Shares Valuation Fiscal Forum 08 April 2003


Representative Company	Organisation
John Harrison	PricewaterhouseCoopers, London
Brian Edwards	PricewaterhouseCoopers, London
Ian Logan	PricewaterhouseCoopers, Birmingham
David Perrin	WJB Chiltern (On behalf of CIOT)
Richard Williams	The Law Society, London
Mark Evans	Parmentier Arthur Services Ltd, London
John Blamey	KPMG, London
Pavan Singh	KPMG, London
Alan Wallis	Ernst & Young
Angela Belsten	Ernst & Young
Bruce Sutherland	Bruce Sutherland & Co, Moreton-in-Marsh
Paul Fisher	Bruce Sutherland & Co, Moreton-in-Marsh
Andrew Caldwell	BDO Stoy Hayward, London
Keith Eamer	BDO Stoy Hayward, London
Lee Whotton	Deloitte & Touche, Nottingham
Lynette Snodin	Deloitte & Touche, Nottingham
Angela Hennessey	A Hennessey, London
Kate Scruby	Valuation Consulting Ltd
Ian Murphie	The RM2 Partnership, New Malden
Stuart Davis	Grant Thornton, London
Mahesh Varia	Travers Smith Braithwaite, London
Jim Calvert	Dove Bid Valuation Services, London
Colin Gibson	Shares Valuation
Fred Cook	Shares Valuation
Mike Fowler	Shares Valuation
Reg Malkin	Shares Valuation
Graeme Scandrett-Smith	Shares Valuation

Apologies


Representative Company	Organisation
Louise Speke	The Law Society
Stuart Drummond	The Law Society of Scotland
Ian Clark	The Law Society of Scotland
Steve Lygo	Parmentier Arthur Services Ltd, St Ives
Diane Elliott	Arthur Anderson
John Cooper	KPMG, London
Tim Harding	KPMG, London
Anne Daly	KPMG, London
Jenny Nelder	On behalf of Institute of Directors
Ewan Wallace	W D Johnston & Carmichael
Simon Jennings	On behalf of Institute of Chartered Accountants of Scotland
Wendy Hallam	BDO Stoy Hayward, London
Trevor McDonagh	Deloitte & Touche, London
Sue Tilstone	Deloitte & Touche, Nottingham
Tony Hindley	Valuation Consulting Ltd
Ian Brewer	Valuation Consulting Ltd
Colin Paterson	RM2 Partnership
Paul Giles	Browne Jacobson
John Neighbour	Hardcastle Burton
Jonathan Brownson	Royce Peeling Green
Richard Fleet	Sir Robert McAlpine Ltd
David Haigh	Brand Finance Plc, Twickenham
Roy Hogg	WJB Chiltern
Amanda Allen	KPMG, Birmingham

The meeting was held at the Chartered Institute of Taxation, 12 Upper Belgrave Street, London and was chaired jointly by Colin Gibson of IR Capital Taxes, Shares Valuation (SV) and John Harrison of PricewaterhouseCoopers (PWC).

1. Introduction and Apologies

Colin Gibson opened the meeting at 10.30. He introduced the SV team and said Steve Gridley was on holiday. Reg Malkin will be retiring in July and this would be his last Forum meeting. Colin Gibson said that a full list of apologies would be included with the minutes.

2. Minutes of the Last Meeting and Matters Arising

Minutes agreed.
Colin Gibson reported that the Shares Valuation manual has now been published. See 5 below.
Colin Gibson reported that the debate regarding the valuation of chattels in co-ownership was still on going and moving along more slowly that he would have liked.

3. SV Performance 2002/2003

Colin Gibson reported that he felt that SV performance for the year had been commendable. A significant volume of work had been received from the Large Business Offices (LBO) as a result of crystallisation of losses following the substantial shareholding changes. Several very large company valuations had also been received. He explained that it was still anticipated that there would be a decline in LBO work especially at Band B2 level and that there had been a reduction in Inheritance Tax valuations. However CGT valuations received were up as the Area Offices were taking up more personal return enquiries.

Colin Gibson confirmed that SV were meeting published customer service targets and post targets. With regard to quality targets he explained that SV was doing well and was achieving satisfactory or better scores in over 97% of cases.

Colin Gibson outlined the following key business and customer service results for the financial year to March 2003:-

Business Results

20934 valuations were received
IHT valuations decreased by 8.5% to 2,807
Post Transaction Valuation Checks remained more or less level at 1,016
Corporate CG work increased by 7% and non-corporate work increased by 15%
Share Options Schemes work decreased by 2.3%
A total of 22,800 cases were settled.

Customer Service

86% of cases settled within 12 months.
Average time to settle a valuation has fallen to less than 6 months.
The number of valuations over 3 years old is down to 257 from 275.
All post timeliness targets met.

4. Organisation of Work in Capital Taxes

Colin Gibson explained the recent re-organisation of roles in Capital Taxes. A greater emphasis was being placed on compliance and he had taken on the role of Deputy Director Compliance covering both Shares Valuation and IHT compliance work.

Colin Gibson explained that this additional role should have no effect on Shares Valuation's performance but the changes should provide closer working links to IHT colleagues and in particular IHT Compliance.

5. SV Manual

Colin Gibson said that the Manual had at last been published on the Internet and apologised for the slight delay beyond December. The manual can be found via the following web address - /manuals/svmanual/.

The web-site also contains the Negligible Value list.

Bruce Sutherland asked whether future amendments to the SV manual would clearly show the date on which any changes / amendments were made. Colin Gibson confirmed that this would happen and that it was essential for audit trail purposes.

Paul Fisher asked how up to date the SV manual was at the time it went to publication and in particular was it up to date in respect of Business Property Relief (BPR). Fred Cook indicated that the SV manual does not include the most recent decisions about BPR but that it would be updated as soon as possible.

Colin Gibson said that the SV manual would be kept as up to date as is feasibly possible. He stressed that it was an internal guidance manual, published as part of government openness. It was never intended that it should be a definitive manual on all aspects of fiscal valuation.

6. Recent articles in Taxation

Colin Gibson acknowledged the recent articles in Taxation and the welcome publicity that Shares Valuation receives following these types of articles.

Mick Ruse Article "Time For A Makeover"

Colin Gibson referred to the suggestion that Shares Valuation might offer a commercial valuation service and charge for valuations undertaken. He confirmed that Shares Valuation would not go down that route, as it was not within the power of the Inland Revenue to charge for such a service even were it minded to do so.

In the same article reference is made to Shares Valuation providing its view of values prematurely. In fact practitioners had always requested that we should provide a view as early as possible. John Harrison said that he does not want to see a change in Shares Valuation current work practice. This was also the consensus of opinion of the forum.

Colin Gibson confirmed that it was unlikely that Shares Valuation would log the time taken on cases. Current IT software in Shares Valuation did not permit such complex time keeping. Colin Gibson said that Shares Valuation already deploys its resources efficiently and that he could not see that sufficient value might be added to justify the logging of time.

Colin Gibson referred to the claim about the indiscriminate use of the 'Without Prejudice' qualification. He explained that of 7000 cases closed on risk assessment only, 29% had been agreed on a without prejudice basis; the figure was 14% for the 11900 negotiated cases. Colin Gibson said that he did not consider that there was a problem.

Quasi-Partnerships

Fred Cook referred to the Taxation article by Robin Mathew QC. Fred Cook said that Shares Valuation did not accept Mr Mathew's view that the case amounted to a "radical re-assessment" of the principles of valuation of minority shareholdings. The case was not a tax case. It was an appeal to the Privy Council from the Cayman Islands, where there are no company law provisions akin to section 210 Companies Act 1948 or its successors. A small minority shareholder who was a director and an employee had been dismissed for alleged "bad performance". This shareholder could only petition for a winding up in the hope this would induce the company to buy his shares at an acceptable price. There was an unresolved dispute over the appropriate price and whether or not the shareholder had the standing of a quasi-partner. Fred Cook pointed out that the Privy Council did not, in fact, make a decision on whether the company was a quasi-partnership. Although the Privy Council did decide that the company's eventual offer to buy out the shareholder at an undiscounted price based on break-up (rather than going concern) value was too low, the decision was very clearly based on what would be fair for an unwilling vendor. The Privy Council distinguished their decision from the valuation that is appropriate on the basis of a bargain as between a willing seller and a willing buyer.

Fred Cook stated the Shares Valuation view on quasi- partnerships thus:

Whether a company is a quasi-partnership is a matter of fact and evidence;
Even if a company is a quasi-partnership, it does not necessarily follow that the fiscal value of a minority holding is other than at a discount to pro rata of the full going concern or break-up value of the company;
Each case has to be considered on its merits and the facts and history need to be considered closely
Since fiscal valuation involves a hypothetical vendor and a hypothetical purchaser, it cannot necessarily be assumed that either of these parties was or will become a quasi-partner
The potential exits (if any) need to be considered.
The courts have made decisions in cases of unfairly prejudicial behaviour. The courts have distinguished these decisions from deciding on market value. It is wrong to assume that a purchaser of shares will find a situation where unfairly prejudicial behaviour gives rise to an exit opportunity.

7. Enterprise Management Incentives ("EMI") and proposed Corporation Tax Relief for employee share acquisition

Making reference to Keith Eamer's letter of 26 March 2003 circulated with the agenda Colin Gibson said that in the absence of Steve Gridley the matter would be dealt with by Fred Cook.

Fred Cook first addressed the point raised by Keith Eamer in respect of EMI. Keith Eamer asked for an explanation of the Shares Valuation approach where options had been knowingly granted at less than market value. Reference was made to a case where the intention to disregard market value in setting the option price had been disclosed to Shares Valuation. Fred Cook said that he recognised the general sentiment expressed by practitioners present that it would be very helpful to have market value agreed nonetheless in order to quantify any employment tax charge payable on the eventual exercise of the option. Shares Valuation would consider the matter.

Fred Cook said that with the Budget the following day the meeting must forgive him for being very circumspect about what he could say in relation to possible changes. So far as the draft legislation providing corporation tax relief for employee share acquisitions was concerned, he could not of course predict the coming Finance Bill on the question of the respective values to be adopted for the relief and that to be attributed to individual employees. What he could say was that Shares Valuation could be expected to adopt a common-sense approach wherever possible.

Keith Eamer had raised some subsidiary points that Fred Cook said would be best answered once we had got past the forthcoming Budget. Fred Cook added that there was no question of pre-transaction valuation checks. John Harrison agreed that the matter should be discussed further at the next Forum.

Bruce Sutherland asked if, in order to avoid any confusion, the legislation could not specifically state that shares should be valued in a specific way. Fred Cook and Colin Gibson noted his comments.

8. Next Meeting

Colin Gibson asked the Forum when they would like the next meeting. John Harrison suggested that perhaps future meetings should be 9 months apart. The consensus of opinion was that this was a good idea.

Colin Gibson suggested that the next meeting should be in early January 2004 - confirmed Thursday 8 January 2004.

9. Any Other Business

John Harrison referred to an apparent trend arising in Shares Valuation regarding pre-transaction checks on Schedule E valuations. Apparently Shares Valuation are only agreeing to a valuation once the options have been granted or if the case is not of a complex nature i.e. one that might require negotiating. John Harrison asked if a definition of complex has been given and whether Shares Valuation had hardened its stance.

Fred Cook said that he had explained the Shares Valuation approach at a previous meeting of the Forum and that the approach had not changed. Essentially Shares Valuation would consider a pre-transaction valuation for Schedule E only if there were a large number of employees involved, where the transaction concerned was transparent and straightforward and where the valuation was unlikely to lead to prolonged contention and debate. Reg Malkin mentioned that if there is a problem on a particular case that there is always the option to ask for the case to be reviewed.

Mark Evans raised a concern about the Mansworth v Jelley case and the granting of options at either their disposal value or their market value. Colin Gibson confirmed that the law stands as it is and that the Revenue position following the decision had been publicised.

Amanda Allen (via a colleague) raised a concern about information being requested by Shares Valuation on EMI valuations. Apparently examiners are often asking for detailed management accounts which would not of course normally be available to purchasers of uninfluential holdings. Reg Malkin confirmed that information required is very much dependant on each case and that there has been no change in Shares Valuation policy in this area.

Mark Evans asked whether s140A ICTA 1988 - Conditional Shares - was covered in the SV manual. Shares Valuation pointed out that the Manual was not intended to cover every possible valuation issue but they would look into the matter. John Harrison agreed that some subjects are best discussed at the Forum rather than being published in the manual.

There being no other business the meeting ended at approximately 12.00pm.

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