ciot and sav talk -12 feb 2015. protective marking – official overview of sav – how to do a...

CIOT and SAV talk -12 Feb 2015

Protective marking – Official

• Overview of SAV – how to do a valuation

• Employment Income & Goodwill

• Bloodstock

• Chattels

• Intellectual Property

• Litigation Process

• Closing remarks & Questions

What will we talk about? – Scott Parker

HMRC NL Standard | 05/08/2013 | 2


Part of Specialised Personal Tax

•70 Valuers

•14,000 valuations

•Tax yield

•Customer Feedback

Shares and Assets Valuation


Protective marking – Official HMRC NL Standard | 05/08/2013 | 4

How to do a valuation


• Is the company a going concern?

• Which method of valuation is appropriate?

• What does an earnings based valuation entail?

• How is an asset based valuation carried out?

• What is goodwill?

What information is needed to value a company?



Activity Method

Property holding A

Farming A

Advertising E

Hairdressing E

Investment Company A

Market Research E

Estate Agent E

Food Retailer E

Assets (A) or Earnings (E)?



“PROFITS ARE WHAT MAKES THE BUSINESS GROW”


A MULTIPLE of PRE TAX PROFIT

Or

A PE times POST TAX PROFIT

provides us with

the GOING CONCERN VALUE of a company

Summary



Dividend Based Valuations



• For minority shareholdings…

• In companies with a record of dividend distributions

When would we use a dividend-based valuation?



• Property Holding companies, Investment Companies, Investment Trusts

• Farming Companies

• What is Net Asset Value?

• Approach to different-sized holdings!

Asset based valuations



".. it shall be assumed that in the open market... there is available to any prospective purchaser of the asset in question all the information which a prudent prospective purchaser of the asset might reasonably require if he were proposing to purchase it from a willing vendor by private treaty and at arm's length.“

S.273 (3) Taxation of Chargeable Gains Act 1992(Similar wording also at S.168 IHTA 1984)

Information Standards: Statutory Definition



• The Directors must actually have, or be able to acquire without much difficulty, the information required.

• In this context, 'require' is taken to mean 'demand as a condition of buying': information is 'required' if the purchase would not proceed without it.

“Reasonably Required”



Employment Income & Goodwill – Barry Roland and Pat McGurk

• Unquoted Shares - Employment Income

• Goodwill – Incorporations



• Approved share schemes, EMI

• Growth Shares

• Employee Shareholder

• Post Transaction Valuation Checks

Employment Income



Enterprise Management Incentives (EMIs)

•Valuation procedures streamlined

•SAV expects a full disclosure of facts regarding grant of options

•Post grant valuations – time limits

Tax Advantaged Share Schemes (TASS) Share Options



• Approved Share Incentive Plans (SIPs)• Company Share Option Plans (CSOPs)• Approved SAYE Share Option Schemes (SAYE)

• More guidance on share schemes found: http://www.hmrc.gov.uk/manuals/essum/index.htm

• More guidance on valuation:

https://www.gov.uk/government/publications/hmrc-shares-and-assets-valuations-sav

Tax Advantaged Share Schemes (TASS) Share Options


http://www.hmrc.gov.uk/manuals/essum/index.htm




• This is a new employment status, which took effect from 1 September 2013. SAV provides a pre transaction valuation check, similar to the EMI process.

• The company must give, or as an employee shareholder you must receive, shares in the employer’s company or employer’s parent company. These shares must have a minimum value of £2,000 on receipt. Relief from CGT on shares up to a value of £50,000.

• Use of Put options.

• After a tentative start SAV is seeing an increasing number of valuations.

Employee Shareholder Shares



• Post Transaction Valuation Checks – discretionary service offered by SAV to facilitate agreements prior to the SA deadline.

• Very popular – it gives employees certainty over their tax/NIC position after receipt of shares in employing company, no unexpected liabilities after submission of SA return.

• Victim of its own success – we are receiving increasing numbers of requests, often close to SA deadline. Most valuations are agreed, but some remain unagreed at the SA deadline. Negotiations then cease.

• But biggest problem is increasing complexity of valuation models employed – 30/40 page valuation reports are now commonplace, involving detailed mathematical formulae.

Employment Income PTVC



Increasing complexity means far more time now spent on such valuations. Pressures are mounting – we need agents to assist, if we are to continue providing this service:

•Explain to us exactly how the models work.•Supply us with worked examples – how much might an employee receive, if targets achieved/hurdles overcome?•Provide us with all the information we request without query - the very latest management accounts, whether a sale or IPO is likely etc.

There is no statutory obligation on SAV to provide this service. Present trends – number of PTVC requests received, increasing complexity, staff resources – are a major concern.

Employment Income PTVC



• Growth Shares are often provided to Employees through Tax Advantaged Share Option Plans which provide for tax benefits, subject to certain conditions.

• Plans contain performance hurdles designed to incentivise employees to grow the company, usually by reference to very demanding targets.

• Historically, agents have sought to argue that because of the hurdles, at the point at which they are granted there is no value in the option.

• SAV have resisted this view and have sought to persuade accountants that there must be value in such options.

Growth Shares



• Shares awarded 2014• Performance target – cumulative profits for 3 years to 2017.• Shares “in the money” if £90m achieved, maximum pay-out if £110m achieved

– sliding scale in between.• Company’s internal forecasts were for £80m over 3 years• Media comment on company very positive, outlook for sector buoyant.• Value proposed to us represented an exact 1/20th of maximum payout for each

employee e.g. maximum payout £200K, value offered £10K.

1. Do we challenge?2. If so, how do we value?3. Should the present day value be impacted by the size of the potential maximum payout? If the maximum pay-out was £2m, instead of £200K, what is the impact?

Growth Shares - example



• SAV has been responsible for valuation of Goodwill in IR and HMRC since 1993

• Growth in the number of incorporations

• £30,000 cases

• Forgotten IP?

• AS14

Goodwill



• Technical Issues

• What has been transferred

• Valuation Issues

• Understanding the market, What Market?

Goodwill - Medics



The thoroughbred exists because its selection has depended not on experts, technicians, or zoologists, but on a piece of wood: the winning post of the Epsom Derby.

Bloodstock – Jerry Goodrich



1st Dam

Alluring Park (IRE), won 1 race at 2 years and £15,201 and placed 3 times including third in Aga Khan Studs Blenheim Stakes, Curragh, L. and Rochestown Stakes, Leopardstown, L.; Own sister to SHINKO FOREST (IRE);

dam of four winners from 4 runners and 6 foals of racing age including-

WAS (IRE) (2009 f. by Galileo (IRE)), won 2 races at 2 and 3 years, 2012 and £319,386 including Investec Oaks Stakes, Epsom Downs, Gr.1, placed 6 times including second in Pretty Polly Stakes, Curragh, Gr.1, third in Nassau Stakes, Goodwood, Gr.1, DarleyYorkshire Oaks, York, Gr.1 and EBF Blue Wind Stakes, Naas, Gr.3, from only 9 starts.

JANOOD (IRE) (2008 g. by Medicean (GB)), won 2 races at 2 years and £32,439 including Matalan Washington Singer Stakes, Newbury, L., placed 3 times.Al Jassasiyah (IRE) (2011 f. by Galileo (IRE)), unraced to date.



Chattel Valuation – Dave Goulsbraunusual items considered by SAV Chattels Team• Collection of Formula 1 Racing

Helmets• Prehistoric fossil of a Pterodactyl,• 1966 England Team World Cup

winners medals and kit• Classic Cars e.g. 1930s Mercedes

SSK valued at £2m• Music Memorabilia e.g. a guitar

formerly belonging to Eric Clapton, an acetate of first Beatles Single “This Boy”

• Marie Antoinette’s jewellery,• 700,000 pictures of cows,• Nelson’s teapot• Roman Mosaic Floor,• A Grand Piano entirely covered in a

work by Burne Jones• Islamic Doors from a Mosque

• Fine Wine and Whisky which is NOT a wasting asset

• Chinese ceramics, e.g. an 18th Century Qianlong vase later sold for £20m

• Vampire Killing Kit circa 1900• American Indian Art• Watercolours and drawings by a

member of the crew of the First Fleet to Australia

• Nobel Prize for Chemistry• Railway locomotives• Railway locomotive nameplate• A manuscript of a Wilfred Owen

poem• Shakespeare Folios• Vivienne Lee Oscar



Section 160 IHTA

Except as otherwise provided by this Act, the value at any time of any property shall for the purposes of this Act be the price which the property might reasonably be expected to fetch if sold in the open market at that time; but that price shall not be assumed to be reduced on the ground that the whole property is to be placed on the market at one and the same time.

Chattel Valuation



Lord Reid in 1972

“It appears that the idea behind this provision is the classical theory that the best way to determine the value of any property is to let the price be determined by economic forces - by throwing the sale open to competition when the highest price will be the highest that anyone offers. That implies that there has been adequate publicity or advertisement before the sale and the nature of the property must determine what is adequate publicity. Goods may be exposed for sale in a market place or place to which buyers resort. Property may be put up to auction. Competitive tenders may be invited.”

Chattel Valuation


Photos Kimbell Museum and Sotherby’s



• Reservation of benefit

• That each party to the arrangement is separately advised and

• The loan agreement provides for regular reviews of the rent and

• The loan agreement specifies that the lessee is responsible for the maintenance, security and insurance of the chattels and

• An annual rent of not less than 1% of the capital value is paid.

Chattel Valuation


Digital image, The Museum of Modern Art, New York/Scala, Florence



Intellectual Property Overview and examples – Paul Simpson & Tony Spindler



IP and intangibles have been very much in the limelight in recent times:

•Organisation for Economic Co-operation and Development (OECD)

•Public Accounts Committee (PAC)

•This rise in importance of IP has led to related valuation techniques evolving.

Overview



• Market related -Trademarks, trade names, service marks, trade dress, Internet domain names

• Customer / supplier related - Customer lists, customer relationships , order-backlog.

• Contract based - Licensing, royalty and standstill agreements, usage rights franchise agreements

• Technology-related - Patented technology, computer software, databases, trade secrets, recipes

• Artistic related - Plays, books, films, music - copyright

Types of Intangible Assets



• IP/intangibles can be difficult to define/recognise and often represent the entire value of a transaction.

• Different tax regimes will often ‘collide’ within a single transaction. This can lead to different value definitions and also apportionment of value.

• Valuation is subjective so HMRC recognises IP/intangibles as a big area of risk.

• The SAV IP Team works collaboratively across HMRC to address valuation risk:- LB, MSB, SME & I&PB

- CTIS, SPT & SI

Overview



• Transfer Pricing – Arm’s Length Price

• Arm’s length/Connected Party transactions – apportionments, including pre/post 2002 intangibles, PPAs (linked to TP)

• Acquisition cost or rebasing valuations

• Impairment valuations

Overview: Main areas of risk



Valuers follow a 5 step process to develop robust opinion on value.

•Transactional Analysis•Asset Identification•Context and Setting (basis of value)•Good Valuation Practice•Robust Opinions

Overview



However, experience in HMRC shows that a great deal of resource is spent on steps 1-3 of this process, whether this is for large or small businesses:

•Transactional/functional analysis – quite often different conclusions are drawn in respect of what actually happened.•Asset Identification – have found that the IP/intangibles involved are not considered to be the same.•Context and Setting – different parameters from value definitions not reflected in valuations.•Ownership issues – seeing cases where IP registration held by the individual but IP used in a connected company. Subsequent transfers led to discussion that shared or prior can compromise an OMV.

Overview



• Market Based Approaches

• Income Based Approaches

• Cost Based Approaches

Many subsets and variants within each approach

Overview: Methodologies



• Shares in a UK company acquired for $180m.

• Operations cease and IP transferred overseas at a value of $100m.

• HMRC informed large part of the value differential ($80m) represented synergies and goodwill that were not transferred.

Example 1



• HMRC advised that the buyer was a ‘special purchaser’ – hence price paid for synergy values etc.

• Considered what was acquired and the aims of the transaction.

• What did the synergies attach to, the business or IP.

• HMRC analysis pointed to IP so valuation was challenged and a significant uplift from the $100m was achieved.

• Worth considering the examples in OECD Chapter VI as tax authorities are reluctant to accept value goes up in smoke!

Example 1 continued



• Multi-national transfers IP onshore for £250m +

• Group claimed all IP was post 2002 and amortisable.

• Mix of IP, but mainly related to trademarks and know-how.

• HMRC valuation request to consider apportionment of TM v know-how.

Example 2



• Brand refresh took place post 2002 with new marks registered.

• However large proportion of ancillary marks registered pre 2002 and therefore within CG regime.

• SAV argued some value derived from prior pre 2002 mark for the principal marks that were refreshed.

• Moved apportionment mainly to pre 2002 (CG regime) and therefore not amortisable.

Example 2 continued



Any questions?



Litigation & Technical Advice Team (LTAT) – Mike Fowler

The path to litigation

•‘Normal’ negotiations fail

•Closure Notice issued by instructing office

•Appeal received

•Case taken over by LTAT

•Advocacy decided

•Expert appointed (internal or external)

•FTT Hearing



• RICS accreditation

• Size of LTAT increased

• More pro-active approach to Closure Notices

Recent Noteworthy Changes



• Anthony Perry Negligible value loan conversionTC/2012/07357

• Dyer and Dyer Negligible value loan conversionTC/2012/10201/10360

• Nicholas Green Gift Aid valuation TC/2011/05967

• Graham Wildin Goodwill on incorporationTC/2010/06391

Recent FTT Valuation Decisions



Decision awaited:

•BG Foods Disposal to offshore trust •Spring Salmon Goodwill on incorporation

Cases pending:

•Gift Aid •Capital Gains avoidance scheme•Goodwill on incorporation

Decision Awaited / Case Pending



Q & A Closing remarks – Juliet Roche



• All new Valuers undertake a RICS accredited six-month supervised training course upon joining the office

• Valuers then undertake a further 18-month structured casework development• programme

• Valuers will then work to achieve RICS accreditation

• Valuers achieve “Associate” status

• Senior Valuers achieve “Member” status

RICS Business Valuer Accreditation


ciot and sav talk -12 feb 2015. protective marking – official overview of sav – how to do a...

Documents

valuationshmrc nl standard

companysummaryhmrc nl

scott parkerhmrc nl

dividendbased valuation

net asset value

method of valuation

valuation entail

information standards