Negotiating with HMRC
The shares are valued, the tax return filed, job done? Not quite. The most exhausting, stressful and time-consuming phase of transactions involving shares in an unquoted company or the goodwill in an unincorporated business may be about to begin, especially if the sums involved are significant.
The process will begin with the local tax inspector referring the valuation of the shares or goodwill to HMRC’s Shares and Asset Valuation section (“SAV”) which will usually issue a seemingly innocuous letter requesting additional information. Sometimes HMRC’s direction of enquiry and initial stance can be ascertained from the type of information sought at this stage. Care should be taken to ensure that only relevant information is disclosed. If it is obvious that a degree of hindsight is being exercised by SAV in its choice of information, this should be challenged.
In most cases SAV will arrive at its own valuation opinion early in the process based upon whatever information it has received and inform the taxpayer or his advisers. If the taxpayer is fortunate, it will be close enough to the filed valuation to warrant immediate agreement. More likely, exponentially so as the amount at stake increases, SAV’s valuation will diverge from the filed amount. This is where the fun begins.
The length and cost of negotiations are generally directly proportionate with the amount of tax at stake and the degree of complexity of the subject-matter. There comes a point in all negotiations with SAV when the taxpayer has to decide whether to continue the process, a decision usually decided by the degree of progress made and an objective cost/benefit calculation relating to any estimated further gains.
Ideally, the assets in question will have been valued by an expert who will orchestrate the inevitable negotiations but as is unfortunately often the case, he has to take over from an enthusiastic amateur who has reached an impasse with SAV. It is never a good place to pick up negotiations from a position of weakness or worse, where the whole situation has been misunderstood and obvious pitfalls not avoided.
Valuing unquoted company shares and goodwill for tax purposes and then securing the optimum value after negotiations with SAV are not activities to be undertaken lightly and certainly not without a detailed understanding of the nature of the beast.
It could be taxing in more ways than one!