to a hypothetical
purchaser of the company. In short, his
shares were not worth more than any other shares. In these circumstances, in my view, the
Special Commissioner was right to reach the view that the price paid to
Mr G under the Sale Agreement for his shares (being an allocation of the
overall consideration fixed by application of the formula in the Subscription
Agreement) represented a consideration greater than the market value of the
shares.
[69] Equally,
in my view, it cannot be said that the Special Commissioner erred in his
assessment of what that market value could be taken to be, there being no
evidence that the overall consideration paid by Jewson Ltd (referred to at
Clause 3.1.1 of the Sale Agreement as "the Consideration"), in what was a
single overall transaction, represented anything other than the arm's length
price which that company was prepared to pay for the whole shareholding of
company B. There was, in
particular, no evidence that Jewson Ltd paid any more for company B as a result
of the existence of the Subscription Agreement than it would otherwise have
done. Although counsel for the
appellants, in emphasising the price agreed to be paid to Mr G under the
Sale Agreement, placed reliance on remarks by Lord Fraser in Stanton v Drayton Investment Commercial Co Ltd to the effect that where there
was an actual agreed price there was no need to look to market value
(page 512), these remarks related to a wholly different provision dealing
with corporation tax (para. 4(1)(a) of Schedule 6 to the Finance
Act 1965) which did not, as a matter of construction, refer to market
value. The remarks were, in any event, obiter.
[70] In all
the circumstances, while certain aspects of the Special Commissioner's
reasoning may be said to be unsatisfactory (in particular perhaps, agreeing
with your Lordship in the Chair, certain comments at paras. 33, 37
and 42 of the decision), he reached, in my view, the right conclusion
overall. For these reasons, and for the
reasons given by Lord Mackay of Drumadoon, I have therefore come to the view
that the appeal should be refused.
