Valuing shares: complexities and consequences
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.