Contents
4. Expert witnesses: the framework agreement
| Representative | Company/Organisation |
| Mark Evans |
Parmentier Arthur Services Ltd |
| Diane Elliott |
Arthur Andersen |
| Tim Harding |
KPMG, London |
| John Blamey |
KPMG, London |
| Amanda Allen |
KPMG, Birmingham |
| Angela Belsten |
Ernst & Young |
| Bruce Sutherland |
Bruce Sutherland & Co |
| Ewen Wallace |
W D Johnston & Carmichael (on behalf of Institute of Chartered Accountants of Scotland |
| Keith Eamer |
BDO Stoy Hayward, London |
| Hermione Scrope |
BDO Stoy Hayward, Bury St Edmunds |
| Errol Danziger Jenny Nelder Tony Hindley |
Danziger Plc Institute of Directors Valuation Consulting Ltd |
| Tim Jameson |
Chiltern Valuation Services |
| John Harrison |
PricewaterhouseCoopers, London |
| Ian Logan |
PricewaterhouseCoopers, Birmingham |
| Ian Murphie Lee Whotton John Neighbour Chris Barrington Paul Rigney Paul McKeown Victoria Nicholl |
RM2 Partnership Deloitte & Touche, Nottingham Hardcastle Burton Royce Peeling Green Royce Peeling Green Grant Thornton Travers Smith Braithwaite |
| Colin Gibson |
Shares Valuation |
| Fred Cook |
Shares Valuation |
| Reg Malkin |
Shares Valuation |
| Jon Rowles |
Shares Valuation |
| Lousie Speke | The Law Society |
| Simon Mackintosh Stuart Drummond |
Law Society of Scotland Law Society of Scotland |
| Steve Lygo |
Parmentier Arthur Services Ltd, St Ives |
| John Cooper |
KPMG, London |
| Anne Daly Mark Collard |
KPMG, London KPMG, Birmingham |
| Paul Fisher |
Bruce Sutherland & Co |
| Simon Jennings |
Institute of Chartered Accountants in England & Wales |
| Andrew Caldwell |
BDO Stoy Hayward, London |
| Wendy Hallam |
BDO Stoy Hayward, London |
| Trevor McDonagh Sue Tilstone |
Deloitte & Touche, London Deloitte & Touche, Nottingham |
| Ian Brewer |
Valuation Consulting |
| Mr Woods Paul Giles Stuart Davis Angela Hennessy David Perrin |
Confederation of British Industry Browne Jacobson Grant Thornton Christopher Glover & Co Chartered Institute of Taxation |
| Mike Fowler |
Shares Valuation |
| Steve Gridley |
Shares Valuation |
The meeting was held at the Chartered Institute of Taxation, 12 Upper Belgrave Street, London and was chaired jointly by Colin Gibson of Shares Valuation (SV) and John Harrison of PricewaterhouseCoopers.
Colin Gibson opened the meeting at 10.30am and the apologies were read. He said that it was pleasing to see some new faces at this meeting as a result of the adverts placed in the Working Together section of the Revenue Web-site.
2. Minutes of the last meeting
No points arose from the previous minutes which had been published on the internet, as will these minutes.
Colin Gibson stated that share schemes were the big growth area for SV and that the use of options was central to current political thinking. Due to the very high number of cases being received, it could give rise to logistical problems and cause a knock-on effect on other valuation work. This was not the case at present but SV are aware of possible conflict and will address the matter if it becomes a problem.
Fred Cook reiterated that EMI schemes were very popular. 474 valuations were settled from April to June. SV was keeping to the service standard but it was stressed that there was a need to understand that valuers had a lot of these schemes on hand and Fred Cook asked for a degree of forbearance.
Fred Cook wished to highlight our views on a couple of points. Firstly, the question of dilution of value flowing from the possible exercise of options. Previously, in pre-FA2000 schemes, the effect of dilution was largely ignored in practice, though previously issued options were taken into account, as there was very little effect in reality due to the size of the holdings. Higher EMI limits, though, allowed the possibility of significant dilution, even in quite large companies. The SV view was that the legislation suggests that we should allow for full dilution and so SV's practice will be to seek to establish the company's intent regarding the issue of options. John Harrison asked whether this included future options, Fred Cook clarified that it was only in respect of the current options being granted.
To view it another way, what would the purchaser's view in the open market be. Being aware of the options, he would factor the dilutive effect in to the value. Mark Evans asked how the purchaser would view vesting conditions. Fred Cook felt that these would be reflected in the value as most value for the option holders in an EMI scheme would probably lie in an exit route and, in that event, the majority would exercise the options. Consequently, SV is happy with the full dilution approach. Where there were capital changes afoot, SV would want details and agreement would be conditional upon those changes taking place.
Secondly, as there were no tax advantages in seeking a high value for EMI, SV would likely accept high values on a without prejudice basis but not on a "not manifestly less than market value" basis. Jenny Nelder asked whether an issue at pro-rata value should be viewed as market value. Fred Cook said that was not the case but that SV would allow the value for EMI purposes.
As regards any restriction or risk of forfeiture, a value agreed for scheme limit purposes would ignore such things, even though it is intended that they should be accounted for when setting the exercise price. It may, therefore, sometimes be necessary to agree two values. However, whilst "restriction" is not expanded upon, the legislation provides that shares are subject to a risk of forfeiture if they are regarded as "only conditional" by virtue of s140C ICTA 1988. Section 140C provides that an interest in shares is only conditional for so long as the terms are not such that the person with the interest will be entitled to receive on forfeiture an amount equal to or more than market value. Shares are not "only conditional" if the Articles require an employee to sell shares back at less than market value should they leave or be dismissed.
Mark Evans mentioned that s140 effectively scuppers US companies as they use formula values which could fall foul of s140. Fred Cook said that this was a policy area but that comments would be fed back to colleagues responsible for such matters.
Keith Eamer asked whether the time limit could be extended to 60 days from 30 days to limit the number of re-referrals and Amanda Allen asked whether valuers could fax agreement letters. Fred Cook said that he was content to ask people in SV to fax agreements and that he will consider the request to increase the time limit to 60 days.
Keith Eamer also praised SV on their turnaround times for EMI schemes.
4. Expert witnesses and the Framework Agreement
The previous lack of an audit trail regarding SV's use of expert witnesses has been discussed and Colin Gibson felt that this position should be addressed.
Fred Cook said that, whilst settlement times were falling, not all cases were straightforward and that litigation was sometimes the way forward. Prior to litigation, SV would often ask for an independent value from an expert. This helped SV either by strengthening their view or causing a re-consideration of their position. Hence, the need for the Framework Agreement which contracts for the supply of independent advice. It was possible the expert would later appear in court on the Revenue's behalf.
The taxpayer would usually be informed when SV had sought outside independent advice and the advice received may be disclosed to the taxpayer, either fully or in broad terms, dependent on each individual case.
SV had put these arrangements in place to make transparent its process for appointment of outside experts. A competitive tender made it clear the process was fair. When SV commenced the tendering process, it was required to advertise the fact to all interested parties. Fred Cook apologised for not notifying the forum first but that would not have been fair to outside parties. However, the advert was brought to the notice of members of the Forum immediately after publication.
17 firms responded to the initial advertisement, nominating 38 people. Tenders were then invited from the 14 firms that complied with the terms of the advertisement in respect of 20 people (selected as being the best candidates from the firms concerned). A scene setting meeting was held at Bush House, following which 15 tenders were received and 5 were selected to sit on the panel. Their appointments were for two years with a further one year option at the Revenue's discretion commencing on 2 July 2001. Quality had been the prime mover in the decision process with cost only being considered at the end. Fred Cook wished to thank all that applied and stressed that non-selection should not be taken as a poor reflection on that person or firm.
There were lessons to be learnt from the process. SV may consider adjusting the first stage process. People who applied and not been successful were encouraged to apply again. The advert should be read fully. Applicants could not rely on their reputations carrying the day since the tender document is the only evidence on which each applicant is judged.
The number on the panel is not fixed but could have been between 5 and 8. It was felt that the 5 people covered most areas of valuation and some members had particular areas of expertise, e.g. brand names. Colin Gibson also said that it was not envisaged that the panel would be used on a regular basis, it was only a few cases that reached this stage of deadlock and a balance had to be struck between fairness and spending taxpayers' money.
Tim Harding asked whether the panel would be used in rotation or at SV's discretion. Fred Cook said it was at SV's discretion but that having the panel in place obviated the need and expense of having to tender each time SV wanted independent advice.
Paul McKeown wondered whether the panel would be available to both parties to put their case. Fred Cook said that that was outside of the agreement: it was not an arbitration panel.
John Harrison queried the temptation to "opinion shop". Reg Malkin said such a course would not be pursued. If an independent valuation indicated that SV was wrong, the position would be accepted. SV would not go to the Commissioners if the case were felt to be weak and any audit trail that indicated "opinion shopping" would look bad.
Amanda Allen asked if the panel would be named. Fred Cook said that was a matter on which he would need to take advice.
Colin Gibson stated that the figures showed that SV was performing well, especially considering that there was constant pressure to cut costs and such pressure inevitably affected staffing levels. In the year to March 2001 SV received 22,000 valuations, settled 21,800 and took 15,000 up for negotiation. On customer service, all targets were exceeded. 84% of cases were settled in 12 months and the average was 7.3 months. Three year old cases were down to 246 from 554 the previous year. 83% of correspondence was dealt with within 15 working days and 97.9% within 40 working days. This was as opposed to the previous year where 83% was dealt with within 28 calendar days and 96.4% within 56 calendar days.
He recognised that some people might not consider the 15 days response time quick enough. These targets were reviewed regularly.
Quality is also important and a new internal system to improve quality is in place for this year
Colin Gibson was gratified by the majority of the results of the survey, though the area of speed written responses was an area of some concern - see 5 above. Post Transaction Valuation Checks were also viewed as poorer than other areas though this may be due to too high an expectation of what SV could do - see para. 8.
Amanda Allen re-iterated the impressive turnaround times for share schemes. Jenny Nelder queried whether the average settlement time included EMI valuations which could be settled in a matter of days and could distort the figures. Fred Cook confirmed that EMI was included but also pointed out that, nonetheless, settlement times for other types of case had fallen. For example, base date valuations (often involving a degree of contention) now averaged 10.5 months. Furthermore, the number of three year old cases had fallen dramatically.
John Harrison was happy with the response time but said he had experienced difficulty in getting valuers to detail their opinion of value. Reg Malkin commented that where all the information was known, a value should be forwarded and asked for instances where this was not happening.
Tuesday 29 January 2002 was fixed for the next forum.
John Harrison asked for clarification as to when Post Transaction Valuation Checks could be sought. Fred Cook had prepared a handout which is attached and sets out the guidelines. SV will also consider Pre Transaction Valuation Checks in respect of PAYE and Schedule E where there are a large number of employees.
Colin Gibson mentioned that SV was involved in the valuation of assets other than shares and cited an instance where SV worked with Heritage Section on the valuation and discounting of part shares in chattels. He is setting up a review within Capital Taxes to try to formulate a line on discounting.
There is a review underway of the quality of service provided across the Revenue and the public sector. Capital Taxes is at the forefront which is welcome and the attached note summarises the terms of reference. Eilish Vaughan who is carrying out the Review will be seeking the views of practitioners and invite any comments.
Colin Gibson also asked that practitioners put references on letters; it helps to speed up internal processes.
Tim Jameson raised the queries as detailed in the attached memo. Fred Cook said there should be cover for a valuer who left earlier than others and if this were not so, the practitioner should speak with that person's manager. Colin Gibson said that flexi-time was popular with staff and suggested that to expedite business by telephone, it might be wise for either agents or valuers to book a call to give both sides a chance to review the matter. A memorandum is attached.
As regards the question of the basis of valuation of a minority transfer from one pension fund to another, this will be researched and the view given in the minutes.
Tim Harding asked whether there had been any developments or changes to the Revenue's view of negligible value, in particular, where a very valuable asset had lost most of its value but still had some value. Fred Cook said that the view remains that the asset must be negligible in value, not merely have lost a lot of its value. Tim then asked about the recent consultation document from the Treasury regarding the deferral and possible exemption from CGT for large companies. It was accepted that this could have a large effect on valuation work but at present it is a consultation document and will be considered in the future.
Jenny Nelder asked whether the SV manual had been updated and was the chapter on Schedule E on the Internet. Fred Cook confirmed that the Schedule E chapter is out but that it is not yet on the Internet. The Web manual is not yet current but will be when some technical difficulties have been resolved. Jenny also asked if SV were ready to be definitive on the level of information required by the standard at any date. She has seen a letter setting out fixed values at certain dates. Fred Cook said there were no fixed figures and the question was unanswerable really and depended on the merits of each case.
