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Share valuation case report – Dyer & Dyer v HMRC

Chartered accountant, William Franklin, examines a recent share valuation dispute concerned with how much intellectual property can belong to an individual rather than a company for share valuation purposes.

Overview

In Roger Dyer and Jean Dyer v HMRC [2013] UKFTT 691 (TC), Mr & Mrs Dyer the claimants unsuccessfully applied for relief for a capital loss under s.24(2) TCGA 1992 and s.132 ITA 2007.

A failure to secure and protect intellectual property assets within the company ownership structure left the company worthless.

Facts

  • The case concerns shares in a company called JD Designs Limited. The sole director was Jenny Dyer, a fashion designer.
  • Jenny Dyer became a fairly successful designer and ‘Jenny Dyer London’ became a valuable trademark.
  • All of the relevant intellectual property for the Jenny Dyer brand was registered in Jenny’s own name and there was no licensing agreement with the company. Jenny was the source of all of the company’s revenue and the sole designer behind the Jenny Dyer brand, but she had no employment contract with the company and could resign as director by giving written notice at any time.
  • On 31 October 2007, Jenny’s parents, Mr & Mrs Dyer, acquired a total of 350 newly-issued shares in the company, representing 91% of its share capital, for £350,000. This represented a capitalisation of part of an £800,000 debt owed to the Dyers.
  • In 2007 and 2008 the company made losses of £470,291 and £306,617.
  • Over the course of 2007 and 2008, the company received several approaches from potential external investors. However, none of the approaches ever came to fruition.
  • In June 2008, Jenny met a Mr Rosen who lived in the US. Jenny left the company in autumn 2008 to move to New York with Mr Rosen. The company was abandoned and eventually liquidated in 2009 and 2010.

Claim

Mr & Mrs Dyer claimed a capital loss in relation to the shares. HMRC accepted that the shares were of negligible value in 2009 when the claim was made, but argued that their value had always been negligible from the time they were first acquired, so that no loss had actually arisen.

Conclusions

Looking at how much a valuation of the shares would be worth on the open market as at October 2007, the court concluded that a third party investor would have required the company to have full rights to the Jenny Dyer London intellectual property, and to have a firm contract in place with Jenny.

Without these, the company was worthless, as demonstrated by the situation on Jenny’s departure.

The Court considered the hypothetical possibility of a buyer who would not have objected to the lack of IP rights or the failure to have a contract with Jenny in place. It concluded that “There is no evidence that any buyer existed or might have existed whose attitude to the defects in the assets whose sale is hypothesised would resemble that of Mr and Mrs Dyer when acquiring the shares.”

Mr & Mrs Dyer’s claim therefore failed.

For further on any aspect of share plans, please contact William Franklin, on 0121 348 7878 or email william.franklin@pettfranklin.com.

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