Nicholas Close v The Commissioners for HMRC

These appeals have been heard together as they all concern the market value of shares in a company called Readybuy Plc (“Readybuy”). Each of the appellants gifted shares in Readybuy to charity in 2003 and claimed relief for those gifts in their tax returns for 2003-04. The shares in Readybuy had been the subject of a placing and admission to the Alternative Investment Market (“AIM”) on 8 September 2003. Mr Close and Mr Nuttall gifted shares on that date and claimed relief based on a value of 53.25p, by reference to the price at which shares were dealt in on AIM on or about the date of gifting. Mr Chisnall gifted his shares on 9 December 2003 and claimed relief based on a value of 50p, also by reference to the AIM price on or about the date of gifting. The respondents (“HMRC”) contend in these proceedings that the market value of the shares on both dates was 8.05p per share.

HMRC opened enquiries into the appellants’ tax returns for 2003-04 on various dates in 2005. Closure notices were not issued until various dates in 2017 and 2018. The closure notice for each appellant amended the relevant self-assessment to show relief based on a market value of the shares at the date of gifting of 14.66p. The effect of the closure notices was that the relief available to the appellants was reduced considerably. In fact, HMRC now contend that the market value was 8.05p and seek to further restrict the relief claimed.

It is apparent from that brief description of the circumstances that the enquiries into the appellants’ returns took many years. It was some 12 years between the enquiries being opened and the closure notices being issued. Mr Nuttall made an application to debar HMRC from defending his appeal and for the Tribunal to allow his appeal on the basis of an abuse of process. His application relied upon what Mr Webster QC, appearing for Mr Nuttall, described as the “inordinate and inexcusable delay” of HMRC in carrying out the enquiry. I heard Mr Nuttall’s application on 21 February 2022 and reserved my decision, partly because there were issues as to what evidence might no longer be available to Mr Nuttall because of the delay and I wanted to see and hear the evidence that was available. I have released my decision on Mr Nuttall’s application at the same time as this decision. For the reasons given in that decision I have refused the application. The result is that Mr Nuttall’s appeal stands or falls on its merits.

Mr Chisnall did not make any separate application for his appeal to be allowed on the basis of delay constituting an abuse of process on the part of HMRC. However, in his evidence and submissions it was clear that he desired a similar outcome. In closing submissions, he stated that his appeal had two main grounds:

For the sake of completeness and clarity for Mr Chisnall I consider that a similar application by Mr Chisnall would have led to the same outcome as the application made by Mr Nuttall. The decision on Mr Nuttall’s application will published in the ordinary course and a copy will be made available to Mr Chisnall when this decision is released.

Mr Close sought to withdraw his appeal by notice dated 20 December 2020. HMRC objected to that withdrawal on the basis that they intended to invite the Tribunal to increase the assessment from that notified in the closure notice. By directions dated 21 April 2021, Mr Close’s case on the appeal was treated as withdrawn but the appeal itself continued for the purpose ofestablishing whether he had been undercharged by the assessment. Mr Close declined the opportunity to participate in the appeal.

Mr Waldegrave for HMRC invited me to increase the assessments on all the appellants on the basis that the value of the shares was less than the value used in the closure notices. Mr Nuttall and Mr Chisnall invite me to allow their appeals on the basis that the value of the shares was as stated in their self-assessment returns for 2003-04.

I heard oral evidence from Mr Nuttall and Mr Chisnall. Mr Neil McArthur also gave evidence on behalf of Mr Chisnall. The appellants did not rely on any expert evidence as to the market value of the shares. HMRC relied on the expert evidence of Mr Andrew Strickland, a chartered accountant and business valuer.

There is no issue between the parties as to the legal framework relevant for the purposes of these appeals. This section of my decision should not be controversial.

In 2003-04 certain shares which were qualifying investments were eligible for income tax relief when gifted to charity pursuant to section 587B Income and Corporation Taxes Act 1988 (“ICTA”). Relief was given by reference to the market value of the qualifying investment as follows:

It was common ground that the shares in Readybuy were dealt in on a recognised stock exchange and were therefore qualifying investments. Section 587B(10) provides that the market value of any qualifying investment is to be determined as it would be under the Taxation of Chargeable Gains Act 1992 (“TCGA 1992”). The relevant provisions for present purposes are contained in sections 272 and 273 TCGA 1992 as follows:

It was common ground that shares dealt in on AIM are not quoted in the Stock Exchange Daily Official List. As such, section 272(3) does not apply in valuing the Readybuy shares and the price at which the shares are dealt in on AIM is not conclusive as to their market value. Further, shares listed on AIM are not “quoted” on a recognised stock exchange for the purposes of section 273(2) (see the discussion in Netley v HM Revenue & Customs [2017] UKFTT 442 (TC) at [185] – [195]). As such, section 273(3) applies to the valuation of the Readybuy shares. All the information which a prudent prospective purchaser of the shares might reasonably require if he were proposing to purchase them from a willing vendor by private treaty and at arm’s length is treated as being available to the prospective purchaser.

The parties were agreed as to the principles of valuation that I should apply in valuing the Readybuy shares pursuant to these provisions. I recently set out those principles at [14] of McArthur & Bloxham v HM Revenue & Customs [2021] UKFTT 237 (TC):

In the same case at [160] to [169], I set out some further practical points which, where relevant, I have adopted in the present appeals. Continuing the sub-paragraph numbers, I can summarise those points as follows:

It is necessary to identify the information available to the reasonably prudent purchaser. I agree with the approach of Dr Brice, the Special Commissioner in Caton’s Administrators v Couch [1995] STC (SCD) 34. I summarised this in Netley as follows:

Finally, in the context of the Tribunal’s powers on this appeal, section 50(7) Taxes Management Act 1970 enables me to increase the amount of tax charged by the closure notices if it appears that the appellants have been undercharged:

I shall first make findings of fact in relation to the claims for relief made by the appellants on gifting shares in Readybuy. I shall then consider the circumstances of Readybuy, including the nature of its business and the circumstances in which it came to be floated on AIM. I shall then make findings of fact directly relevant to the valuation of the shares in Readybuy at the material dates in 2003. Finally, I shall consider the circumstances in which the appellants came to invest in Readybuy.

The basic facts in relation to each appellant are summarised in the following table:

The table shows the number of shares acquired by each appellant following the offer for subscription and placing of shares in Readybuy described below. It also shows the amount of relief claimed by each appellant in their respective tax returns, the adjusted relief following HMRC’s closure notices and what I have termed the re-adjusted relief which HMRC now says the appellants were each entitled to. In relation to Mr Chisnall, it is not clear from the documentary evidence how many shares he originally purchased in the offer for subscription and placing. Mr Chisnall’s oral evidence was that he purchased the equivalent of 130,000 shares but nothing really turns on the exact figure. It is not disputed that he acquired shares in Readybuy through the offer for subscription and the placing, and that he gifted 100,000 of those shares on 9 December 2003.

The appellants all gifted the shares identified above to charity. Mr Close to the World Wide Fund for Nature, Mr Nuttall to the Prince’s Trust and Mr Chisnall to Bolton School.

Mr Close subscribed for the equivalent of 123,000 shares in the offer for subscription at a cost of £15,000 giving an acquisition cost of 12.2p per share. He then acquired 7,188 shares in the placing at a price of 48p per share and a cost of £3,450. The total cost of shares purchased by Mr Close was £18,450. Following his gift of shares on 8 September 2003 he retained the shares he had acquired in the placing. The enquiry into Mr Close’s self-assessment return for 2003-04 commenced on 19 December 2005 and a closure notice was issued on 11 October 2017.

Mr Nuttall subscribed for the equivalent of 328,000 shares in the offer for subscription at cost of £40,000 giving an acquisition cost of 12.2p per share. His offer to subscribe for shares was dated 30 July 2003. He then acquired 19,167 shares in the placing at a price of 48p per share and a cost of £9,200. The total cost of shares purchased by Mr Nuttall was £49,200. Following his gift of shares on 8 September 2003 he retained the shares he had acquired in the placing. The enquiry into Mr Nuttall’s self-assessment return for 2003-04 commenced on 15 June 2005 and a closure notice was issued on 28 September 2017.

Mr Chisnall acted at all material times through his broker, Brewin Dolphin. His self-assessment return was completed by Deloitte on his behalf and included a claim for gift relief using figures identified by Deloitte. As mentioned, the documentary evidence does not identify the precise sums paid by Mr Chisnall for his shares, but it seems likely that he subscribed on the same terms as Mr Close and Mr Nuttall. The enquiry into Mr Chisnall’s self-assessment return for 2003-04 commenced on 12 July 2005 and a closure notice was issued on 29 May 2018.

On 19 June 2018, HMRC sent a letter to Mr Chisnall apparently chasing payment of the tax due as a result of the closure notice. I note the time for appealing the closure notice had not expired. Despite this, HMRC’s letter threatened action including distraint to recover the tax said to be due. I can well imagine the outrage this caused Mr Chisnall, especially when the enquiry had taken so many years. However, the purpose of this Tribunal is to determine the appellants’ entitlement to relief on their gifts of shares. It is not my role to oversee the general conduct of HMRC. The only relevance of HMRC’s conduct is in relation to the abuse of process application made by Mr Nuttall and I have considered it in the context of that decision.

Prior to issuing the closure notices, HMRC obtained a valuation report from Mr Andrew Sofola (“the Sofola Report”) which was undated. A copy was provided to Mr Nuttall in February 2017. Mr Sofola was an associate of the Royal Institution of Chartered Surveyors employed in HMRC’s Shares and Assets Valuation department. He did not give evidence. I note that his conclusion was that the shares in Readybuy at each valuation date “cannot be more than 14.66p per share”. It was this valuation that HMRC relied upon when they issued closure notices to each appellant. The appellants make various criticisms of Mr Sofola. I have not taken the Sofola Report into account in reaching my conclusions on valuation and it is not necessary or appropriate for me to look any further at the criticisms made.

Readybuy was incorporated in England and Wales as a private limited company on 29 April 2003, under the name Readybuy Limited. On 18 June 2003, following various share reorganisations, it was re-registered as a public company, Readybuy plc. At this stage it had a small number of shareholders (“the Initial Subscribers”) who had paid nominal amounts for their shares, including associates of Zeus Partners (“Zeus”), a corporate finance house.

Readybuy published an “Offer for Subscription” on or about 20 June 2003 (“the Offer”). The Offer document stated as follows on the front page:

The directors of Readybuy at this time were Mr Ian Currie and Mr Norman Molyneux, both corporate finance specialists. Mr Currie was one of the partners of Zeus.

The Offer went on to set out detailed information about Readybuy and its plans. At the beginning of Part I it stated:

The Offer also stated:

The obligation was for shareholders subscribing to the Offer to invest a further amount on admission to AIM equal to 23% of their initial investment. It was not known at this point how many new shares this would equate to, or what price would be paid for those shares. It is not entirely clear whether this obligation was enforceable as such, but nothing really turns on that.

The Offer also set out the terms of a “Lock-in” which would apply in relation to shares acquired pursuant to the Offer. In summary, the Offer provided that subscribers for shares in Readybuy would not be permitted to transfer their shares during a period, which would last until the second anniversary of the share issue. The Lock-in was subject to certain exceptions, one of which was that Readybuy would consent to the transfer of restricted shares to a registered UK charity, provided that the charity itself agreed to be bound by the Lock-in.

The Offer was fully subscribed and on 4 August 2003 shares were allotted to 25 subscribers, including Mr Close and Mr Nuttall. As mentioned, the evidence was not clear as to how many shares Mr Chisnall was allotted pursuant to the Offer. There was then a further re-organisation of the shares in Readybuy, the effect of which was that Mr Close held 123,000 shares, Mr Nuttall held 328,000 and Mr Chisnall appears to have held 130,000 shares. The cost of subscription for those shares was just under 12.2p per share.

Readybuy issued a further 1,640,000 shares on 20 August 2003 by way of private placing. These shares were allotted to 11 individuals, not including the appellants, at a price of just under 12.2p per share, raising a further £200,000. These shares were also subject to the Lock-in. I shall describe these shareholders, together with shareholders who subscribed in the Offer as “the Subscribers”.

As at 25 August 2003, the average price per share paid by the Initial Subscribers and the Subscribers was 6.82p per share. This figure takes into account the fact that the Initial Subscribers paid a nominal sum of £750 for their shares equating to 0.012p per share.

Readybuy published a prospectus on 26 August 2003 as part of a placing of new shares and the admission of its shares to trading on AIM (“the “Prospectus”). At this stage the directors of Readybuy were Mr Molyneux and Mr Keith Salisbury. Mr Salisbury was a chartered accountant who worked in the corporate finance department of Brewin Dolphin.

In the introduction, the Prospectus stated as follows:

I describe the business of McDonald Yang Limited (“McDonald Yang”) in more detail below.

Immediately following admission to AIM it was intended that three further directors would be appointed:

Mr Malcolm McDonald was identified as senior management of Readybuy, more specifically the operations and technical manager. He had wide experience in the food sector, holding senior positions at Kellogg’s and Waterford Dairies. He had been responsible for the planning and design of the McDonald Yang factory, ensuring conformity with hygiene and good manufacturing practice regulations.

The Prospectus went on to outline why the directors of Readybuy considered that McDonald Yang represented an attractive acquisition. It described the history of McDonald Yang, the opportunity considered to be available to Readybuy, general market information, and Readybuy’s objectives as follows:

Under risk factors, the Prospectus included the following passage:

The Prospectus was accompanied by detailed financial information concerning McDonald Yang which I will summarise in due course. The Prospectus identified that Readybuy intended to apply for admission of its shares to trading on AIM, with trading to commence on 8 September 2003. The nominated adviser, or “Nomad” for the purpose of admission to AIM was WH Ireland Limited, stockbrokers.

The evidence included a working capital report and a draft “long form report” dated 12 August 2003 prepared by Readybuy’s accountants, Chadwick containing financial information which I refer to later.

Readybuy entered into a sale and purchase agreement (“the SPA”) on 26 August 2003. Readybuy acquired from third party vendors the entire issued share capital of McDonald Yang. The vendors were Mr Gerry Yeung and his brother, Mr Harry Yeung (“the Yeungs”). The consideration given by Readybuy to the vendors consisted entirely of 3,598,802 newly issued shares in Readybuy (“the Consideration Shares”). The Consideration Shares were to represent 20% of the share capital of Readybuy following admission to AIM. The value attributed to the Consideration shares in the SPA was £435,000 which was the figure identified in the Prospectus as the consideration being paid by Readybuy. On that basis, the Consideration Shares were treated by the parties to the acquisition of McDonald Yang as having a value of about 12.09p each. The Consideration Shares were subject to the Lock-in provisions.

The SPA was subject to the condition that the Consideration Shares were admitted to dealing on AIM before 6 October 2003. On completion, Gerry Yeung, Mr McDonald and Yang Sing Limited were to be repaid certain outstanding loans totalling approximately £100,000 and were to be released from personal guarantees to the bank.

Readybuy shares were admitted to dealing on AIM on 8 September 2003. At the same time, Readybuy issued a further 455,208 shares (the “Placing Shares”), which were allotted at 48p each to the Subscribers pursuant to the terms of the Offer. Readybuy raised £218,500 from the placing. 7,188 of the Placing Shares were allotted to Mr. Close and 19,167 were allotted to Mr. Nuttall. Again, the position in relation to Mr. Chisnall is not clear. The Placing Shares were not subject to the Lock-in.

It is important to note that none of the Subscribers chose to invest in the Placing Shares at 48p per share. They did so pursuant to the Offer. The price and the number of shares issued as Placing Shares was identified to reflect the obligation on Subscribers to invest a further 23% of the amount paid for their shares pursuant to the Offer. The more shares issued as Placing Shares the lower the price those shares would have been. Similarly, the more shares issued, the more diluted the holdings of the Initial Subscribers would become. The Yeungs were not affected because they had agreed the number of Consideration Shares and the percentage they would represent of the enlarged share capital.

Mr Strickland’s evidence shows that on the day of flotation, the shareholders in Readybuy and the cash amounts paid to Readybuy or in the case the Yeungs, the value attributed their shares, for the allotment of shares were as follows:

One of the shareholders was identified in the Prospectus as Mr Alwin Thompson. He was the Chairman of Inter Link Foods plc and a well-known businessman. He held 620,052 shares at the date of flotation, but the circumstances in which he obtained those shares was not in evidence. The Prospectus states that he had a consultancy agreement with Readybuy dated 26 August 2003 for a period of two years at a fee of £10,000.

Whilst it was not explored during the evidence, it appears from the documentary evidence that the shares subject to the Lock-in were the shares owned by the Yeungs, the shares owned by the Subscribers, excluding the Placing Shares, and 195,005 shares held by Mr Salisbury. It appears therefore that some 6,410,203 shares, including the Placing Shares, were not subject to the Lock-in.

On 8 September 2003, Readybuy issued a press release announcing the admission of its shares to dealing on AIM. The press release briefly referred to the company’s business and stated that “trial listings” of its products had been secured with two major supermarkets.

There were a number of transactions in Readybuy’s shares on AIM between 8 September 2003 and 21 October 2004. Transactions occurred on 38 days in that period and the shares were traded at prices between 40p and 56p per share. In total, 2.26% of Readybuy’s ordinary shares were traded on AIM during this period.

The Prospectus showed that McDonald Yang had been loss-making in the three years prior to the sale to Readybuy. As at 1 May 2000 it had losses brought forward of £302,204. Its financial results for the following three years may be summarised as follows:

The decrease in net liabilities in 2003 was principally a result of the Yeungs converting loans of approximately £400,000 to equity. The Prospectus also included a pro forma consolidated balance sheet of Readybuy after the intended acquisition of McDonald Yang prepared by Chadwick. It showed the following assets and liabilities as if the acquisition and placing had taken place on 20 June 2003:

A note to the pro forma balance sheet in relation to the valuation of goodwill on the acquisition of McDonald Yang describes the “fair value” of the consideration given to the Yeungs as £280,000. It is not clear how this sum was identified or why it differed from the figure of £435,000 identified in the SPA. A value of £280,000 for a 20% holding in Readybuy equates to 7.8p per share whilst a value of £435,000 equates to 12.1p per share.

The Prospectus noted that two members of the management team, Mr Bennett and Mr McDonald had been granted share options pursuant to a share option scheme as set out in the table below. The options were exercisable between 8 September 2006 and 8 September 2013.

I note also that paragraph 12.1(f) Part VI of the Prospectus refers to share options being granted to Mark Anthony Shields to subscribe for 179,940 shares at 12.2p. It is not clear what connection Mr Shields had to Readybuy, or if this is simply an error in the Prospectus

By way of background, Mr Nuttall is a practising barrister. His evidence was that he invested in Readybuy because he believed that the Yang Sing brand was a strong one, that the business model had great potential and that it was unlikely to fail. In 2003 the Yang Sing was famous for its high-quality food and was regarded by many as one of the finest Chinese restaurants in the North of England. Mr Nuttall shared that view. However, later in his evidence he accepted that at the time he committed to purchase shares in the Offer he may not have known that McDonald Yang was the target business.

The evidence included a letter to Mr Nuttall from Berkley Morgan, independent financial advisers. It was undated, but all parties accepted that it pre-dated the Offer. The letter referred to Readybuy, enclosed a prospectus and identified a closing date of 21 July 2003, but stated that this had been extended because of a small shortfall in the funding. It went on to state:

The letter went on to illustrate a potential investment Mr Nuttall might make, but those details are not relevant to the issue of valuation I must determine. As stated above, Mr Nuttall’s offer to subscribe for shares was dated 30 July 2003. It seems unlikely that Mr Nuttall knew at this stage that the intended target was McDonald Yang Limited because this was not mentioned in the Offer or in the letter from Berkley Morgan.

Mr Nuttall said that he had no reason to doubt that the price at which he purchased the Placing Shares and the price the shares traded at on AIM was a fair price which represented the true value of the shares. He claimed relief for the shares he gifted on 8 September 2003 at a value of 53.25p per share.

Mr Chisnall is a successful businessman. In 1981, together with Mr Neil McArthur he set up an engineering business providing services to the nuclear industry. The company prospered and gave rise to several other businesses before it was sold to an AIM listed company. It is now part of Babcock International.

In 1997, Mr Chisnall and Mr McArthur set up a telecommunications business called Opal Telecommunications which became very successful. In 2000 it was due to be floated with a market capitalisation of £250m but market conditions led to a postponement of the flotation. In 2002 it merged with Carphone Warehouse and formed Talk Talk. Talk Talk subsequently demerged from Carphone Warehouse and until recently it was a FTSE 250 company.

As well as being a successful businessman, Mr Chisnall is also an experienced investor. He has a wide-ranging, balanced investment portfolio, which is managed on a discretionary basis by Mr Peter Martin of Brewin Dolphin, stockbrokers. It was Brewin Dolphin who decided to invest in Readybuy on behalf of Mr Chisnall. Mr Chisnall was not aware of the investment at the time. They had previously invested in a number of similar private companies which were launched as “cash shells” before acquiring a business with growth prospects and floating on AIM or other stock markets. Some of those investments were successful, others were not. Mr Chisnall was not surprised that there was a four-fold increase in the value of the Readybuy shares on flotation compared with the amount he had paid when subscribing for shares. The decision to purchase shares and which shares should be gifted was made by his advisers.

Mr Chisnall gave evidence as to his opinion of HMRC’s approach to share valuations in relation to similar cash shell investments, and in relation to Readybuy in particular. He was very critical of their enquiry and their approach to share valuation. Mr Chisnall is not an expert witness, and as such his evidence of opinion is not relevant or admissible in these proceedings. It is therefore not appropriate for me to rehearse those aspects of his evidence in this decision. However, Mr Chisnall was keen to make the point, which I have no reason to doubt, that he did not invest in Readybuy as part of a tax avoidance scheme.

Mr McArthur gave evidence which was in many respects identical to that of Mr Chisnall. That is not surprising because they were in business together and have adopted similar investment strategies. Mr McArthur also used Brewin Dolphin to manage his investment portfolio on a discretionary basis and that firm subscribed for shares in Readybuy in the Offer on behalf of Mr McArthur. Like Mr Chisnall, he was not surprised that there was a four-fold increase in the value of the Readybuy shares on flotation compared with the amount he had paid when subscribing for shares in the Offer.

Mr McArthur also criticised the time taken by HMRC to conduct their enquiry. For example, he drew my attention to an email chain between HMRC officers from which he said it was apparent that HMRC operated a policy during the enquiry of valuing shares in cash shells which had been gifted at the acquisition price paid by subscribers. Whether or not that is right I do not know. I do not consider it to be relevant to the issue of valuation that I must determine, regardless of how HMRC conducted their enquiry. Mr McArthur criticised HMRC’s approach to share valuation generally. Again, Mr McArthur is not an expert witness and as such his evidence of opinion for example as to the increase in value attributable to a public listing of shares, is not relevant or admissible in these proceedings. Mr McArthur was also keen to make the point, which I have no reason to doubt, that he did not invest in Readybuy as part of a tax avoidance scheme.

Mr McArthur has gifted shares in many companies, including shares acquired by way of subscription to cash shells, to the Hamilton Davies Trust. That is a charitable trust which he set up in 2004 to support youth, educational, sport and community projects in the areas of Irlam, Cadishead and Rixton with Glazebrook. Mr McArthur’s donations to that charitable trust exceed £10m.

Following the introduction of tax relief for gifts of shares to charity in 2000, HMRC became concerned that tax avoidance schemes were being set up with a view to exploiting the relief. I was referred to a written ministerial statement by the First Secretary to the Treasury dated 15 December 2009. The statement noted the existence of such schemes and whilst not accepting that the schemes were effective, stated that legislation would be introduced in Finance Bill 2010 to remove any doubt. Mr Cocker on behalf of Mr Chisnall drew my attention to the following passage in the statement:

It is also the case that certain professional advisers, not connected with this appeal, have been convicted of cheating the revenue in relation to schemes set up to exploit the relief.

In his skeleton argument, Mr Waldegrave stated HMRC’s position as follows:

At one stage in the cross-examination of Mr Nuttall it appeared as though HMRC were seeking to allege that Mr Nuttall’s investment involved a tax avoidance motive. However, Mr Waldegrave confirmed that HMRC’s position was as stated in his skeleton argument and no such allegation was relied upon.

I therefore proceed on the basis that whether or not any of the appellants had a tax avoidance motive in subscribing for shares in Readybuy is irrelevant to the question of valuation. It is therefore unnecessary for me to make any findings of fact in that regard

The appellants did not rely on any expert evidence on valuation of the shares. They did however challenge the evidence of Mr Strickland. In this section I shall summarise Mr Strickland’s evidence.

Mr Strickland is a chartered accountant and business valuer. He is a consultant to a firm called Scrutton Bland and a member of the valuation committee of the Institute of Chartered Accountants of England and Wales. He is a member of the board of the International Institute of Business Valuers. In his professional capacity he has given presentations to HMRC employees on business and share valuations. I am satisfied that Mr Strickland is well qualified to give expert evidence as to the value of shares in Readybuy. It was suggested by Mr Chisnall in his closing submissions that Mr Strickland was influenced by HMRC’s desire to achieve the lowest possible price. That is an allegation of actual or sub-conscious bias and is without foundation. It is a serious allegation which should not have been made.

Mr Strickland’s opinion was that the value of the shares on both valuation dates was 8.05p per share. His reasoning identified three recognised approaches to the valuation of a business, which he described as the cost approach, the income approach and the market approach. Under the cost approach, the value equates to the aggregate net value of all the assets. The principal method under the income approach is to use discounted cashflow techniques. The principal method under the market approach is to use valuation metrics of listed companies or corporate transactions. Those metrics might include for example the price earnings ratios of listed shares. Mr Strickland considered valuations using each of these approaches.

The principle behind the cost approach is stated in International Valuation Standards 2020 as follows:

Mr Strickland considered that the best approach to valuation of Readybuy shares at the valuation dates was the cost approach. He considered that it was based on reliable assumptions and the strongest evidence. In his view, the value of Readybuy immediately prior to the acquisition of McDonald Yang was the amount of funds it had raised, taking into account the cost of raising those funds. The best indicator of the value of McDonald Yang at the date of flotation was the consideration received by the Yeungs on sale of the company to Readybuy.

In relation to the acquisition of McDonald Yang, Mr Strickland considered that there was no evidence that the transaction was not at arm’s length. He noted that the pro forma consolidated balance sheet showed net assets of £1,177,000 which equated to a net asset value of 6.54p per share.

However, Mr Strickland considered that transaction costs should be added back to the value of those net assets. He based that opinion on market evidence and academic research which supported a view that launch costs do not initially depress share values. When the transaction costs of £272,750 are added back, the net assets of Readybuy following flotation were £1,449,750 equating to a net asset value of 8.05p.

This latter figure was Mr Strickland’s opinion as to the market value of the shares on 8 September 2003. In forming that opinion, he took into account the following matters:

Mr Strickland considered that there was no further information available to purchasers relating to the financial performance of Readybuy in the period from 8 September 2003 to 9 December 2003. In the circumstances, he considered that a prudent purchaser would adopt the same valuation of 8.05p per share at the later date.

In order to value the shares using an income approach, Mr Strickland considered that the prudent purchaser would require reliable data for future profits or cashflows. One source of such data for Readybuy was a working capital report prepared for the company by Chadwick (“the Working Capital Report”). A second draft of the Working Capital Report dated 13 August 2003 was included in the evidence. It included projections of profits and losses, cash flows and balance sheets for the three years to 31 July 2006. There was also the second draft of a “long form” report prepared by Chadwick which contained information about the business and its prospects.

Based on information in the Working Capital Report, Mr Strickland calculated that the value of the business would be £752,000 equating to a share value of 4.18p. However, he considered that the Working Capital Report would not be information available to the prudent purchaser. I am satisfied that Mr Strickland was right to take that view and the appellants did not suggest such information would be available. The shares gifted by the appellants represented between 0.6% and 1.8% of the issued share capital of Readybuy. As such, the prudent purchaser would not expect to have anything more than published information. In the circumstances, I do not propose to examine Mr Strickland’s calculations any further. Nor do I take into account the indicative share value of 4.18p. It is based on information which would not be available to the prudent purchaser.

Mr Strickland considered that it was not possible to apply a market approach based on the price earnings ratios of similar listed companies because Readybuy had no real earnings in the periods prior to the valuation dates. Further, he considered that alternative valuation metrics based on other corporate transactions would be very unreliable. There were, however, transactions in the shares of Readybuy following its flotation on AIM. The evidence in relation to those transactions may be summarised as follows:

The shares traded in this period amounted to 2.14% of the total share capital of Readybuy. Mr Strickland did not regard that as a liquid market.

Mr Strickland noted that the indicative market capitalisation of Readybuy at a share price of 54.45p was £9.8m. Readybuy’s only real assets in the pro forma balance sheet were its cash of £1.1m and its investment in McDonald Yang, which the Yeungs had valued in the SPA at £435,000. Mr Strickland could not understand how the business might be considered to have increased in value to such an extent following the flotation. As a valuer, he would want further information including details of the transactions summarised above to see whether they were bargains at arm’s length between unconnected parties. He specifically identified:

Information as to projected results for the year ended 31 July 2007 would not be available to the prudent purchaser. At one stage in cross-examination Mr Strickland said that because he was giving evidence so long after the valuation dates, he did not know what evidence might have been in the public domain at the valuation dates. He accepted that the promoters on a flotation would want publicity about the offer and would take active steps to promote the offer. He suggested there might have been press releases, brokers’ briefings and investor roadshows. It made sense to Mr Strickland that the promoters would keep files of such briefings and press comments and he accepted such information would be available to the prudent purchaser. However, he was not sure how the provision of such information would interact with AIM rules and the release of confidential information. Later in his evidence he corrected himself and said that the Prospectus would have contained all the relevant publicly available information. There would not be any additional facts about the business beyond what was in the Prospectus because of the risk of market abuse. In the absence of any contrary expert evidence I accept Mr Strickland’s later evidence.

At the time of his report Mr Strickland only had monthly summaries of the market transactions, similar to the information I have tabulated above. Details of the individual market transactions would not be available to the prudent purchaser directly, but Mr Strickland accepted that some information as to the identity of the parties might be available from the share register. The Sofola Report included the dates, prices and share volumes of transactions on various dates between 8 September 2003 and 4 October 2004. Mr Strickland did not know where Mr Sofola would have obtained this information. He had been told by HMRC that the information was not available, but he accepted that perhaps he ought to have made his own further enquiries. It has not been suggested that any more detailed information as to the market transactions would have been available to the prudent purchaser at the valuation dates beyond the summary in the table above. I am not satisfied on the evidence before me that anything more would have been available.

Mr Strickland’s evidence was that ordinarily, market transactions would be a very significant factor in valuation to which he would give significant weight. He did not attach weight to the transactions in Readybuy shares because he considered the indicative price could not be reconciled to the publicly available information in the Prospectus. He also regarded the number of shares traded as indicating a very thin market, in other words a market that was not very liquid, and therefore not reliable as a basis of valuation.

When Mr Strickland referred to witness evidence as to the motivation of share purchasers in September 2003 he was referring to purchasers following admission to AIM, and not the Subscribers. The prudent purchaser would not have access to such information.

Mr Strickland noted a decline in the number of market transactions between September 2003 and December 2003 which he also considered was an indicator of an illiquid market. Overall, he did not consider the information as to market transactions sufficiently reliable to affect his calculation of valuation based on a cost approach.

Mr Strickland went on to consider a number of factors which could be relevant to valuation. I have already dealt with Mr Strickland’s view of transaction costs. The remaining potentially relevant factors, including those put to Mr Strickland in cross-examination were:

Mr Strickland did not consider that the existence of the options would have a material depressive impact on the value of the shares. Nor did he consider that the options gave any indication as to the value of the shares at the valuation dates. Indeed, he considered there was a mis-match between the 12.2p at which the option could be exercised and the 48p paid for the Placing Shares. It did not provide any incentive to Mr Bennett or Mr McDonald to add value, if the value was already there. Having said that, he agreed that the share options might operate as a form of golden handcuff, giving an incentive to Mr Bennett and Mr McDonald to remain with the business for at least 3 years.

Clearly the Subscribers risked not getting their money back. It was put to Mr Strickland that the Subscribers would attach a premium to the quality of the people sponsoring the Offer, namely Zeus and WH Ireland. Once McDonald Yang had been identified as the target, potential purchasers of shares in Readybuy would also attach significance to the fact that it was a business supported by the Yeungs and other experienced individuals and that the Yang Sing was a very strong brand. Mr Strickland accepted that was the case. But also noted the production difficulties that McDonald Yang had encountered and which were explained in the Prospectus.

It was put to Mr Strickland that McDonald Yang had a strong brand and a concept which it had substantially developed, however it lacked capital and experience in the market. The flotation gave them that capital at a time when it was difficult to raise finance and also put experienced professionals in senior roles in the business. Mr Strickland did not take issue with that analysis. He also accepted that WH Ireland were the Nomad but he could not comment on the role of the Nomad. He acknowledged that the AIM rules required a Nomad and that the Nomad had a regulatory role but he was not sure what responsibility the Nomad had for the price at which shares were listed. He thought that was more a matter for the market-maker. He had not seen any documents indicating how the price of the Placing Shares had been identified.

Mr Strickland did say that the knowledge and experience of the management team would normally be reflected in their remuneration and so would not be expected to add value as such. However, he accepted that their identity might influence potential purchasers. The Prospectus shows that following flotation, Mr Bennett was entitled to a salary of £65,000pa plus certain benefits. Mr Davies, Mr Gerry Yeung and Mr Salisbury were each entitled to directors’ fees of 10,000pa. In valuation terms, Mr Strickland considered that their contributions would be treated as reflected in their remuneration.

Mr Strickland’s evidence was that what might happen in the future, so called “hope value”, would not affect the value of a business unless reflected in future cashflow forecasts which can be discounted to give a present value. No such information was available to the prospective purchaser in the case of Readybuy.

Mr Strickland was aware that by March 2003 there was a sense of optimism in markets and the bottom of a stock market fall following the “dot com boom” had been called. He did not take into account any background to the company or the market for chilled foods other than what was contained in the Prospectus. In particular, he did not factor into his valuation the novel nature of the product and the market place for the product.

It was put to Mr Strickland that the existing business together with the strong brand, access to capital and a new management team was “greater than the sum of its parts”. Mr Strickland did not accept that analysis. He maintained that the Yeungs were in the best position to know the value of the business and there was no evidence to suggest that they sold below market value.

Mr Strickland did not consider that admission to AIM would in itself result in any increase in the value of the shares. He acknowledged that on a flotation, where there is a liquid market, one would expect to see an increase in value over the flotation price because the promoters would want to price the shares to achieve a modest premium following the flotation.

Overall, Mr Strickland’s opinion was that the market value of small holdings in the shares of Readybuy at both valuation dates was 8.05p. He was unable to reconcile those valuations based on the cost approach to the market transactions in shares between September 2003 and December 2003. In the circumstances, he considered that the prudent purchaser of shares would adopt the cost approach without any adjustment.

In valuing most assets, courts and tribunals rely on expert evidence. In relation to company shares, the statutory regime in sections 272 and 273 TCGA 1992 distinguishes different types of shares. Shares which are quoted on The Stock Exchange Daily Official List are valued at the price quoted in that list. In that case expert evidence would not be required, unless as a result of special circumstances the price quoted is not a proper measure of market value. The shares of Readybuy were not quoted on the Official List, and therefore it is necessary to have regard to expert evidence. The appellants have not adduced their own expert evidence but they do challenge the expert evidence of Mr Strickland. I shall consider those challenges by reference to the following headings:

It was suggested that Mr Strickland had failed to take into account an increase in the value of shares in a private company when those shares are listed on a stock exchange such as AIM.

Mr Strickland’s starting point and indeed his finishing point was a valuation of Readybuy shares based on a cost approach. He did not accept that when a private company becomes listed on a stock exchange, its shares will necessarily increase significantly in value. He distinguished the value of the business as a whole, and the value of minority holdings. The value of the business would be determined by future cashflows, which would be the same whether the shares were listed or not. However, the value of a minority interest in an unlisted company may be subject to a discount for lack of marketability. On listing, if the shares were fully liquid then the value of that interest would be closer to the pro rata value of the shares based on the value of the business. Mr Strickland is well-qualified to give that evidence and I accept it.

Mr Strickland valued the Readybuy shares pro rata to the value of the business as a whole. He did not include any discount for lack of marketability. In my judgment, therefore, the issue raised by the appellants does not undermine Mr Strickland’s evidence on valuation.

Mr Strickland acknowledged that the valuation of shares in the context of a public offering or admission to listing was generally a matter for merchant bankers rather than accountants. However, he said he would be surprised if an accountant’s valuation was not “on the same page” as the merchant banker. He gave that evidence in light of his previous experience valuing a large transport company which was to be the subject of either a trade sale or a stock market listing and I accept his evidence. There is no evidential basis for me to find that in the context in which Readybuy shares come to be valued, namely a flotation on AIM, the three approaches to valuation described by Mr Strickland do not apply or ought to be modified in some way.

Clearly, if a business has strong growth prospects then that will be reflected in the market value of its shares. It is the appellants’ case that Readybuy did have strong growth prospects, derived from its strong brand, the availability of capital, the introduction of a new, experienced and respected management team and the involvement of respected corporate finance professionals with a good track record in similar flotations. Whilst McDonald Yang had no track record in terms of profits, these factors meant that Readybuy had good prospects to establish and grow the business.

It was specifically put to Mr Strickland that he failed to recognise any value attributable to these factors. Mr Strickland justified this by saying “we don’t know whether they can work their magic”. In relation to the introduction of new management, Mr Strickland’s evidence was that the value added by new management would be recognised by their remuneration. It seems to me that Mr Webster fairly pointed out that shareholders would not allow the executives to take all of the added value by way of remuneration. Mr Strickland’s position may be standard valuation practice, but if so he did not explain it as such.

In relation to the availability of capital, Mr Strickland did not accept that there were any benefits of synergy when a good business which was short of cash was provided with cash. He did accept that a business with sufficient capital had more options than a business without sufficient capital which should reflect in a greater value. However, he pointed out that there was no evidence that McDonald Yang was otherwise unable to obtain capital. Having said that, the prudent purchaser would know nothing about what capital might otherwise be available to McDonald Yang.

Mr Webster submitted that Mr Strickland had provided no justification for not taking into account the future prospects of Readybuy. He said that if Mr Strickland was right, then no investor would ever take a reasonable risk or ascribe value to the prospect of good management and cash developing a business. The appellants sought to portray this as the difference in approach between an accountant’s view and an investor’s view. The latter taking into account “market sentiment” Mr Strickland did not accept that analysis. His evidence was that he would expect “market sentiment” to “match reality”. The difficulty with Readybuy was that the business had no track record and no sales. As the Prospectus made clear, future success would depend on the directors’ ability to implement their objectives and strategy. However, there were no forecasts available to the prudent purchaser by reference to which he could value the future prospects.

In similar vein, Mr Webster criticised Mr Strickland’s valuation based on a cost approach because it ignored the views and existence of experienced investors such as Mr Chisnall and Mr McArthur who, through Brewin Dolphin, subscribed for shares expecting to see a four-fold increase in value on flotation. However, it would be wrong for me to treat Mr Chisnall and Mr Webster as some sort of proxy for what a prudent purchaser would pay for the Readybuy shares. It is the expert evidence which is a proxy for the reasonably prudent purchaser.

Taking all these submissions into account, even if I accept that Readybuy did have good prospects of establishing and growing the business, the question is how that should be reflected in the market value of the business and Readybuy’s shares.

Mr Strickland’s three approaches to valuation did not expressly take the factors relied on by the appellants into account, including what Mr Webster as “market sentiment”. The obvious way in which those factors could be taken into account is if the publicly available information included cashflow and profit forecasts for the business. That would have enabled Mr Strickland to use the income approach to valuation. Whilst Mr Strickland did carry out an income based valuation, he did so using the Working Capital Report which would not have been available to the prudent purchasers at the valuation dates. For that reason, I have not taken it into account. The prudent purchaser could not therefore make any reliable assessment as to the future prospects of the business based on the available financial information.

In my judgment, it is not the case that Mr Strickland’s evidence fails to take into account the future prospects of Readybuy or market sentiment. Rather, no financial information would be available to the reasonably prudent purchaser by reference to which those factors can be taken into account. Certainly not in any quantitative analysis, and in my judgment it is necessary to adopt a quantitative analysis.

Mr Webster recognised in his submissions the difficulties in attributing value to the availability of capital and the involvement of the new management team. He submitted that in those circumstances, the safest course would be to take the market transactions as offering the best indicator of market value.

Mr Strickland was unable to reconcile his views on valuation with the market transactions which occurred in the period 8 September 2003 to 31 December 2003. He had no knowledge as to whether those transactions were at arm’s length. He did not accept that he had simply failed to understand the views of investors in Readybuy. In his opinion, “hope value” could not explain the difference between his cost-based valuation of 8.4p per share and the values obtained from market trades in the region of 54p per share. He accepted that there was no evidence to suggest that the market transactions were anything other than arm’s length transactions.

The existence of these transactions would not have been known to the prudent purchaser on 8 September 2003. They would have been known to the prudent purchaser on 9 December 2003. However, they might be taken into account as contemporary comparable transactions reflecting the market for Readybuy shares at both valuation dates. Mr Strickland did not suggest that they could not be taken into account. His point was that they were so far away from his valuation based on the cost approach that they must be discounted.

The appellants suggested that whilst the number of shares traded in Readybuy was relatively small, there was a “functioning market” and there were sufficient transactions to give a fair indication of how investors saw the shares. There is no evidence that these were anything other than arm’s length transactions. The market transactions were relied upon as evidence of what the shares would fetch on the open market.

Mr Waldegrave submitted that I should not assume that the market transactions were at arm’s length simply because there is no evidence to the contrary. I should not make any assumptions as to whether or not they were at arm’s length. I accept that submission. There was no evidence before me as to the way in which the AIM market operated, in particular the involvement of market makers and how potential buyers are matched with potential sellers. This was not within Mr Strickland’s expertise.

In relation to the valuation on 8 September 2003, if the market transactions are treated as comparable transactions, they may be said to be an indicator of the demand for Readybuy shares in the market at or about that time. However, Mr Strickland’s evidence was that they were not a reliable indicator because they reflected transactions in an illiquid market, amounting to 2.14% of the total share capital. Taking into account that only 6,410,203 shares could be freely traded during this period, the transactions amounted to 6% of those shares. This was not explored in evidence or submissions and I am left with Mr Strickland’s evidence that the market transactions are not a reliable indicator. In the absence of any contrary expert evidence I must accept Mr Strickland’s conclusion in this regard.

In relation to the valuation on 9 December 2003, in my judgment the prudent purchaser would see the disconnect between the cost approach to valuation and the price at which the market transactions were taking place. However, he would not know why there was a disconnect. He would not be able to satisfy himself that the market transactions were a reliable indicator of value and his only other way of valuing would be the cost approach. Mr Strickland is an expert valuer. His evidence was that in the circumstances it is not appropriate to take into account the market transactions. Effectively, all the prudent purchaser can do in those circumstances is recognise the disconnect but base his decision on price by reference to his quantitative valuation analysis based on publicly available information. The prudent purchaser would not give any uplift for the existence of the market transactions. There is no evidential basis on which I can say that Mr Strickland is wrong to take that approach. In the circumstances, I can give no weight to the existence of the market transactions as at 9 December 2003.

Mr Webster criticised Mr Strickland for failing to have regard to the witness evidence of the appellants and Mr McArthur, despite saying in his report that such evidence would be relevant to explain the discrepancy between his cost approach and the market transactions. I do not accept that criticism. I have already said that in seeking to explain the discrepancy, it was not witness statements from the appellants and Mr McArthur that Mr Strickland regarded as relevant, but from the purchasers who were a party to the market transactions. Such evidence was not available and would not be available to the prudent purchaser.

Mr Strickland did have access to the witness statements served by the appellants and Mr McArthur. Whilst he considered that they contained interesting background material, he did not consider they were relevant to his conclusions. For example, he did not consider that their explanations of why they invested in Readybuy were relevant to his valuation exercise. At one stage in cross-examination, Mr Webster suggested that the appellants were reasonably prudent investors and as such provided evidence of what a reasonably prudent investor would pay for the shares. I do not accept that inference can legitimately be drawn. Expert evidence is a proxy for the prudent purchaser. Non-expert evidence from an actual purchaser cannot be taken as a proxy for what the prudent purchaser would pay for the shares.

It is convenient to deal with further criticisms of Mr Strickland’s evidence under this general heading. The following criticisms were put to Mr Strickland and relied upon by the appellants in submitting that I should not accept Mr Strickland’s valuation.

Mr Webster submitted that given these defects in Mr Strickland’s approach, the only reliable measure was the market transactions in circumstances where there is no reason to think they were not at arm’s length.

I do not accept that the appellants have established any defects in Mr Strickland’s approach. In particular:

It remains the case that there is a disconnect between the price attributable to the Consideration Shares in the SPA and the value of the business by reference to the market transactions following flotation. The market transactions suggest a value of the business including the cash raised of £9m, and therefore a value of the business itself of £8m. Yet the Yeungs sold the business for at most some £435,000. The prudent purchaser is left without any explanation for that disconnect. Mr Strickland’s evidence was that in those circumstances the prudent purchaser resorts to a valuation based on the cost approach. I accept that evidence.

For the reasons given above, I accept Mr Strickland’s expert evidence on valuation, subject to one point.

The cost approach indicates a value of Readybuy’s assets following flotation of £1,449,750 which equates to a value of 8.05p per share. It is not clear from Mr Strickland’s evidence how Chadwick would have arrived at a “fair value” of the Yeungs’ shares in McDonald Yang of £280,000. That was the value he adopted for the value of McDonald Yang in his cost approach. Mr Strickland’s evidence did not explain how a fair value might relate to a market value for present purposes. Mr Strickland expressly took the fair value into account, as well as the value attributable to the Consideration Shares in the SPA which was £435,000 and equates to 12.1p per share. He also took into account the price paid by the Initial Subscribers and the Subscribers. However, he appears to have discounted all this evidence in favour of the fair value identified by Chadwick. The evidence leaves me without any explanation as to why these other indicators were discounted.

In those circumstances, I must do the best I can with the evidence before me. I do consider that Mr Strickland gave insufficient weight to the fact that the figure of £435,000 was negotiated at arm’s length, and that it gave a share price very similar to the amount of 12.2p per share paid by the Subscribers in the Offer. There was also value to the Yeungs in that loans were repaid and they were released from personal guarantees.

The 12.2p per share paid by the Subscribers would not in itself be a good indicator of value because it was paid when the Subscribers had no knowledge of the target business. However, I find that the prudent purchaser would consider that the value attributed to the Consideration Shares by the Yeungs together with the price paid by the Subscribers in the Offer would together be a good indicator of the value of the shares on 8 September 2003.

Taking into account all the evidence and submissions, in my judgment the highest price a reasonably prudent purchaser would have paid for the shares in Readybuy on 8 September 2003 would have been 12.1p per share. The only additional information available to the prudent purchaser on 9 December 2003 was the fact there had been some transactions on AIM which I have summarised above. The prudent purchaser would have realised there was a disconnect between the prices paid in those transactions and the price of 12.1p indicated by the other information available. In circumstances where there was no explanation for that disconnect, the prudent purchaser would not increase the amount he would pay for the shares. The price paid for the shares on 9 December 2003 would therefore remain 12.1p per share.

Neither party suggested that the option exercise price of 12.2p per share would affect the price payable by the prudent purchaser, and I have not taken it into account.

The closure notices for each appellant gave rise to assessments calculated on the basis of a share price of 14.66p per share. I am satisfied that those assessments should be increased to reflect a market value of 12.1p per share.

In the circumstances, I dismiss the appeals and direct that the assessment on each appellant shall be increased accordingly.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.