HMRC - Chattels Valuation Fiscal Forum Minutes

Present

Present

Representative	Company / Organisation
Mike Fowler	HMRC Shares and Assets Valuation (SAV)
Robert Dawes	HMRC Shares and Assets Valuation (SAV)
Dave Goulsbra	HMRC Shares and Assets Valuation (SAV)
Lesley Toye	HMRC Shares and Assets Valuation (SAV)
Paul Davidson	Bonham’s
Chris Ewbank	Society of Fine Art Auctioneers (SOFAA)
Steven Hill	National Association of Valuers and Auctioneers (NAVA)
Susan Johnson	Christie’s
Edward Manisty	Christie’s
Melissa Papadakis	Sotheby’s
Wendy Philips	Sotheby’s
Rupert Toovey	RICS Arts and Antiquities Faculty

Executive Summary

1. Introductions and Apologies

• Introductions made
• Edward Manisty replaced Anastasia Tennant who was unable to attend
• SAV are the HMRC focus for chattels valuation issues

2. Performance and Workloads

• Statistics provided on chattels workloads and results
• Risk assessment and case progression procedures outlined.

3. Presentation of Valuations

• Statutory valuation provisions outlined
• SAV require sufficient information to identify noteworthy assets
• Photographs are likely to speed up the process in certain situations
• Discussion about auction estimates and open market value
• SAV will always be guided by market evidence if it exists
• Insurance valuations treated with caution

4. Use of Indices

• Art Market Research imperfect but useful for HMRC risk assessment process and as an aid to negotiations

5. Chattels Rental Rates

• Problems arise where there is no meaningful rental market
• HMRC experience is that an unsubstantiated norm of 1% of capital value has arisen
• HMRC reject the view that purely nominal rates are appropriate for very high value items
• SAV do not provide a rental rate checking service

6 Any Other Business

• Chattels which are fixtures pose particular difficulties. Every case to be treated on its own merits
• German restitution cases. SAV factor in likely timescale and degree of certainty of restitution at valuation date

7. Date of Next Meeting

• November or December 2007 in Nottingham

Minutes

The meeting was held at Room G44 100 Parliament Street London and was chaired by Mike Fowler.

1. Introductions and Apologies

• Introductions made
• Mike Fowler introduced the first Chattels Valuation Fiscal Forum and expressed the hope that it would open channels of communication and smooth working relationships
• He explained that Shares Valuation has been renamed Shares and Assets Valuation (SAV) to convey that SAV value more than just shares. He provided a brief outline of the current organisation of SAV and the referrals, risk assessment and appeals procedures
• Edward Manisty asked if it was acceptable that, on a valuation agreed with SAV, the Inspector of Taxes should re-open the case because he was dissatisfied with SAV’s efforts. Mike Fowler stated that SAV are the HMRC experts on chattels valuation matters and if anyone, internal or external, is dissatisfied with the handling of a particular case he would expect them to contact Robert Dawes, the manager of SAV chattels, in the first instance

2. Performance and Workloads

• Robert Dawes stated that his team consists of 8 valuers. About two thirds of his team’s work relates to the valuation of unquoted shares and about one third to chattels/bloodstock. Latest work in progress figures show 167 chattels cases with an average of 11 valuations per file and 371 unquoted share cases with an average of 2.5 valuations per file
• Chris Ewbank asked if these figures referred to cases which other HMRC offices had referred to SAV. Robert Dawes confirmed that they did
• Robert Dawes explained that many chattels valuations are risk assessed out by the HMRC office that they are submitted to. It is only those where the receiving office feels that the value needs checking that are referred to SAV. He gave some figures covering valuations referred to SAV since April 2006:
  • 87% have been accepted at the risk assessment stage, usually without the taxpayer or agent even realising that SAV have been involved
  • Of those valuations challenged by SAV 78% have resulted in an amended agreed value. The total adjustment to proposed values amounts to c£4 million over this period
  • he average time taken to settle chattels valuations on risk assessment has been 3.15 months and the average time to settle chattels valuations after negotiation has been 9.91 months
  • Only two chattels cases have been live in SAV for over 2 years
• Rupert Toovey asked how SAV measure success. Robert Dawes stated that targets are customer orientated. Yield is monitored but not targeted
• Chris Ewbank asked if there were referral mechanisms in place if, for example, a case stalled or became problematical. Robert Dawes said that agents could write direct to him or ask that a case be reviewed by the valuer’s manager
• Melissa Papadakis asked how often cases reached a stalemate and what happens then. Robert Dawes advised that this occurred infrequently. Meetings are encouraged as a way of progressing intractable cases. Ultimately, if it is impossible to reach agreement, the only way of resolving the matter is by way of a contentious hearing before the Commissioners
• Wendy Philips said that she felt taxpayers were at a disadvantage because the potential costs of litigation were frequently greater than the amount of tax at stake and this had to be taken into account when assessing HMRC’s ‘success’ rate. Robert Dawes stressed that SAV are also subject to cost constraints and have to balance the cost of litigation against the tax at stake. Mike Fowler assured the meeting that SAV make every effort to be reasonable and drew attention to the fact that, if all else fails, taxpayers have recourse to the Adjudicators Office or Ombudsman
• Wendy Philips asked for an indication of how many cases are referred to the Commissioners. Edward Manisty asked if it was correct that only one case had ever been heard. Dave Goulsbra said that, over the 15 years or so that he had been involved with chattels valuations, several cases had been heard before the General Commissioners. Mike Fowler said that one chattels case is currently being prepared for listing
• A general discussion ensued on the costs incurred by taxpayers and hence the pressure to settle to avoid the Commissioners. Mike Fowler reiterated that SAV’s aim was to be reasonable and said that he hoped the forum would build bridges and help to avoid difficulties of this nature. There was general agreement that the forum was a positive step in this direction
• Paul Davidson asked if the c£4 million technical adjustment figure referred to just IHT. Robert Dawes advised that it was a total technical adjustment figure and that no breakdown was available
• A general discussion on March 1982 capital gains valuations, and the difficulties of such valuations, followed. Robert Dawes stated that evidence is the key to agreeing valuations and all present agreed that the paucity of contemporaneous information dating back 24 years can be a problem. A pragmatic approach is sometimes necessary
• Edward Manisty said that he was aware of a situation where, in two unconnected cases, two taxpayers had been made an offer to settle subject to the other agreeing. Was this policy approved by HMRC? Mike Fowler assured the meeting that HMRC policy was to treat all taxpayers as separate individuals. He said that he would review the case in question.

3. Presentation of Valuations

• Dave Goulsbra gave an overview of the valuation provisions of s272 TCGA 1992 and s160 IHTA 1984
• request was made for this legislation to be included in the minutes. Links are as follows:

  http://www.hmrc.gov.uk/ihta/part_6_chapter_1/ihta160.htm#TopOfPage

  http://www.opsi.gov.uk/acts/acts1992/Ukpga_19920012_en_20.htm#mdiv272

• Dave Goulsbra said that valuations which are headed ‘for probate purposes’ tend to be regarded with suspicion and asked that valuers make clear that values being proposed for probate purposes are open market values in accordance with s160IHTA 1984 as at the date of death. This demonstrates that the valuer understands the proper basis of valuation
• Dave Goulsbra outlined HMRC’s expectations in respect of valuations submitted. He stressed that it is important for SAV valuers to be able to identify noteworthy items and said it is often the case that if more information was provided initially it would alleviate the need for SAV to raise questions at a later stage. He suggested that providing photographs of higher value items should also be considered
• Rupert Toovey asked what SAV consider high value. Dave Goulsbra
  proffered £25,000+ as a guide value. Mike Fowler advised that there is no threshold as such but common sense should prevail to the extent that if valuers felt that SAV might raise questions then supplying supporting information and a photograph upfront might satisfy any concerns and enable the value to accepted without enquiry. Susan Johnson asked if photographs could be returned. Robert Dawes assured her they could
• Steven Hill felt it might be useful to include a description of the house to give a perception of the contents. Chris Ewbank noted that this could be misleading in that expensive houses do not necessarily have expensive contents. This was generally acknowledged
• Estimates of value were discussed with attention focused on high or low sale estimates being declared as open market vale depending on the tax advantages. Dave Goulsbra said that, if auction estimates were in point, SAV would generally expect mid-range to be proposed as market value. Chris Ewbank drew attention to the December 2004 IHT Newsletter which specified mid range. He felt that the wording of the newsletter might be too prescriptive and the emphasis should be on market value rather than a range of values and a formula. Wendy Philips felt that, if there was evidence that sales were going through at prices above or below the mid point then this should be reflected in the value acceptable to SAV. Mike Fowler agreed that market evidence would most certainly influence SAV’s judgement on market value. Actual sale prices of comparable pieces would be particularly helpful in this respect. He agreed to review the wording of the IHT Newsletter with IHT colleagues. (NB. This has now been done. No immediate change was felt to be necessary but the situation will be monitored.)
• Rupert Toovey said there was a need for balance and education in the continuing professional development which his Faculty was involved in.
  He asked if SAV would be prepared to give talks to external bodies. Robert Dawes said that talks are occasionally given to professional bodies and he was prepared to give a limited number clarifying HMRC’s approach to valuation issues
• Chris Ewbank asked if SAV accepted that insurance values were irrelevant as far as open market value was concerned. An exchange followed after which Mike Fowler summed up by stating that insurance values would be noted with interest but treated with caution.

4. Use of Indices

• Robert Dawes outlined the indices provided by Art Market Research (AMR) and sought views on the subject of indices in general
• The general consensus was that AMR was imperfect and expensive but useful for identifying trends and in negotiations if no comparables were available. Wendy Philips commented that she found AMR frustrating in many respects but sometimes one had to have recourse to it in the absence of other options
• It was noted that ArtNet was also a useful database for providing comparable examples
• Rupert Toovey felt there were other useful databases on the market and said he would forward details for Robert Dawes to peruse
• Chris Ewbank felt AMR did not give an indication of the condition of items. Dave Goulsbra suggested that sales in top 25% quartile might be indicative of items in better condition

5. Chattels Rental Rates

• Mike Fowler said that this is a small work area for SAV but is
  occasionally contentious and he would like to offer as much guidance as possible to enable Practitioners to apply a rate which is likely to be acceptable to HMRC
• He said that if a meaningful rental market exists there is not usually a problem as all concerned will be guided by the prices achieved in that market. The issue becomes problematical when the assets in question are items such as country house chattels or valuable works of art where there may be no meaningful rental market. In these cases HMRC advice has been that the rental rate is unlikely to be challenged if the taxpayer can demonstrate that it resulted from:

1. a bargain negotiated at arms length
2. by parties who were independently advised
3. which followed the normal commercial criteria in force at the time it was negotiated

• The facts of individual cases will vary but, against this back ground, HMRC experience is that an accepted norm of 1% of capital value has arisen. This rate has no robust basis but is regularly accepted by HMRC, on a without prejudice basis, as an informal way of resolving a difficult issue
• Mike Fowler advised that some Practitioners have argued that purely nominal rates are appropriate in respect of particularly important chattels. He made it clear that, much as every case will be treated on its own merits, HMRC have no sympathy with this line of argument and taxpayers who apply purely nominal rental rates can expect them to be vigorously challenged
• Edward Manisty asked if the figure of 1% included costs such as insurance. Mike Fowler said that it didn’t. Edward Manisty said that this conflicted with his experience of the 1% dispensation, whereby, if the user agreement provided that if the donor/lessee was responsible for the insurance, security etc., that such costs were deducted from the 1%. Dave Goulsbra said that he had dealt with these issues for HMRC for many years. Arrangements varied but, in his experience, the norm was for 1% per annum of the capital value to be paid to the owner and the costs of ownership to be dealt with separately
• Wendy Philips wondered if HMRC views on this subject had changed over the years. Edward Manisty asked for clarification and confirmation that the apparently new line on costs of insurance, security etc. would only be applicable with regard to the negotiation of rents after the issue of the anticipated guidance. Mike Fowler stated that there was no change in HMRC’s approach to this issue. It was appreciated that rental arrangements vary and mention of the 1% norm was simply to give Practitioners an idea of the sort of rental rate that might be acceptable
• Wendy Philips sought confirmation that SAV take into account the terms of rental agreements and the type of chattel. She asked that all cases be looked at on their own merits. Mike Fowler confirmed that such issues are taken into account and assured the meeting that SAV would not raise frivolous enquiries
• Edward Manisty took issue with the statement that HMRC can be expected to vigorously challenge nominal rental rates for extremely valuable pieces. He felt that it was obvious that no-one would ever pay a rate as high as 1% to rent a piece worth many millions of pounds. Mike Fowler acknowledged the difficulties facing valuers when there is no market but said that he could do no more than state that HMRC did not accept that purely nominal rates were appropriate and warn Practitioners that taxpayers who apply them can expect a vigorous challenge. Edward Manisty asked that it be minuted that he strongly disagreed with this approach
• Melissa Papadakis asked if HMRC would check existing rental rates and advise on whether or not they are acceptable to HMRC. Mike Fowler advised that SAV would only consider individual cases when a chargeable occasion arose.

6. Any Other Business

• Paul Davidson pointed out valuation difficulties in respect of items which cannot realistically be removed from buildings. This was acknowledged to create particular problems. Mike Fowler advised that every case would be treated on its own merits
• Robert Dawes stated that ‘right to retrieve’ valuations, particularly German restitution cases, arise occasionally. The SAV approach is to value the items and apply discounts to reflect uncertainties
• Rupert Toovey said that he was experiencing an influx of letters from Probate Lawyers in connection with the new IHT form. He asked if HMRC require Practitioners to re-categorise all assets into three categories. Mike Fowler advised this was an IHT form and suggested the question should be directed to IHT managers. Rupert Toovey will do so
• Edward Manisty suggested it might be useful to have representatives from HMRC Heritage Section on the next forum. Mike Fowler said that this had been discussed internally and with Practitioners after informal meetings instigated by the RICS. The view had been taken that the forum should be restricted to valuation issues only as if other specialists were included it could lose its focus and become unwieldy and less useful

7. Date of Next Meeting

• Mike Fowler sought feedback. All present thought the forum was a positive development and should be repeated
• The consensus was that it should be held annually. The next meeting will be in Nottingham in November or December 2007.