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HMRC internal manual

Employment Related Securities Manual

HM Revenue & Customs
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Disposals for more than Market Value: Grays Timber Products Limited v HMRC ([2010] UKSC 4)


Mr Gibson was appointed as managing director of the company in November 1999 and shortly afterwards paid £50,000 for ordinary shares in Grays Group Ltd (the Group), the holding company of his employer, amounting to about 6% of the ordinary share capital of the Group. The Group had just one class of ordinary shares. Separately, but at around the same time Mr Gibson entered into a subscription agreement with various other holders of shares in the Group who, together with Mr Gibson, owned about 84% of the ordinary shares. One of the effects of the agreement was that, broadly, in the event of a takeover of the Group, Mr Gibson would receive 1/3 of the sale consideration over a target amount, in accordance with a formula set out in the agreement.

In November 2003 the Group’s 222,037 ordinary shares were sold to Jewson Limited for around £6m, of which Mr Gibson received just over £1.4m. Mr Gibson would have received just under £0.4m if each of the 222,037 ordinary shares had been sold for the same amount.


HMRC contended that Mr Gibson had disposed of his shares for more than their market value and that the amount by which the consideration he received exceeded the market value was employment income by virtue of Chapter 3D.

The company argued that the market value of Mr Gibson’s shares should include the effects of his rights under the subscription agreement, so that he had not received more than market value for his shares.


The Supreme Court found that the market value to be determined for the purposes of Chapter 3D was the value of the rights attached to the shares for which a hypothetical purchaser would be prepared to pay. The fact that the rights under the subscription agreement were personal to Mr Gibson, and of no value to any purchaser meant that they were not part of the asset to be valued for the purposes of Chapter 3D.

There was much discussion during the hearing of the case at all its stages of whether the rights provided by the subscription agreement “attached” or were intrinsic to Mr Gibson’s shares, and of the significance or otherwise of the rights not being contained in the articles of the Group. In his judgment Lord Walker referred directly to both these questions and said that the answers did not alter his conclusion that the rights were personal to Mr Gibson.

“… some rights, even if properly described as intrinsic to the property to be valued, are nevertheless worthless to the hypothetical purchaser posited by the statutory definition of “market value”. (para 37)

“These rights would have been personal to Mr Gibson even if they had been set out expressly in the new articles adopted by Group when the subscription agreement was entered into. A right can be personal even though it is intrinsic in the sense previously discussed, since class rights can be enjoyed by a class with only one member.” (para 39)

“Lord Kingarth (at 67 and 68) [in the Court of Session]… considered that Mr Gibson’s rights were personal rights that did not attach to the shares. Lord Mackay of Drumadoon (at 87-89) took the same, or a very similar, view. I am in substantial agreement with the majority of the Court of Session, except that I would reach the same conclusion even if the rights did in some sense attach to Mr Gibson’s shares: whether attached or unattached, they were of no value to the hypothetical purchaser, and he would pay the hypothetical vendor nothing extra on account of them.” (para 40)

The other Supreme Court judge to give a full decision in the case was Lord Hope, and he, too, is clear that the rights to be valued are those acquired by the hypothetical purchaser; rights that are of no interest to such a purchaser should be ignored.

Lord Hope also rejects the proposition advanced by Counsel for the company that the legislation in Part 7 of ITEPA needs to be interpreted on the basis that the overriding consideration is that each Chapter of Part 7 should be applied consistently with all the others.

“… if there is any theme in the Act it is one of anti-avoidance and the closing down of perceived tax loopholes. This suggests that the correct approach is to take each Chapter according to its own terms without trying to draw conclusions from the way the common definition of “market value” is applied elsewhere in Part 7.” (para 56)

In the context of Grays Timber Products this meant that the concept of market value, and the determination of the asset to be valued, needed to be approached in a way which made sense in the context of Chapter 3D.

Factors to be considered in determining market value for the purposes of Chapter 3D

  • If rights connected with securities are personal to a vendor, in the sense that they would be of no value to a hypothetical purchaser, then they do not form part of the asset to be valued and have no impact on the market value of those securities for the purposes of Chapter 3D, even if those rights are expressed in the articles of association relevant to the shares.
  • A right can be personal even though it is “intrinsic”;
  • A common definition of market value cannot be applied consistently across all the Chapters of Part 7: the general anti-avoidance theme of Part 7 must be borne in mind. Accordingly, the concept of “market value”, and the determination of the asset to be valued, need to be approached in a way which makes sense in the context of each Chapter of Part 7 viewed individually, including Chapter 3D.