A special commissioner decided that the disposal of shares allotted to the managing director of a company as employment-related securities fell within the clear words of ITEPA 2003, s. 446Y and was taxable thereunder.

Facts

As part of the agreement appointing the taxpayer's managing director, G, he was to be allotted shares in Company B, the taxpayer's holding company. He had accordingly subscribed for 14,465 £1 ordinary shares in Company B. G later acquired a further 258 £1 ordinary shares. In 2003, the entire issued share capital of Company B had been sold to an unconnected third party. The consideration paid to the ordinary shareholders in Company B was £5,903,219. Applying an agreed formula to all his shares in Company B, G was paid £1,451,172 for his shares.

The Revenue contended that the shares had been sold for more than their market value, and consequently the sale occasioned a charge to income tax determined under Pt. 2 of ITEPA 2003 by virtue of Ch. 3D of Pt. 7 of that Act. The taxpayer maintained that the shares had been sold for their market value so that the whole of the consideration received by G fell to be brought into computation of his capital gain on the disposal under the Taxation of Chargeable Gains Act 1992.

If the disposal in question occasioned a charge under ITEPA 2003, the amount of the income charged by virtue of ITEPA 2003, s. 446Y was to be treated as though it had been a payment of income to G by the taxpayer. The taxpayer was then required to account for tax in respect of that notional payment under the PAYE provisions as though it were an actual payment. The real dispute between the parties was the market value of the shares in Company B held by G for the purpose of Pt. 7, Ch. 3D of ITEPA 2003, and how that value was to be determined.

It was common ground that the ordinary shares in Company B held by G were securities as defined in ITEPA 2003, s. 420 (1)(a); that he was allocated ‘employment-related securities’ for the purposes of Chapter 7 of ITEPA; that the shares in Company B were never quoted on a recognised stock exchange; and that the 258 shares purchased by G in May 2000 were additional securities as defined in ITEPA 2003, s. 421D so that they were to be regarded as acquired pursuant to the same right as he acquired the original 14,465 shares.

Issue

Whether the shares had been sold for more than their market value for the purpose of ITEPA 2003, Pt. 7, Ch. 3D.

Decision

The special commissioner (David Demack) (dismissing the appeal) said that, in determining market value, one assumed that the hypothetical vendor and purchaser did whatever reasonable people buying and selling such property would be likely to have done in real life. The concept of the open market involved assuming that the whole world was free to bid, and then forming a view about what in those circumstances would in real life have been the best price reasonably obtainable.

When one was considering market value, it might be legitimate to aggregate several units of property, but that did not mean in the present case there was one value of G's shares based on the formula contained in the subscription agreement and another for all the remaining shares; G's shares should not be considered separately from any other person's shareholding in Company B. For valuation purposes G's shares should not be considered separately from the remaining ordinary shares. Looking at the matter against a background of the entirety of the case law on market value, G's shares were simply £1 ordinary shares in Company B which had a value to any purchaser identical to any other ordinary shares in the company (IR Commrs v Crossman [1937] AC 26; Duke of Buccleugh v IR Commrs [1967] AC 506; and Re Lynall (1968) 47 TC 375 considered).

In all the circumstances, G's disposal of his shares in Company B was taxable under ITEPA 2003, s. 446Y. He had disposed of his shares for more than their market value and, in calculating the market value of each and every £1 ordinary share in Company B, including G's shares, one simply took the total paid by the outside purchaser, namely £5,903,219, and divided that figure by the number of ordinary shares issued, 222,037. That resulted in a market value of £26.59 per share and the taxpayer was liable for the tax due on the disposal.

(2007) Sp C 602.
Decision released 21 March 2007.