Valuing shares: complexities and consequences

Posted by RM2 at 14:24 on 25 Jan 2018


A recent case in the tax tribunals demonstrates that valuation of company shares, even when AIM listed, can be complex and carry unforeseen consequences (Jonathan Netley v HMRC [2017] UKFTT 0442 (TC)).

A shareholder in an AIM listed company claimed tax relief on a gift of his shares to charity in July 2004. He argued that the shares had a value of 48p, evidenced by the price at which the shares were traded on AIM. The amount of tax relief generated by the gift was more than he had invested when he subscribed for shares only a month early.

HMRC argued that the shares were only 6.6p, reducing the tax relief significantly. In particular, the AIM price was not a true measure of the shares’ value - the proper valuation was the price which the hypothetical prudent purchaser would pay in the open market.

Evidently the difference in values was significant and when it came to a decision as to the “proper” value, the judge noted that this was “not of course a binary choice … I may find … the value of the shares is anywhere within that range, or indeed outside that range”. Ultimately, it was concluded that the value of the shares in July 2004 was 17.5p.

Perhaps the most important point in the judgment is the comment that “share valuation is in many respects an art not a science and in some cases has been described as ‘intelligent guesswork’”.

This is of course of direct relevance to the valuation of private company shares in the context of employee share plans. Private companies in this position are strongly recommended to seek an agreement with HMRC as to the value of their shares if they can do so – currently this can be done if companies are making tax-advantaged share or option awards (for example, under a Share Incentive Plan or Enterprise Management Incentive arrangement).

The advantage of seeking such an agreement does provides the company and participants with some degree of assurance as to tax outcomes. Another key advantage is that, should the company be sold in the future, the acquirer’s solicitors will request such agreements as part of the due diligence process. At the very least, companies should have a detailed and contemporaneous record of how they reached conclusions as to the market value of any employee equity awards, but a formal agreement with HMRC is far preferable and is likely to make that part of the due diligence exercise considerably smoother for all parties.

Note that any such agreement cannot be relied upon for other types of award or share transaction. Furthermore, such HMRC agreements have a relatively short shelf life (usually 60 days for EMI options, or six months for SIP awards). If possible, it is always sensible to agree a valuation with HMRC for future share or option awards.

RM2 regularly carries out valuation exercises for private companies in the context of employee share and option schemes. If you would like more information, contact us on 0208 949 5522.