Grays Timber Products Limited vs HMRC

The new UK Supreme Court has recently handed down its first unanimous Tax Decision in favour of HMRC in Grays Timber Products Limited v Her Majesty’s Revenue and Customs. The case is complex and will be of limited appeal generally as it concerns the value of employment-related shares and whether rights attaching to those shares were “intrinsic” or “extrinsic” and had any enhanced value to the purchaser.

Grays Timber was sold to Jewson Limited in November 2003 for around £6m mainly in cash, a disproportionate part of which was paid to the Managing Director. The Taxpayer argued that this enhanced value (which was around £1m more than the open market value of the shares would otherwise have been) should be subject to capital gains tax, whereas HMRC claimed that income tax should apply in accordance with ITEPA 2003 Part 7. The case had already been heard by the Special Commissioners and an Extra Division of the Inner House of the Court of Session (in Scotland) and the facts of the case and decisions in those earlier hearings are reported in detail here.

The question for the Supreme Court, was whether the shares should be valued on the basis only of the rights attached to them as set out in the articles of association of the company (the intrinsic rights) or whether the special rights held by the MD under a separate subscription agreement (the extrinsic rights) should also be taken into account. The Court rejected the argument that the subscription agreement should be construed as part of the articles of association, such that the market value of the shares was enhanced. This finding was partly on the grounds that the subscription agreement recognised, not that the shares themselves were special but that the MD as holder of the shares was being rewarded for his efforts.

Lord Walker rejected the Taxpayer’s appeal and agreed with HMRC that the enhanced value should be subject to income tax. In his judgement he criticised the legislation in ITEPA Part 7 and expressed “the hope that Parliament may find time to review the complex and obscure provisions of Part 7 of ITEPA 2003”.