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Cite as: [2007] STC (SCD) 466, [2007] UKSPC SPC00602, [2007] STI 1326

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"Company A " v Revenue & Customs [2007] UKSPC SPC00602 (21 March 2007)


    INCOME TAX employment income sale of whole of share capital of holding company of Appellant whether sale of employment related shares in holding company by managing director of Appellant was for more than market value thereby occasioning charge to income tax by virtue of chapter 3D, part 7 ITEPA 2003 held sale for more than market value appeal dismissed




    - and -



    Special Commissioner: David Demack

    Sitting in public in Edinburgh on 29 November 2006

    Michael Sherry of counsel instructed by Messrs Anderson, Anderson and Brown, chartered accountants of Aberdeen, for the Appellant

    Jane Paterson of counsel instructed by HM Revenue and Customs for the Respondents





  1. In this appeal by "Company A", a wholly owned subsidiary of "Company B", the issue for determination is whether certain ordinary shares in Company B held by Mr G, the managing director of Company A, as employment-related securities, and sold as part of the sale of the whole of the share capital of Company B were sold for more than their market value. Her Majesty's Commissioners for Revenue and Customs ("HMRC") contend that the shares were so sold, and consequently the sale occasions a charge to income tax determined under Part 2 of the Income Tax (Employment and Pensions) Act 2003 ("the ITEPA") by virtue of Chapter 3D of Part 7 of that Act. (The determination under appeal was initially made under Chapter 4 of Part 7 of the ITEPA in the sum of 423,894 but HMRC have since abandoned reliance on that Chapter to maintain it. They now rely on chapter 3D for the purpose so that if I dismiss the appeal, the amount determined must be adjusted). In contrast, Company A maintains that the shares were sold for their market value so that the whole of the consideration received by Mr G falls to be brought into computation of his capital gain on the disposal under the Taxation of Chargeable Gains Act 1992 ("the TCGA").
  2. If the disposal in question does occasion a charge under the ITEPA, the amount of the income charged by virtue of section 446Y of the ITEPA is to be treated as though it had been a payment of income to Mr G by Company A. Company A is then required to account for tax in respect of that notional payment under the PAYE provisions as though it were an actual payment. That is why the appellant taxpayer is Company A, Mr G's employer, and not Mr G himself.
  3. The real dispute between the parties is the market value of the shares in Company B held by Mr G for the purpose of Chapter 3D of Part 7 of the ITEPA, and how that value is to be determined.
  4. The case for Company A was presented by Mr Michael Sherry of counsel, and that for HMRC by Miss Jane Paterson, also of counsel. They produced an agreed statement of facts and a bundle of copy documents. From that statement, as supplemented by the contents of the relevant documents, I find the following facts to have been established.
  5. The Facts

  6. On 20 October 1999 Mr G entered into a service agreement with Company A whereby with effect on 22 November 1999 he was appointed managing director of Company A for an indefinite period terminable by either party on not less than six calendar months' prior notice. The agreement also provided for its automatic termination in certain circumstances, e.g. on Mr G attaining the age of 65, and for his immediate dismissal, e.g. for any act of gross misconduct. In the event, Mr G took up his employment with Company A on 8 November 1999.
  7. As part of the arrangements under which Mr G took up his employment, he was to be allotted shares in Company B, Company A' holding company. To deal with that allotment and certain other matters, on 9 December 1999 Company B held an extraordinary general meeting at which four resolutions two special resolutions and two ordinary resolutions were passed on a show of hands. Only the two special resolutions are relevant to the present dispute. They took the following form:
  8. "1. That the entering into by the company of the subscription and shareholders' agreement among the Company, Mr G and certain shareholders of the Company in the form annexed hereto for identification purposes be and is hereby approved.
  9. That the regulations contained in the document headed 'new Articles of Association' annexed hereto be and they are hereby adopted in the Articles of Association of the Company to the exclusion of all existing Articles hereof."
  10. Pursuant to the first of those special resolutions and the allotment of shares to Mr G, (1) Company B, (2) Mr G, and (3) the holders of 83.8 per cent of the issued share capital of Company B entered into a subscription and shareholders agreement ("the Subscription Agreement"). The Subscription Agreement itself was undated, but the last shareholder to execute it did so on 18 December 1999. It was expressed to be subject to the law of Scotland.
  11. By clause 2 of the Subscription Agreement, Company B was to take or procure certain steps including the adoption of new articles of association to the exclusion of its existing articles, and the allotment of 14,465 1 ordinary shares in Company B to Mr G against payment in cash of 50,000; and, if they had not already done so, the parties should enter into, and Company B should procure that Company A entered into, the service agreement, and that Mr G was appointed a director of both Company B and Company A.
  12. Clause 3, entitled "Termination of Service Contract", provided for Company B to "buy back" the shares issued to Mr G in the event of his service contract with Company A being terminated, and included at clause 3.7 a requirement that if any shareholder who had not signed the document took or threatened to take proceedings to prevent the "buy back", Company B and the signatories to the Subscription Agreement would promptly "take all reasonable steps to resolve the matter". Clause 4 dealt with "Disposal". In the event of, inter alia, a change in control of 50 per cent or more of the issued share capital of Company B prior to the second anniversary of completion of the Subscription Agreement, Mr G was to receive 125,000 for "Mr G's Shares" from Company B or the purchaser. The phrase "Mr G's Shares" was defined in clause 1 as meaning the "Ordinary Shares to be subscribed by Mr G pursuant to clause 2.1.2 together with any Shares derived from the said shares at any time as a result of a bonus issue or capitalisation of reserves or a consolidation or sub-division of the share capital of the company, and for the avoidance of doubt,
  13. (i) there shall be excluded therefrom any Shares acquired by Mr G as a result of a rights issue or the acquisition of any Shares by Mr G from any other holder of Shares in the capital of the Company; and
    (ii) "
    (I observe that there was no clause 2.1.2 in the Subscription Agreement. The clause providing for Mr G's subscription of 14,465 shares in Company B was clause 2.2.2).

  14. But in the event of a share disposal taking place on or after the second anniversary of completion, the price to be paid to Mr G for "Mr G's Shares" was to be determined in the following way:
  15. "4.2.1 In the event of a Shares Disposal taking place on or after the second anniversary of the Completion Date, Mr G shall sell and the Shareholders shall procure that the Company or that the purchaser in terms of the Shares Disposal shall purchase Mr. G's Shares at a price equal to the aggregate of the sums calculated in accordance with (i) and (ii) below.

    (i) the lower of 50,000 and the sum equivalent to:

    B X C X 0.74 where A equals the number of Mr. G's Shares,

    B equals the total number of Shares, and

    C equals the Net Asset Value plus the Notional

    all as at the date of the Shares Disposal; and

    (ii) the sum equivalent to:

    (D (E + F)) where D equals the Consideration

    3 E equals the Target Net Asset Value as at the date of the Shares' Disposal,

    F equals the sum calculated in accordance with sub- paragraph (i) above."

    (Broadly speaking, in the event of a disposal to a third party, the formula entitled Mr G to a one-third share in the value by which Company B had increased from the date of his initial share purchase to the date of disposal).

  16. By clause 6.1 of the Subscription Agreement those shareholders entering into it expressly acknowledged that Mr G was to be entitled to a payment additional to that to be made to other shareholders on Company B being sold by a disposal of its shares. Clause 7.1 dealt with Mr G's ability to deal in Company B shares; and Clause 9 stated that his rights under the Subscription Agreement were not assignable. Clause 11.2 dealt with the priority of the articles of association and the Subscription Agreement in the following terms:
  17. "The provisions of this Agreement shall prevail over the [existing] Articles [of Association] (and any other Articles of Association of the Company subsequently amending or replacing the same) such that if there is any conflict between the two the provisions of this Agreement shall prevail and rule to the exclusion of any such conflicting provisions of the Articles or such other Articles of Association"

  18. The articles of association of Company B adopted on 9 December 1999, and subsequently registered at Companies House, confirmed its authorised ordinary share capital as 323,200. By article 5, all the ordinary shares carried equal rights in terms of the articles; and article 11 provided for the directors in their absolute discretion and without giving any reason to decline to register any transfer of shares, but subject to their registering the transfer of any ordinary shares to inter alias a member of the family of a member of the company or deceased member, a transfer to a trust created by a member, or to the legal personal representative of a deceased member. And article 12 provided for the company to be appointed agent for any member who wished to sell his or her shares "at a price to be mutually agreed between the transferor and the company which the auditors of the company (acting as experts and not as arbiters) shall certify in writing to be in their opinion the fair value thereof on a going concern basis between a willing seller and a willing buyer".
  19. In consideration of 50,000 paid by Mr G to Company B, 14,465 of its 1 ordinary shares were allotted to him on 9 December 1999. I find that the Subscription Agreement post-dated that allotment.
  20. On 16 May 2000 Mr G purchased a further 258 1 ordinary shares in Company B from a fellow shareholder for 864. He did so as part of an exercise of the rights of pre-emption contained in its articles of association by all the shareholders of Company B to purchase the shares of an existing shareholder.
  21. On 29 November 2003, the entire issued share capital of Company B consisting of 222,037 1 ordinary shares, was sold to Company C, an unconnected third party, pursuant to an agreement ("the Sale Agreement") made between all the shareholders in Company B and Company C. The relevant provisions of the Sale Agreement are set out in the Schedule to my decision.
  22. The Sale Agreement provided for the full consideration of 6 million for the ordinary shares in Company B to be reduced by 96,781 in the event of the Inland Revenue not having confirmed that by the time the sale was completed the moneys due to Mr G were not liable to employer's national insurance contributions. As that confirmation had not been provided by completion, the consideration in fact paid to the ordinary shareholders in Company B was 5,903,219.
  23. Applying the formula contained in Clause 4.2.1 of the Subscription Agreement to all his shares in Company B, by agreement among all Company B's shareholders Mr G was allocated and paid 1,451,172 for his shares.
  24. By a disclosure letter, also dated 29 November 2003, the shareholders in Company B made various disclosures and gave warranties to Company C. Amongst the matters disclosed at clause 5.7, was the existence of the Subscription Agreement, to which disclosure was added, "However, this agreement is to be terminated at completion".
  25. The Legislative Framework

  26. The legislation upon which HMRC rely to support the determination under appeal is to be found in part in Part 7 of the ITEPA and in remainder in Part VIII of the TCGA. The relevant parts of Chapters 1 and 3D of Part 7 of the ITEPA provide as follows:
  27. "CHAPTER 1

    417 Scope of Part 7

    (1) This part contains special rules about cases where securities are acquired in connection with an employment.
    (2) The rules are contained in

    Chapter 3D (securities disposed of for more than market value)

    Chapter 4 (post-acquisition benefits from securities)

    (3) The following make provision for amounts to count as employment income Chapters 2 to 6
    420 Meaning of 'securities' etc
    (1) Subject to subsections (5) and (6) for the purposes of Chapters 2 to 5 the following are 'securities'
    (a) shares in any body corporate (wherever incorporated)

    421 Meaning of 'market value' etc

    (1) In this Chapter and Chapters 2 to 5 'market value' has the same meaning as it has for the purposes of TCGA 1992 by virtue of Part 8 of that Act.
    421A Meaning of 'consideration'
    (1) This section applies for determining the purposes of Chapters 2 to 5 the amount of the consideration given for anything.
    (2) If any consideration is given partly in respect of one thing and partly in respect of another, the amount given in respect of the different things is to be determined on a just and reasonable apportionment.
    421B Application of Chapters 2 to 4
    (1) Subject as follows (and to any provision contained in Chapters 2 to 4) those Chapters apply to securities acquired by a person where the right or opportunity to acquire the securities is available by reason of an employment of that person.
    (2) For the purposes of subsection (1)
    (a) securities are acquired at the time when the person acquiring the securities becomes beneficially entitled to those securities (and not, if different, the time when the securities are conveyed or transferred), and
    (b) 'employment' includes a former or prospective employment.

    (2) A right or opportunity to acquire securities made available by a person's employer or by a person connected with a person's employer, is to be regarded for the purposes of subsection (1) as available by reason of an employment of that person unless
    (a) the person by whom the right or opportunity is made available is an individual, and
    (b) the right or opportunity is made available in the normal course of the domestic, family or personal relationships of that person.

    (8) In this Chapter and Chapters 2 to 4

    'the acquisition', in relation to employment-related securities, means the acquisition of the employment-related securities pursuant to the right or opportunity available by reason of the employment,
    'the employment', in relation to employment-related securities, means the employment by reason of which the right or opportunity to acquire the employment-related securities is available ('the employee' and 'the employer' being construed accordingly unless otherwise indicated), and
    'employment-related securities' means securities to which Chapters 2 and 4 apply.

    421C Associated Persons
    (1) For the purposes of this Chapter and Chapters 2 to 4 the following are 'associated persons' in relation to employment-related securities
    (a) the person who acquired the employment-related securities on the acquisition
    (b) (if different) the employee, and
    (c) any relevant linked person.

    (2) A person is a relevant linked person if
    (a) that person (on the one hand), and
    (b) either the person who acquired the employment-related securities or the acquisition or the employee (on the other),
    are connected or, although not connected, are members of the same household.

    421D Replacement and additional securities and changes in interest

    (1) Subsections (2) and (3) apply when an associated person is entitled to employment related securities (the 'original securities') and either
    (a) ; or
    (b) by virtue of that person being entitled to the original securities, that person or another associated person acquires other securities (the 'additional securities').
    (2) The additional securities are to be regarded for the purposes of section 421B(1) (securities acquired pursuant to a right or opportunity available by reason of an employment) as acquired pursuant to the same right or opportunity as the original securities.

    (4) Subsections (2) and (3) apply whether or not the replacement securities, or the additional securities, were acquired for consideration.

    CHAPTER 3D Securities Disposed of for More Than Market Value

    446X Application of this Chapter

    This Chapter applies if

    (a) employment-related securities are disposed of by an associated person so that no associated person is any longer beneficially entitled to them, and
    (b) the disposal is for a consideration which exceeds the market value of the employment-related securities at the time of the disposal.
    446Y Amount treated as income
    (1) Where this Chapter applies the amount determined under subsection (3) counts as employment income of the employee for the relevant tax year.
    (2) The 'relevant tax year' is the tax year in which the disposal occurs.

    (3) The amount is
    CD MV DA


    CD is the amount of the consideration given on the disposal,

    MV is the market value of the employment-related securities at the time of the disposal, and
    DA is the amount of any expenses incurred in connection with the disposal.

    446Z Definitions

    (1) In this Chapter 'market value' has the meaning indicated in section 421(1)
    (2) For the purposes of this Chapter sections 421(2) and 421A apply for determining the amount of the consideration given for anything.

    (3) In this Chapter
    'the employee', and
    'the employment-related securities',
    have the meaning indicated in section 421B(8)

    (4) In this Chapter 'associated person' has the meaning indicated in section 421C."

  28. The relevant sections of the TCGA, to be found in Part 8 thereof, are the following:
  29. 272 Valuation: general
    (1) In this Act 'market value' in relation to any assets means the price which those assets might reasonably be expected to fetch on a sale in the open market.
    (2) In estimating the market value of any assets no reduction shall be made in the estimate on account of the estimate being made on the assumption that the whole of the assets is to be placed on the market at one and the same time.

    273 Unquoted shares

    (1) The provisions of subsection (3) below shall have effect in any case where, in relation to an asset to which this section applies, there falls to be determined by virtue of section 272(1) the price which the asset might reasonably be expected to fetch on a sale in the open market.
    (2) The assets to which this section applies are shares and securities which are not quoted on a recognised stock exchange at the time as at which their market value for the purposes of tax on chargeable gains falls to be determined.
    (3) For the purposes of a determination falling within subsection (1) above, it shall be assumed that, if the open market which is postulated for the purposes of that determination, 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 arms length."

    Market Value

  30. Much of the case law dealing with disposals at market value, as agreed between the parties, relates to deemed disposals, so that it deals with situations quite different from the actual disposal in point in the instant case. Nevertheless, it does provide much that is of help to me in making my decision.
  31. In Commissioners of Inland Revenue v Crossman [1937] AC 26, by a majority, the House of Lords followed the decision of the Court of Appeal in Attorney-General v Jamieson [1905] 2 IR 218 in holding that the value of shares in a company, the articles of which imposed rigid restrictions upon the alienation and transfer of its shares, for estate duty purposes was to be estimated at the price they would fetch if sold in the open market on terms that the purchaser should be entitled to be registered and to be regarded as the holder of the shares, and should take and hold them subject to the articles of association including those relating to the alienation and transfer of shares in the company.
  32. In delivering the first and leading speech in Crossman, Viscount Hailsham LC said that:
  33. "in order to reach the right conclusion upon the construction to be placed upon [section 7 (5) of the Finance Act 1894] the charging provision there in point and its application to the facts of the present case, it seems to me essential to determine what is the property to be valued".
  34. He approved as being the right way in which to arrive at the value in the open market the approach by the judge at first instance of not excluding anybody or including anybody in particular, but rather of considering the matter generally. Viscount Hailsham added that he thought it would not be right to appreciate the value of the shares because of a special demand for a special purpose from a particular buyer.
  35. In Duke of Buccleuch v Inland Revenue Commissioners [1967] AC 506, another estate duty case, Lord Reid (at page 524) took the view that:
  36. "the phrase [in the open market] requires that the seller must take or have been supposed to have taken such steps as are reasonable to attract as much competition as possible for the particular price of property which is to be sold".

    A number of their Lordships indicated that it was what the purchaser paid which was important, Lord Wilberforce, for instance, saying (at page 550):

    "[section 7 (5) of 1894 Act] requires the gross open market price, i.e. what the purchaser pays, and not what the vendor ultimately receives to be taken as the valuation figures".

  37. In In re Lynall deceased (1968) 47 TC 375, Harman LJ also had to consider section 7(5) of the Finance Act 1894. He opined (at page 392):
  38. "The sale envisaged by the section is, as is agreed, not a real but a hypothetical sale, and must be taken to be a sale between a willing vendor and a willing purchaser: see, for instance, the speech of Lord Guest in In re Sutherland [1963] AC 235, at page 262. It is true that the so-called willing vendor is a person who must sell: he cannot simply call off the sale if he does not like the price; but there must be on the other side a willing purchaser, so that the conditions of the sale must be such as to induce in him a willing frame of mind".

  39. The authorities on the statutory hypothetical sale for estate duty and the successor duties on death were drawn together by Hoffman LJ at pages 371 and 372 of his judgment in Inland Revenue Commissioners v Gray (surviving executor of Lady Fox deceased) [1994] STC 360 in the following terms:
  40. "The only express guidance which S38 [of the Finance Act 1975] offers on the circumstances in which the hypothetical sale [for capital transfer tax purposes] must be supposed to have taken place is that it was 'in the open market'. But this deficiency has been amply remedied by the courts during the century since the provision first made its appearance for the purposes of estate duty in the Finance Act 1894. Certain things are necessarily entailed by the statutory hypothesis. The property must be assumed to have been capable of sale in the open market, even if in fact it was inherently unassignable or held subject to restrictions on sale. The question is what a purchaser in the open market would have paid to enjoy whatever rights attached to the property at the relevant date (see IRC v Crossman [1937 AC 26). Furthermore the hypothesis must be applied to the property as it actually existed and not to some other property, even if in real life a vendor would have been likely to make some changes or improvements before putting it on the market (see Duke of Buccleuch v IRC [1967] 1 AC 506 at 525). To this extent, but only to this extent, the express terms of the statute may introduce an element of artificiality into the hypothesis.

    In all other respects, the theme which runs through the authorities is that one assumes 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 hypothetical vendor is an anonymous but reasonable vendor, who goes about the sale as a prudent man of business, negotiating seriously without giving the impression of being either over-anxious or unduly reluctant. The hypothetical buyer is slightly less anonymous. He too is assumed to have behaved reasonably, making proper inquiries about the property and not appearing too eager to buy. But he also reflects reality in that he embodies whatever was actually the demand for that property at the relevant time. It cannot be too strongly emphasised that although the sale is hypothetical, there is nothing hypothetical about the open market in which it is supposed to have taken place. The concept of the open market involves 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. The practical nature of this exercise will usually mean that although in principle no one is excluded from consideration, most of the world will usually pay no part in the calculation. The inquiry will often focus on what a relatively small number of people would be likely to have paid. It may have to arrive at a figure within a range of prices which the evidence shows that various people would have been likely to pay, reflecting, for example, the fact that one person had a particular reason for paying a higher price than others, but taking into account, if appropriate, the possibility that through accident or whim he might not actually have bought. The valuation is thus a retrospective exercise in probabilities, wholly derived from the real world but rarely committed to the proposition that a sale to a particular purchaser would definitely have happened.

    It is often said that the hypothetical vendor and purchaser must be assumed to have been 'willing', but I doubt whether this adds anything to the assumption that they must have behaved as one would reasonably expect of prudent parties who had in fact agreed a sale on the relevant date. It certainly does not mean that having calculated the price which the property might reasonably have been expected to fetch in the way I have described, one then asks whether the hypothetical parties would have been pleased or disappointed with the result; for example, by reference to what the property might have been worth at a different time or in different circumstances. Such considerations are irrelevant."

    Submissions and Conclusion

  41. It is common ground that the ordinary shares in Company B held by Mr G were securities as defined in section 420 (1) (a) of the ITEPA; that he was allocated "employment-related securities" for the purposes of Chapter 7 of the ITEPA; that the shares in Company B were never quoted on a recognised stock exchange; and that the 258 shares purchased by Mr G on 16 May 2000 were additional securities as defined in section 421D of the ITEPA so that they were to be regarded as acquired pursuant to the same right as he acquired the original 14,465 shares.
  42. Mr Sherry accepted that had there been no Subscription Agreement and, for whatever reason, the remaining shareholders in Company B had acknowledged that Mr G might be entitled to the increase in value in his holding of Company B's shares calculated using the formula for which clause 4.2.1. of the Subscription Agreement provided, that would have been the normal case for section 446Y of the ITEPA to apply. But, he maintained, the existence of the Subscription Agreement meant that different considerations applied to the holding; since the agreement had equal authority with or took precedence over the articles of association, the increase in value of the holding did not fall to be taxed under section 446Y.
  43. In contrast, Miss Paterson contended that Company B's articles of association governed the situation, and to calculate the market value of a Company B share one simply took the total paid by Company C and divided that figure by the number of issued shares in Company B: it became a simple arithmetical exercise. She maintained that in terms of section 446Y the "market value" of the employment-related securities required consideration of:
  44. (i) the value achieved for a notional share, the Jamieson case;
    (ii) the sale / purchase being by an imaginary person / entities, the Crossman case;
    (iii) the hypothetical seller being endowed only with information which could legally be disclosed, the Lynall case; and
    (iv) the price paid, or consideration, not being that which the seller could achieve, but that which a purchaser would pay, the Duke of Buccleuch's case.

  45. When Mr G was allotted 14,465 ordinary shares in Company B on 9 December 1999 the Subscription Agreement had not been entered into, so I find that it could not have governed that allotment. That he may have expected the Subscription Agreement to have been entered into prior to the allotment, I accept, but the fact is that it was not.
  46. Mr Sherry first and primarily submitted that, since the disposal by Mr G of his holding of shares in Company B to Company C was a transaction at arm's length between unconnected persons, the price paid for them by Company C was their market value. For that submission he relied on Bullivant Holdings Ltd v Inland Revenue Commissioners [1998] STC 905 at page 921 where Ferris J held that:
  47. "A process under which a party has to yield in respect of one part of a composite transaction in order to obtain the much desired benefits of another part of the same transaction is of the essence of a general commercial bargain"

  48. In other words, as I understood him, Mr Sherry claimed that the sale of the whole of the share capital of Company B under the combined effect of the Subscription Agreement and the Sale Agreement comprised a composite transaction under which each shareholder agreed to accept the sum apportioned to him or her in column 5 of Schedule 1 to the Sale Agreement. Accordingly, he maintained that the consideration of 1,451,172, attributed to Mr G represented his contractual entitlement and the market value of his holding of shares; and 4,452,047 represented the aggregate market value of the shareholdings of the remaining shareholders.
  49. To deal with that claim, I find it necessary to step back from the Sale Agreement, and to consider the Subscription Agreement and events relating to it. I observe that notice of the extraordinary general meeting of Company B and the passing of the special resolution relating to the Subscription Agreement by a show of hands did not constitute a shareholder becoming a party to the Subscription Agreement. All that the first special resolution did was to authorise the "entering into" of the Subscription Agreement; it gave no vires for it. And the passing of the resolution did not necessarily mean that the Subscription Agreement would ever be entered into. (As Miss Paterson observed, if the Subscription Agreement were "somehow" to be read with Company B's Articles of Association as binding all the company's shareholders, there would have been no reason for clause 3.7 of the Subscription Agreement). In contrast with the Subscription Agreement, the articles of association bound all Company B shareholders.
  50. Mr Sherry further submitted, and I accept, that a collateral agreement entered into by shareholders in a company may combine with its articles of association to represent the terms of the shareholders' association for an economic purpose. As Lord Hoffman observed at page 7 of his speech in O'Neill and another v Phillips and others [1999] 2 BCLC 1:
  51. "The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders."

  52. Mr Sherry contended that the Subscription Agreement was a collateral agreement of the type to which Lord Hoffman was referring. I am unable to accept that contention. In my judgment, since the Subscription Agreement was entered into by the holders of only 83.8 per cent of Company B's shares, such holders alone were bound by it, and then only among themselves: Clause 11.2 of the Subscription Agreement was effective only to that limited extent. All the shareholders were bound by Company B's articles of association and, in my judgment, it was the articles alone which in the instant case contained the terms of the shareholders' association. And since article 5 provided that all the ordinary shares carried equal rights in terms of the articles, and "Mr G's Shares" were ordinary shares, I am unable to conclude that the Subscription Agreement had any effect on the value of his shares. In so holding I have considered a submission by Mr Sherry that in ascertaining market value an actual purchaser must be taken to step into the shoes of a hypothetical purchaser, taking the asset subject to but with the benefits and obligations pertaining thereto, see the Crossman case, even if it is not possible for a purchaser to acquire the asset due to a prohibition on transfer, ibid; and that, as in the instant case that meant that the hypothetical purchaser would have taken Mr G's Shares with the benefit of the Subscription Agreement and, as at the date of actual sale, with the benefit of the Sale Agreement, the purchaser would have been prepared to pay for the shares purchased what he actually received pursuant to the two agreements. I shall give my reasons for rejecting that claim shortly.
  53. Mr Sherry fortified the submission to which I have just referred by adding that if there had been any prejudicial conduct on the part of the shareholders who had not ratified the Subscription Agreement, on the authority of O'Neill v Phillips the court would have granted relief. I do not agree. In a case such as the instant one where the Subscription Agreement did not bind all the shareholders, I would expect the court to take account of its existence in reaching its conclusion, but, against the background of the agreement not having parity with or taking precedence over Company B's articles of association, to grant relief on the basis of the predominance of the articles.
  54. Further, again in my judgment, Company C could not have acquired the benefit of the Subscription Agreement for, on completion of the sale of Company B's shares, it ceased to exist (see paragraph 5.7 of the disclosure letter). Consequently, as Miss Paterson submitted, one could not simply delete Mr G's name from the Subscription Agreement on completion and substitute Company C's for it: that "just did not work". Even had Company C been able, and wanted, to step into Mr G's shoes under the Subscription Agreement by paying more for his shares than for those of other shareholders, it would simply have been paying itself for the privilege of doing so an event so unlikely that I may discount it.
  55. I also reject a submission by Mr Sherry that the Subscription Agreement might be compared with an easement over property which would bind that property. I do so because by clause 9 of the Subscription Agreement the rights and obligations thereunder were not assignable: they were personal to Mr G. And they were certainly not rights which had any value to Company C as purchaser of the share capital of Company B.
  56. No evidence was adduced to show that Company C paid any more for Company B as a result of the existence of the Subscription Agreement than it would otherwise have done and, in its absence, I find that it would not have done so.
  57. I reject yet a further submission by Mr Sherry that I should infer from the existence of the Subscription Agreement that Company C was prepared to pay more for Mr G's shares than for those of the other shareholders. Indeed, as no evidence was adduced in relation to that claim, I find that it was not prepared to do so.
  58. For all the reasons I have so far given, I hold that the Subscription Agreement did not have equal authority with or take precedence over Company B's articles of association; the articles of association predominated.
  59. Having dealt at some length with the Subscription Agreement, I then turn to the Sale Agreement. All that I need say of it is that while Schedule 1 to it indicated how the sale price of 5,903,219 was to be allocated among Company B's various shareholders, by clause 3 of the Sale Agreement the allocation did not bind Company C itself.
  60. To arrive at the market value of Mr G's holding of shares, Miss Paterson submitted that one had to look at their value in the open market, i.e. not simply by looking at what was being sold, but also by considering what was being bought, and taking account of the true nature of the transaction. In the instant case, she maintained that a hypothetical purchaser, i.e. an independent third party, would have been prepared to pay 5.9 million for the entire share capital of Company B, that capital consisting of shares held by various people having separate holdings. In a hypothetical sale one did not endow any particular seller with any particular identity, In Re Lynall.
  61. Consequently, in reliance on the decision in Inland Revenue Commissioners v Gray [1994] STC 360 where it was held that for capital transfer tax purposes the valuation of property comprising two or more component parts could be treated as one unit of property if a prudent hypothetical vendor would have so treated them in order to obtain the most favourable price without undue expenditure of time and effort Miss Paterson accepted that when one was considering market value, it might be legitimate to aggregate several units of property. But, she maintained, that did not mean in the instant case there was one value of Mr G's shares based on the formula contained in the Subscription Agreement and another for all the remaining shares; Mr G's shares should not be considered separately from any other person's share holding in Company B. In my judgment, Miss Paterson's submissions are correct and, in accepting them, I reject a claim by Mr Sherry that for valuation purposes Mr G's shares should be considered separately from the remaining ordinary shares.
  62. Looking at the matter against a background of the entirety of the case law on 'market value' referred to earlier, I hold that Mr G's Shares were simply 1 ordinary shares in Company B which had a value to any purchaser, including Company C, identical to any other ordinary shares in the company.
  63. For completeness, I now include Mr Sherry's other principal submissions. Secondly, he submitted that as the Subscription Agreement had been disclosed to Company C, that was the best evidence that its contents constituted information within section 273(3) of the TCGA, and so must be taken to be information which would have been known to a hypothetical purchaser of Mr G's shareholding at the time of its actual sale, see Caton (deceased) v Couch [1995] STC (SpC) 34. A reasonably prudent purchaser might have been expected to enquire whether the shares it intended to acquire were subject to a sale contract and to require sight of the terms of such a contract. Whilst accepting the submissions, I do not consider that they advance matters further.
  64. Finally, Mr Sherry submitted that a taxpayer should only be taxed according to clear words, see W T Ramsay & Co Ltd v IRC [1981] 54 TC 101 at page 184 per Lord Wilberforce (referred to with approval in Barclays Mercantile Business Finance Ltd v Mawson [2005] STC 1 at page 145). He maintained that that was especially important where, as in the instant case:
  65. (a) the charge sought to be imposed was essentially retrospective, applying to the disposal of an asset acquired some three and a half years before section 446Y was enacted, and its disposal less than five months after the section came into effect; and
    (b) the taxpayer on whom the charge in issue was imposed was not a party to the disposal, did not receive the proceeds of disposal, and was not a party to the Subscription Agreement.

  66. That the charge to tax on Company A is essentially retrospective is of no help to it: either Mr G's disposal falls within the clear words of section 446Y of the ITEPA, or it does not. If it does, then Company A is liable for the tax due on the disposal. And the matters referred to in paragraph 47(b), while factually correct, avail Company A nothing.
  67. Having considered all the submissions of the parties, the case law to which I have referred, and taking account of the various findings I have made, I conclude that Mr G's disposal of his shares in Company B falls within the clear words of section 446Y, and thus to be taxed thereunder. I hold that he disposed of his shares for more than their market value. And to calculate the market value of each and every 1 ordinary share in Company B, i.e. including Mr G's Shares, in my judgment one simply takes the total paid by Company C for Company B, namely 5,903,219, and divides that figure by the number of ordinary shares issued, 222,037. That results in a market value of 26.59 per share.
  68. I dismiss the appeal, and direct that the determination under appeal be reduced to take account of my calculation of the market value of Company B's shares.

    Release Date: 21 March 2007



    "2. Sale and Purchase of Shares

    2.1 Each of the Vendors [all the ordinary shareholders in Company B] shall sell and transfer with full title guarantee the number of [1 ordinary] Shares set opposite the Vendor's name in column (2) of schedule 1 and the Purchaser [Company C] shall purchase the Shares free from all claims charges liens encumbrances equities and other third party rights of any nature.

  70. 4 Title to, beneficial ownership of, and any risk attaching to the Shares shall pass on Completion and the Shares shall be sold and purchased together with all rights and benefits attached or accruing to them at Completion (including the rights to receive all dividends distributions or any return of capital declared paid or made by the Company on or after Completion).
  71. 5 Each of the Vendors hereby waives any right of pre-emption or other restriction on transfer in respect of Shares or any of them conferred on him under the articles of association of the Company or otherwise and agrees to procure before Completion the irrevocable waiver of any such right or restriction conferred on any other person.
  72. Consideration
  73. 1[.1] The Consideration [for the Shares] shall be 6,000,000 (six million pounds sterling) subject to adjustment in accordance with clauses 4.3 and 4.4 and clause 4A. For the avoidance of doubt, the allocation of the Consideration set out in this clause 3.1 shall not be binding on the Purchaser or the Warrantors in connection with any Warranty Claim.
  74. 2 The Consideration shall be paid or satisfied by the Purchaser at Completion in the following manner:
  75. 2.1. Five million Four Hundred and Three Thousand and Two Hundred and Nineteen pounds (5,403,219) by payment of cash at Completion by way of telegraphic transfer to the Vendor's Solicitors (as agents for and on behalf of the Vendors) who are hereby authorised to receive the same whose receipt shall be a complete discharge to the Purchaser who shall not be obliged to inquire as to the distribution thereof; and
  76. 2.2. Five Hundred Thousand Pounds (500,000) by the due issue of the Loan Notes to that aggregate nominal value to Elbora Limited;
  77. 2.3. Ninety six thousand seven hundred and eighty one pounds (96,781) by the payment of the Retention [referred to in clause 4A] to be placed in an interest bearing account in the joint names of the Vendor's Solicitors and the Purchaser's Solicitors.
  78. 4 The Vendors shall be entitled to the Consideration in the amounts set out in column (3) of schedule 1. The part of the Consideration payable under Clause 3.2.1 shall be allocated to the Vendors in accordance with column (5) of schedule 1."
  79. "4A Retention
    4A.1 If prior to 29 February 2004 the Purchaser shall either have (i) not have received written intimation in a form reasonably satisfactory to the Purchaser from the Inland Revenue that neither the Purchaser nor any member of the Company Company B has any liability to account or pay to the Inland Revenue employer's national insurance contributions in respect of that part of the Consideration payable to Mr. G ("the NIC liability") or (ii) received affirmation in a form reasonably satisfactory to the Purchaser that any of the Purchaser or any member of the Company Company B has any liability to account or pay to the Inland Revenue employer's national insurance contributions in respect of the NIC liability, the Consideration shall be reduced by an amount equal to 96,781. The reduction of the Consideration shall be satisfied in full by the release of the Retention Fund to the Purchaser's Solicitors and the receipt by the Purchaser's Solicitors of the Retention Fund shall operate as an absolute discharge of the Vendors' obligations in respect of the payment of the reduction of the Consideration. If the Inland Revenue subsequently repays or refunds the NIC liability to the Purchaser of the Company Company B the Purchaser shall immediately notify the Vendors in writing and pay to the Vendors an amount equal to the refund or repayment. The Vendors shall be entitled to the Retention Fund in the same proportions to which they are entitled to the Consideration."
    Schedule 1

      [Column 2] [Column 3] [Column 4] [Column 5]


    No. of Ordinary

    Amount of

    Proportion of shortfall
    Amount of
    (after National Insurance retention)
    Elbora Limited 50,888 1,110,731 18.512% 592,815
    Mr G 14,723 1,474,964 24.583% 1,451,172
    W G McIntosh 5,244 114,462 1.908% 112,616
    J R Nicholson 137,932 3,010,654 50.178% 2,962,091
    L E Shaw 5,000 109,135 1.819% 107,375
    S M Nicholson 5,500 120,031 2.000% 118,095
    A W McIntosh 2,750 60,023 1.000% 59,055

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