Shares gifted to charity were overvaluedby
The valuation of shares donated to charity should be based on all available information, not just the AIM quoted share price, particularly in cases where the shares are relatively illiquid.
In this, the season of goodwill, we are reminded of St Francis of Assisi's quote: "For it is in giving that we receive." It was in giving 190,000 AIM-listed shares to charity that Mr Kay hoped to receive £81k of tax relief, but HMRC giveth and HMRC taketh away. Some 13 years after opening an initial enquiry, the tax authority issued a closure notice which reduced the relief from £80,750 to £17,936.
The 13-year delay echoes HMRC's conduct in the case of Andrew Nuttall (TC08517) where the FTT decided that a 12-year wait for the share valuation was shocking but not an abuse of process.
Kay made the gift of shares in a company called Access Intelligence plc (Access Intelligence) to the Lord’s Taverners, a charity which supports underprivileged children through sports, on 2 April 2004. He had himself been given the shares the previous day (by a friend who had sold their interest in another company).
At the time of Kay's gift to the charity, section 587B of the Income and Corporation Taxes Act 1988 (‘ICTA 1988’) provided tax relief in respect of gifts of qualifying investments to charities. Where the whole of the beneficial interest in the qualifying investment was given to a charity, relief was available as a deduction for income tax purposes of an amount equal to the market value of the qualifying investment at the time of disposal.
That the Access Intelligence shares met the “qualifying investment” condition was not disputed. It was the "market value" of the shares at the time of the gift that caused controversy and sparked the appeal to the first tier tribunal (FTT).
Kay had claimed tax relief on his 2003-04 self assessment tax return using a valuation of 42.5p per share, being the quoted AIM share price on the date of the gift. HMRC argued that other factors should be considered, not just the quoted share price, and reduced the valuation to 9.44p per share. Kay appealed.
What is market value?
According to section 272 TCGA 1992 “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”.
That price, according to the legislation, should be based on prices quoted in the Stock Exchange Daily Official List except where special circumstances prevent the quoted prices from being a proper measure of market value.
Looking to case law, the FTT referred to Netley v HMRC  UKFTT 442 (TC) (Netley) in which the judge held that there was insufficient liquidity in the market for the company's shares for the listed price to be taken as a proper measure of market value. It was also noted in Netley that “AIM shares are unlisted shares not in the Official List” so AIM quoted prices were not a reliable open market valuation.
The Access Intelligence shares were, according to HMRC, similarly illiquid as evidenced by the very limited extent of trading. Based on reports from Daniel Ryan of Berkeley Research Group and Richard Lamb of HMRC’s Shares and Assets Valuation department, HMRC concluded that the AIM price was not a reliable indicator of the value of the shares.
The tribunal heard evidence from Clare Rooney, HMRC senior officer and a qualified associate member of the Royal Institution of Chartered Surveyors. Her analysis produced a 64-page report, in which she considered the background and trading activity of Access Intelligence; her interpretation of the legislation; and various alternative valuation methods.
Rooney opined, having “considered the information that would have been available to an uninfluential minority purchaser as at the valuation date” and “taken the view that this would be restricted to published information only”, that the Access Intelligence shares had a market value of just 9.42p on the disposal date.
Kay contended that he “thought AIM was a recognised stock exchange and he had used what was available to him at the time to arrive at the correct value”.
However, Rooney felt that a prudent purchaser would have considered other publicly available information including Companies House data, prospectus details and internet searches, as well as the AIM listings.
Indeed she referred to such sources for her own valuation and noted that although the prospectus showed a share price of 37p, the related transactions were not at arm's length. She considered the shares to be “thinly traded” such that the AIM listing was not a reliable measure.
The FTT, although understanding of Kay's position, gave weight to Rooney's expert evidence.
Referring to Netley and Findlay's Trustees v CIR (1938), the judge stated: "We must, however, consider the hypothetical purchaser to be a reasonably prudent purchaser who has informed himself as to all relevant facts.”
Based on the detailed analysis and explanations in Rooney's report, the judge found that the value of the Access Intelligence shares was not the 42.5p claimed by Kay, nor even the 9.44p given by HMRC. The correct valuation according to the FTT was the 9.42p determined by Rooney.
A win for HMRC and a result that is hard to argue with on the facts. But one can't help but spare a thought for the poor taxpayer whose act of charity ultimately led to a tribunal outcome where he was even worse off than had he accepted the initial closure notice!
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Consulting Tax Editor for AccountingWEB.
I have spent the last 10 years teaching the accountants of the future, mainly ICAEW advanced level corporate reporting. I also cover tax news and write and edit tax updates for other publishers including PTP Limited.