Shares and Assets Valuation Fiscal Forum
27 January 2009

List of attendees

Colin Gibson
Paul Simpson
Steve Gridley
Scott Parker - Shares and Assets Valuation [SAV] (HMRC)
Brian Edwards - PriceWaterhouseCoopers, Nottingham
Kirti Seth - PriceWaterhouseCoopers, Nottingham
Anne Daly - KPMG, London
Sam Woodward - KPMG, London
Angela Belsen - Ernst & Young, London
Trudie Gubitz - Ernst & Young, London
Andrew Caldwell - BDO Stoy Hayward, London
Keith Eamer - BDO Stoy Hayward, London
Wendy Hallam - BDO Stoy Hayward, London
Matthew Earp - Deloitte & Touche, Nottingham
Candid Fernandes - Deloitte & Touche, Nottingham
Angela Hennessy - Lane Clarke & Peacock LLP, London head
James Lindon - The RM2 Partnership, New Malden
Ken Read - Grant Thornton, Birmingham
Stuart Davis - Davis Consultancy
Mahesh Varia - Travers, Smith, Braithwaite, London
Errol Danziger - Danziger Plc
Diane Elliott - Chiltern Tax Support for Professionals Ltd
Michael Weaver - American Appraisal, London
Travis Taylor - American Appraisal, London
James Palmer - Duff & Phelps Ltd
David Bowes - Vantis Plc
William Franklin - Pinsent Masons, Birmingham
Graeme Nutall - Field Fisher Waterhouse LLP
Simon Browning - PKF (UK) LLP, London
Ian Murphie - Baker Tilly Tax & Advisory Services LLP, Guildford
Mark Collins - Baker Tilly Tax & Advisory Services LLP, Guildford
Tarlochan Lall - Charles Russell LLP, London
David Hadley - Kingston Smith LLP, London
Jenny Nelder - Bruce Sutherland & Co (on behalf of IOD)

List of apologies

Mark Evans - Evans Appraisal Ltd, London
Penelope Williams - Withers Worldwide (on behalf of the Law Society)
James Ness - Law Society of Scotland, Edinburgh
Ian Clark - Turcan Connell (on behalf of Law Society of Scotland)
John Blamey - KPMG, London
Alan Wallis - Ernst & Young, London
Bruce Sutherland - B Sutherland (On behalf of CBI)
Simon Jennings - Rawlinson Hunter (On behalf of ICAEW)
Philippa Steadman - ICAEW London
Ewan Wallace - WD Johnston & Carmichael (on behalf of ICAS)
Mervyn Woods - Confederation of British Industries London
Ian Brewer - Valuation Consulting Ltd - London
Colin Paterson - The RM2 Partnership
Jonathan Brownson - Royce Peeling Green
Richard Fleet - Sir Robert McAlpine Ltd, Hemel Hampstead
Jacky Kinsey - Tenon Ltd
David Haigh - Brand Finance Plc, Twickenham
Lindsay Pentelow - Mazars, Bedford
Natalie Smith - Osborne Clarke, London
Kiki Stannard - Smith & Williamson Ltd, London
Patrick Burns - Employee Ownership Association, London

Minutes

1. Introduction and apologies

Colin Gibson introduced the delegates from Shares and Assets Valuation and welcomed all new delegates to the forum. Colin provided a brief introduction and apologised on behalf of co-chair Mark Evans, who was unable to attend for family reasons.

2. Minutes of the last meeting

The minutes of the last meeting (19 February 2008) were agreed with no points to action.

3. SAV performances and workloads

Colin Gibson advised that he was no longer of Employee Share and Securities Unit (ESSU) but in addition to SAV he now led the Expatriate Unit.

Colin reported that Fred Cook had recently experienced a heart attack and was on sick leave. However, a full recovery was expected with no lasting damage. Fred hoped to return to work on 9 February 2009 (which indeed he did). The meeting wished him a speedy recovery.

Colin Gibson stated that SAV has continued to reduce in size with fewer than 100 staff in post compared to 140 in 2000. SAV had managed this reduction though coupled with the need to train new staff it was causing an impact on workstate. SAV was currently not meeting the 15 day post-turnaround time target; 74 per cent of post was being dealt with whereas ideally we would be looking at 80 per cent or better. However 96 per cent of post was being dealt with within 40 days. Colin apologised for any difficulties that this may cause and said that SAV would continue to monitor the position.

SAV was receiving in the region of 21,000 valuation requests per annum. SAV is continuing to work with HMRC colleagues to ensure that cases are referred correctly.

As a result of improved risk-assessment procedures the median settlement time for valuations is now one month, though this figure is impacted by a number of low-level cases. Of the cases taken up for negotiation the median time for settlement was under five months and 80 per cent of 'negotiation' cases were settled within one year. Overall settlement times were significantly reduced.

There are now only 300 cases over 18-months old in SAV (the definition of old cases was previously two, and longer back three, years). This figure excludes the 'adherent goodwill' cases (see 4 below). It represents another significant improvement in an area customers tell us is important to them.

Colin Gibson concluded by advising that SAV are moving building to Ferrers House, though still at Castle Meadow, Nottingham.

Brian Edwards asked if it would be possible to correspond with SAV by email to in order to speed up the process. Colin Gibson advised that for security reasons this was a non-starter. SAV continually monitors its post management and prioritises accordingly. However if there was an extremely pressing need he could exceptionally be emailed personally provided there was a written agreement to indemnify HMRC against any data loss or misdirection. Paul Simpson suggested that agents would want a thought-through/considered response rather than a hurried reply dictated by generic post-turnaround times.

4. Property Interests/Premiums and Goodwill

Paul Simpson referred to updates at the last two Fiscal Forums where the difficult issues around apportionment that HMRC needed to consider following the Balloon Promotions case [SpC 524] had been highlighted. He was now able to report that progress had been made. HMRC with the benefit of legal advice had reached an internal consensus on an approach to the issues and via the VOA had engaged with the Royal Institute of Chartered Surveyors (RICS) and other external bodies/firms on the mechanics of valuing trade related properties. Paul advised that handouts were available and that these provided:

• An introductory note for agents that outlined how the issues arose, how HMRC's views had altered during the review period and how the backlog of cases was going to be tackled. This also touched on the potential differences in approach for CGT/SDLT and Schedule 29 FA 2002.
• A background note with a little more detail.
• A practice note drawn up by the VOA and that had been shared with RICS etc.

Paul stated that this was the current HMRC position but he acknowledged that discussions with RICS and other professional bodies were continuing as there were still some differences of view. He emphasised that it had taken a significant amount of time to reach this position. HMRC had to provide certainty of treatment for those who wanted it and now needed to get on with addressing the case backlog that had developed. Paul advised that the handouts were to be included in the Agents Update due for issue on 26 February 2009.

Jenny Nelder asked whether HMRC had considered taking a case to the Special Commissioners in order to form a definitive consensus view. Jenny stated that the formulated view represented evolution and that there was now an important recognition that there could be an element of goodwill in this type of business (eg nursing homes). Paul Simpson recognised that although an agreed solution was desirable there may be cases that would have to be litigated. That option was always open to the taxpayer.

5. Current circumstances - question from William Franklin

'In view of the credit crunch and (according to the Chancellor) the most difficult economic circumstances for over 60 years, the lowest bank of England interest rates since the 17th Century, the increasing numbers of corporate insolvencies etc it would be interesting to hear from HMRC SAV the extent to which the current circumstances have effected (if at all) their thinking and approach to valuation matters (not just for shares, but also restrictions on shares, earn-outs and assumptions in DCF calculations)'

William Franklin stated that pension valuations had shrunk, interest rates were highly sensitive and an era of deflation had provided a challenge which had affected earn-outs leading to a struggle in thinking valuations through. Steve Gridley and Paul Simpson commented that it could be of greater interest to explore attendees' views in this sphere because they actually prepared valuations for SAV to consider.

Paul Simpson said that at a basic level as financial ratios used in valuations of unquoted shares are often taken direct from the quoted marketplace the significant fall in the value of UK quoted companies during the 'credit crunch' had had a direct read across to the prime components of many fiscal valuations. In many sectors achieved and forecast earnings have also fallen with a corresponding impact.

Paul commented that at a more sophisticated level there had also been an effect on approaches to DCF valuations that commonly relied on the calculation of both the cost of equity using the CAPM and of the relevant WACC. It had been widely acknowledged that the current economic conditions had significantly impacted on the component parts to these calculations. Paul added that this had prompted related questions in the professional press on valuations matters such as 'Does the CAPM work at all? What is the cost of borrowing and is there a liquidity premium?' Add to this the fact that there is an ongoing worldwide liquidity crisis that leaving aside the increasing cost of debt had created a situation where many banks were refusing to provide loans at all, it was very evident that there were many new and difficult considerations for related valuations.

Steve and Paul emphasised that is was not SAV's role to tell the profession how to conduct valuations but that it seemed clear that everyone recognised that in the current climate good valuation practice via benchmarking was important and that all involved would need to stand back and consider valuations in a commonsense manner.

Brian Edwards stated that PWC had been considering this question closely analysing the markets, looking at CAPM and how a business could be worth more on the same calculation with rates down. He suggested that every valuation would be treated on its own merits.

Ken Read said that there were difficulties presented by transactions falling off and a lack of evidence in the market. Transactions even six months prior would not be comparable. Angela Belsten added that finding reliable comparables in these circumstances was hugely problematic.

Steve Gridley said that although William Franklin had mentioned difficulties with earn-out valuations, in practice, SAV had seen a sharp decline in contingent consideration cases. The exception perhaps being those for Schedule 23 purposes.

William Franklin suggested that option-pricing theory had been called into question in the context of the current market and that there had been a decline in equity option trading.

Angela Hennessy felt that certain valuers in SAV did not necessarily take the common sense view. Steve Gridley replied that if practitioners felt that common sense was not being applied, an informal word with the valuer's team leader might prove helpful. And as had been said before, the Assistant Directors are always willing to be approached over the phone if there are real problems, rather than the matter being escalated to a formal complaint. Stuart Davis added that asking a valuer's manager to review a case did not in his view constitute a complaint and was merely an opportunity to get a fresh opinion on the case.

6. EMI Schemes - Form 231 and qualifying conditions under ITEPA - question from Ken Read

Points for discussion:

1. Clarification of the purpose and meaning of both the questions under section 5 on the VAL231
2. Clarification of HMRC's approach regarding the following paragraphs in ITEPA 2003

• Para 9 (3) in part 3 of schedule 5
• Para 58 in part 8 of schedule 5

Ken Read introduced the question and asked what SAV would view to be admissible information with regard to the exit route and the prospect of shares being sold and whether this was a valid question for SAV to ask?

Steve Gridley stated that if a company wished to approach SAV to agree a price for the grant of EMI options the 'exit route' question on the form must be answered in full. The contemporaneous facts should be provided and not withheld because practitioners considered the information to be 'confidential' and not deemed to be available for valuation purposes. If practitioners consider that certain information is not deemed to be available under the information standard, that qualification should be explained and reflected in the accompanying valuation.

Ken Read asked for clarification on HMRC's stance on paragraphs 9(3) and 58 and SAV's practice when the 'exit route' question indicated that paragraph 9(3) might be in point.

Steve Gridley said that the SCEC have a number of open cases concerning this particular subject where litigation may eventually prove necessary and so it was inappropriate at this stage to comment on the matter. However, the legislation is widely drawn and where a company was in the process of being sold, it might not be possible to grant qualifying EMI options.

A general debate on the matter then ensued concluding with Steve Gridley saying that he would raise the issue with ESSU and report back.

7. Any other business

Anne Daly queried whether an employment income PTVC could be sent to SAV at the same time as it is sent to the tax office as she had received conflicting opinions on this from the helpline. Scott Parker clarified that, as a concession, employment income PTVC's could be sent simultaneously in order to speed up the process. However, SAV does require confirmation of the valuation requirements from the office responsible for the taxpayer. The process for CG PTVCs remains as detailed in the previous minutes - ie that they should be sent to the appropriate local office with SAV only to be approached direct if real uncertainty exists as to where that might be. In the case of Schedule 23, Steve Gridley explained that requests for PTVCs must be sent to the corporation tax officer who will then decide whether or not the requirements of the legislation have been met and if a reference to SAV is necessary. (See HMRC's Business Income Manual at BIM 44325)

Steve Gridley raised the issued of so-called 'growth shares' and asked practitioners to present a reasoned valuation when asking for a PTVC, rather than just using an unsubstantiated rule of thumb approach without any supporting valuation evidence.

Colin Gibson proposed that we aim to have the next meeting around January 2010. Nobody disagreed and the meeting closed at 3:45 pm.