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Tax Doctor:
David Teale
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August 2004
Q:
My company recently issued a few shares at par to an employee. As the shares only represent about 2% of the company's share capital, my accountant took the view, taking into account the discounts appropriate for minority shareholdings, that the shares had little value and a benefit in kind charge on the employee could only be minimal.
Inland Revenue Shares Valuation, however, say the shares must be valued on an "investment basis" by discounting a comparable quoted PE ratio. This produces a much higher valuation and potential tax liability. Are the Inland Revenue correct?
A:
Unfortunately there is case law justification for Share Valuation's approach. However, there are a number of problematic features with regard to this method:
- There is the familiar difficulty of finding a truly comparable quoted company or sector.
- Even if a comparable company can be found, the size of the discount against the quoted PE ratio to take into account the difference between the two companies, e.g. size, growth, prospects, non-payment of dividends, lack of marketability, restrictions on transfer and so on, is hard to determine.
- The general effect of this method is to considerably increase the potential value of a small minority shareholding as against the value that will be produced using a whole company valuation suitably discounted. So if you try to relate the value obtained by this "investment value" approach to the value of the company as a whole, you usually can't as it would produce a full company value which far exceeds what the company could ever possibly be worth. Shares Valuation will counter this by pointing out that they are not seeking the value of the whole company but only the investment value of a specific small shareholding and to that extent the whole company value is irrelevant. This argument, however, is not entirely convincing.
You should go on the offensive and attempt to attack the Inland Revenue's arguments on the basis that the quoted company or sector in question is not truly comparable and that an unrealistic whole company value is being produced. However, some compromise is inevitable and accountants (such as yours) need to take into account when advising clients of the possibility of this approach being taken by Shares Valuation and thus give clients a range of forecasted potential value for the shareholding in question.
About the author
David Teale is a senior tax partner with DTE Business Advisory Services Limited. He was formerly an Inspector of Taxes and from 1984 to 1994 was visiting lecturer in Taxation at University College Salford. He is currently Chairman of the UK 200 Group Tax Panel. DTE Taxation Services, a division of DTE Business Advisory Services Limited, provides a wide range of tax planning and compliance advice to small to medium sized family and owner managed businesses, high net worth individuals and fellow professionals. They run an ongoing seminar programme to provide continuing professional development in taxation for professional colleagues and have published a number of practical tax guides specifically intended to help small to medium sized professional practices. In addition to the normal range of tax planning advice described above, David Teale has particular specialisms in unquoted share valuations for tax purposes and tax advocacy at the General Commissioners.
Contact: Tel: 0161 767 1200; Fax: 0161 767 1290; dteale@dtegroup.com; www.dtegroup.com; DTE Group, DTE House,
Hollins Mount,
Bury,
Greater Manchester,
BL9 8AT
David Teale
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