Shares & Assets Valuation Fiscal Forum – 25 January 2007

List of attendees

Representative	Company / Organisation
Colin Gibson	Shares & Assets Valuation
Steve Gridley	Shares & Assets Valuation
Paul Simpson	Shares & Assets Valuation
Jon Hewing	Shares & Assets Valuation
Mark Evans	Evans Appraisal Ltd, London
Brian Edwards	PricewaterhouseCoopers, London
Penelope Williams	Withers Worldwide (on behalf of The Law Society)
Steve Lygo	Parmentier Arthur Services Ltd
John Cooper	KPMG, London
Pavan Singh	KPMG, London
Angela Belsten	Ernst & Young, London
Jenny Nelder	Bruce Sutherland & Co (on behalf of Institute of Directors)
Keith Eamer	BDO Stoy Hayward, London
Ken Read	Deliotte & Touche, Nottingham
Hannah Reedy	Deliotte & Touche, Nottingham
Angela Hennessey	A Hennessey, London
Wendy Roberts	Valuation Consulting Ltd, London
Colin Paterson	The RM2 Partnership, New Malden
James Lindon	The RM2 Partnership, New Malden
Kirti Seth	Grant Thornton, Leicester
Stuart Davies	Davis Consultancy
Marc Abrams	Tenon Ltd, Nottingham
Mahesh Varia	Travers Smith Braithwaite, London
David Haigh	Brand Finance plc, Twickenham
Errol Danziger	Danziger plc, London
Diane Elliott	Chiltern plc, London
Michael Weaver	American Appraisal, London
Colin Copeland	Mazars, Bedford
Ruth Keates	Duff & Phelps Ltd, London
David Bowes	Vantis plc (on behalf of CIOT)
William Franklin	Pinsent Masons, Birmingham

LIST OF APOLOGIES

Representative	Company / Organisation
Ian Logan	PricewaterhouseCoopers, Leeds
Stuart Drummond	Law Society of Scotland, Edinburgh
Ian Clark	Turcan Connell (on behalf of Law Society of Scotland)
Tim Harding	KPMG, London
John Blamey	KPMG, London
Anne Daly	KPMG, London
Amanda Allen	KPMG, Birmingham
Alan Wallis	Ernst & Young, London
Bruce Sutherland	Bruce Sutherland & Co (on behalf of CBI)
Ewan Wallace	W D Johnston & Carmichael (on behalf of ICAS)
Simon Jennings	Rawlinson Hunter (on behalf of ICAEW)
Wendy Hallam	BDO Stoy Hayward, London
Andrew Caldwell	BDO Stoy Hayward, London
Sue Tilstone	Deloitte & Touche, Nottingham
Mervyn Woods	Confederation of British Industries, London
Tony Hindley	Valuation Consulting Ltd, London
Ian Brewer	Valuation Consulting Ltd, London
Paul Giles	Browne Jacobson, Nottingham
John Neighbour	Hardcastle Burton, Hoddesdon
Jonathan Brownson	Royce Peeling Green, Manchester
Richard Fleet	Sir Robert McAlpine Ltd, Hemel Hempstead
Jim Calvert	DoveBid Valuation Services, London
Travis Taylor	American Appraisal, London
James Palmer	Duff & Phelps Ltd, London
Vicki Carr	Osborne Clarke Solicitors, Bristol
Lindsay Pentelow	Mazars, Bedford

Executive Summary

1. Introduction and Apologies

• Apologies read

2. Minutes of Last Meeting

• Minutes agreed

3. SAV Performance & Workloads

• Customer service targets exceeded in 05/06
• Budget cutbacks will increase pressures on 06/07 customer service targets

4. Valuation of Adherent Goodwill

• Implications of Balloon Promotions SPC524 still being considered

5. ITEPA Valuations

• SAV’s practise now to seek to agree both AMV and UMV in all EMI valuations

6. Any Other Business

• SAV to withdraw from Edinburgh by summer 2008
• SAV’s approach to Management Buyout valuations remains unchanged
• Differential between AMV and UMV judged upon merits of the individual cases

7. Date of Next Meeting

• To be arranged

Minutes

The meeting was held at The Auditorium of 1 Horse Guards Road, London and was chaired by Colin Gibson and Mark Evans.

1. Introductions and Apologies

• Introductions made and apologies noted.

2. Minutes of the Last Meeting

• Minutes agreed.

3. SAV performance and workloads

• Colin Gibson explained that the recent change in the Office’s name to Shares and Assets Valuation was taken to raise the profile of the Office internally within HMRC. As SAV considers the values of many types of assets other than unquoted shares, the narrower Shares Valuation was no longer appropriate.
• Colin Gibson said that SAV’s funding constraints remained much as reported at the previous meeting. No further cuts in SAV’s budget have arisen but no additional funding is expected either.
• Colin Gibson stated SAV expected to receive 25,000 valuation requests in 2006/07 which is down upon the original estimate of 27,000. SAV expects to settle 28,500 valuations. The average time SAV takes to settle a case on Risk Assessment is currently 2.32 months and on cases that require a negotiated value it is currently 9.6 months.

Colin Gibson said that SAV continued to receive a bad press from some quarters over matters that he thought were largely historical. He wanted to put the performance of SAV into context. He compared the current SAV figures with 2000/01 when he first came to the then SVD.

Title	2000/01	2006/07
New valuations received	22,500	25,000
Settlements	21,500	28,500
% closed within 12 months	83%	94%
Average time to settle	7.6 months	3.62 months
No. of old cases	(> 3 years) 422	(> 2 years) 309
Staff in post	129	108

Colin Gibson said he thought that these figures highlighted the significant progress that SAV had made in recent years to improve their customer service and reach satisfactory agreements more efficiently.

• In light of these figures he was disappointed when he continues to hear comments that SAV remains dilatory in their approach to see matters resolved, especially as this issue had not been raised in recent Fiscal Forum discussions. He said he would like to encourage an open debate; was SAV under a false impression of success from their results? Was this opinion of SAV being dilatory widely shared amongst delegates?

John Cooper stated that this opinion could be more likely held within HMRC. He would be willing to defend SAV’s recent record as he was satisfied with the treatment that he receives. Mark Evans asked whether there was a problem with Senior Partners of firms who would think of the valuation requirement of an asset last in a taxation scenario and whose own experience of SAV may be out of date. John Cooper felt that this could be true as the historic perception of SAV was that it generally took two years on average to see SAV matters resolved.

Paul Simpson stated that this was not an uncommon reproach. He had attended the Large Corporates Forum to provide an outline of how the LBS and SAV worked together under a protocol to ensure valuation negotiations progress as rapidly as possible and, also, to address the perceptions about delay that some large corporates still retain despite the evidence of improved SAV performance.

Colin Paterson said that on average he sends in two or three EMI valuation requests in each week. His experience is that SAV offers a very good service that is both quick and fair. He felt very happy in his dealings with SAV.

• Jennie Nelder was also very happy with SAV’s service as she generally received replies within a day or so. However, the ‘black hole’ still existed on some cases where freehold or leasehold property values were referred to the Valuation Office Agency (VOA).

Colin Gibson recognised this complaint and said that a review of SAV’s working relationship with the VOA was about to get under way.

Jennie Nelder asked whether there were any set guidelines that SAV followed when deciding when a referral to the VOA was required? Was there a sample process for examples where there are multiple properties involved?

Steve Gridley replied that SAV had no set procedure for VOA referrals as this was left to the judgement of the individual valuer. But there is a process that allows for a sample of properties to be valued where there were multiple properties involved.

Colin Gibson closed the discussion saying that it takes a long time to overcome old perceptions. He asked delegates that if they were unhappy with any part of SAV’s service then please let SAV know so that they could tackle the issues directly; conversely if delegates were happy with SAV’s service perhaps they could pass that on to their colleagues.

• In response to a question Colin Gibson said that the impact of the Varney review was still unclear. John Cooper asked if it would be possible in the future to get SAV’s blessing to a proposed transaction? If so, this security would be reassuring for many businesses. Paul Simpson said that this was one of the aspects currently under review; Colin Gibson thought it unlikely that a pre-transaction valuation service would be provided.

Mark Evans believed that the onus must be on businesses to get it right. Involving Government in the transaction process could lead to sloppiness in the valuation approach. Negotiators could twist the structure of the transaction to suit their own needs. Government involvement in open market transactions would not be good.

After general discussion around the point Colin Gibson said he hoped that the position would be clearer by the time of the next Fiscal Forum meeting and any changes to procedures would be shared with the Forum.

4. Valuation of Adherent Goodwill

Paul Simpson advised that he did not envisage a debate about the appropriate approaches for valuing adherent goodwill and said that he was also uncertain as to how many of those present would have any direct involvement with such valuations. Nevertheless, as there were ongoing difficulties embracing both definition and valuation issues he wanted to respond to the request for an update on the current state of play.

Referring to the case known as Balloon Promotions SPC524, Paul Simpson explained that although principally about other issues some of the commentary in the decision had touched on how the HMRC CG Manual approached the wider matter of goodwill. This and follow up press comment had fuelled debate on the appropriate approach for defining and valuing adherent goodwill and, as a result, a number of negotiations had reached something of a stalemate. HMRC had given an official response to the Balloon case commentary in TB83 and this continued to be the HMRC position but given the number of cases involved and the fact that the tax implications extended beyond CG HMRC had decided to seek legal advice. Paul Simpson advised that this process was ongoing so there was little point in an academic debate about what the conclusion might be.

Jennie Nelder presumed that before any referral to litigation was made that VOA would be consulted. She also stated that it would be helpful for SAV to say when free goodwill arises.

Paul Simpson confirmed that as the valuation of adherent goodwill fell to the VOA, that office was involved in the internal consultation process. On the second point, any such guidance from SAV would need to reflect the benefit of the legal advice that was being sought.

Mark Evans felt the valuations of goodwill always appear odd. Goodwill is always only defined after an asset has been sold. Therefore, it only exists when sold but requires an acquisition value when it doesn’t exist. Paul Simpson expressed the view that when an asset is sold and a re-basing valuation is required the asset to be valued as at 31st March 1982 is defined via S35 (2) TCGA 1992.

5. ITEPA Valuations

Steve Gridley referred to paragraph 9 of the minutes of the meeting on 11th July 2006. Ian Murphie had raised a question regarding UMV & AMV valuations for EMI purposes. Steve Gridley indicted that it was now SAV’s practice to seek to agree both the UMV & AMV in all EMI valuations to avoid difficulties later. Colin Paterson said that this was sensible and helpful to his clients.

John Cooper asked if an intention to grant options in the future should be reflected in a valuation for a present grant of options, For example, if 200,000 options were going to be granted in March but it was expected that a further 700,000 options were to be granted in June, could the issued share capital be diluted by 900,000 for the March valuation?

From a practical point of view, Steve Gridley thought that the company might consider delaying the matter until June. However, if that was not possible, the March valuation should, in his view, be based on how the share capital stood at that time. Furthermore, Steve Gridley was not convinced that dilution was an issue in any event if the exercise price was to be set at market value. If options are granted at market value, how would that dilute the value of the shares? John Cooper explained that the exercise price would not be paid immediately and so unlike a share subscription, the value of the existing share capital would be diluted. Steve Gridley responded that until exercise, the option holders would not receive any return either and so dilution, in his view, was only an issue as the date of exercise approached.

6. Any Other Business

• Diane Elliott asked for clarification about the future of SAV Edinburgh as she had heard that the office was to be closed.

Colin Gibson confirmed that a decision has been taken to move the work of SAV Edinburgh to Nottingham. There were several reasons for this including the pressure on resource costs Department wide. There was a flexible time-scale for this process but the current target date for completion was summer 2008. He did not anticipate any significant reduction in customer service as a result of this move.

• Lindsay Pentlow of Mazars submitted the following topic for discussion prior to the Fiscal Forum:

“It appears that SAV are taking a new more aggressive approach to MBO’s in which they say systematically that an MBO creates a lower exit for the vendor than a trade sale and that MBO teams therefore acquire shares at less than market value by reference to the value which could be achieved on a trade sale.”

Paul Simpson explained that SAV does not have a set approach to MBO situations as, along with many commentators on the issue over the years, SAV recognised that the nature and substance of MBOs varied due to such factors as economic trends and the specific circumstances of the business that featured in the transaction. To illustrate the point Paul Simpson compared the evidence from MBOs in the recession of the early 1990’s to the current situation fed by private equity investment. On this basis it seemed logical to conclude that this was an “each case on its merits” situation and key issues were matters of judgement for the valuer involved.

Paul Simpson added that if it was felt that problems were arising in negotiations with SAV on a matter relating to a poor understanding of the valuation issues involved then a request could be made for the valuer’s team leader to review the case. Paul Simpson said that if it was felt that there was a reason to complain on non-valuation matters then a request for a review by the relevant Assistant Director could be made.

• Vicki Carr of Osborne Clark submitted the following topic for discussion prior to the Fiscal Forum:

“We understand that SV take a different approach to the relative values of a restricted security than the shares schemes unit. They are still valuing shares with relatively minor restrictions as having a 10-20% differential between AMV and UMV. Is our understanding right?”

Steve Gridley stated that ESSU does not take a view on valuation issues because that is not a function of that unit. SAV does consider that restrictions, such as transfer restrictions, can depress the value of shares, but it all depends on the facts.

Colin Paterson thought that there may be some old guidance on HMRC’s website that contradicted that view. Mark Evans explained that despite some initial confusion regarding restrictions, transfer restrictions did clearly fall within section 423.

Jennie Nelder asked for clarification of the level of adjustment to a price SAV considered appropriate for transfer restrictions. Did such restrictions really affect value?

Steve Gridley repeated his view that transfer restrictions can depress value, but that each case needs to be treated on its merits. For example, in his book Principles of Share Valuation for Fiscal Purposes, Bruce Sutherland states that “it is accepted to a greater or lesser extent, depending on their severity, restrictions on transfer do have a depreciatory effect on the value of the shares subject to them”. Similarly, in Practical Share Valuation (4th edition) by Eastaway, Booth & Eamer, it is stated that “restrictions on transfer can have a depreciatory effect on the value of shares”.

Also, in Salvesen’s Trustees v IRC (1930) ATC 43, Lord Fleming stated that “All the witness were agreed that the restrictions would depreciate the value of the shares, but the only witness who put any money value on this restriction was Mr Robertson Durham who said that in his opinion it might make a difference of as much as 8s. 4d. on his value of £1. 6s. 8d. and, in my opinion, this figure is not by any means excessive.”

The discount implied by those figures is 24%, but the restrictions in Salvesen were rather severe.

• Steve Lygo stated that he had recently dealt with a valuation for an IHT ten-year anniversary discretionary trust charge. The case was settled on the basis that the threshold would not be exceeded at the valuation date. However, the final letter from SAV had stated that the matter had been settled without prejudice to the question of the Shareholders’ Agreement in place at the time. Steve Lygo asked if there had been a change in policy regarding such agreements in relation to IHT.

Steve Gridley said that it was difficult to comment without sight of the actual papers. However, for IHT purposes “property” was defined in section 272 IHTA to include “rights and interests of any description.” A Shareholders’ Agreement would probably therefore be “property” for IHT purposes and need to be factored into a valuation in appropriate circumstances.

Steve Gridley indicated that the meaning of “property” for IHT purposes had been considered in Melville V IRC [2000] STC 628.

7. Date of Next Meeting

• Colin Gibson thanked the delegates for their attendance and contribution to the Forum. The next meeting provisionally set for July, the date to be confirmed later. He was concerned that the agenda for this meeting had looked very thin. He would not want to cancel a meeting but on the other hand there was no point in people taking time to attend if there was nothing on the agenda. He reiterated his desire to see more topics for discussion coming from delegates outside of SAV in the future and asked for delegates to be pro-active in this area.