Valuation is an art: Make sure of what you are painting

Practical Share Valuation deals not only with unquoted shares but also with the valuation of other intangible assets such as goodwill and intellectual property.

In lliffe News and Media Ltd & Others v Revenue & Customs Commissioners (2013) SFTD 309, the valuation was considered of five-year licences of ‘various unregistered trademarks (UTMs) being titles of local newspapers and other periodicals, referred to as “mastheads” (which) were assigned from the respective subsidiaries to their parent company INML and were then licenced back to the subsidiaries by INML for consideration of various sums totalling £51,400,000’.

Three methodologies of valuation were considered, all assuming a five-year licence. These were:

  • The royalty relief methodology (‘RRM’) – which we understand to be a computation of the present value of royalty payments saved through the ownership of the licence;
  • The elimination methodology (‘EM’) – sometimes called ‘the residual value approach’, which is a method based on allocating the correct proportion of the determined value of the entire intangible assets and goodwill of a business to the assets licenced, and determining the proportion of that value attributable to the licences by application of the RRM, and
  • The market methodology (‘MM’) – ascertaining the proportion of enterprise value represented by mastheads in transactions in the market place (or the price paid for mastheads sold in isolation), applying such proportion to the value of the relevant subsidiaries’ businesses and determining the proportion of the resultant ascertained value attributable to the licences by application of the RRM.

HMRC’s independent valuation expert (Mr Ryan), in his second Supplementary Report also considered clause 3.8 of the licences, which he said he had overlooked when he wrote his two earlier reports. Clause 3.8 concerns the entitlement of the licensor (INML) from time to time, at its sole discretion on at least 30 days’ notice, to remove any UTMs from the licence on payment of a pro-rata refund of the licence fee attributable to UTMs so removed.

Mr Ryan stated that clause 3.8 significantly increased the likelihood that an existing publisher would be the only credible acquirer of the licences, essentially because of the investment needed in the business which the licences would permit, and the uncertainty attendant upon possible exercise by the licensor (INML) of its entitlement under clause 3.8. He stated his opinion that the replacement value of the UTMs which were subject to the licences was £10.8m and, on the basis that the Tribunal found that the existing publishers (notionally deprived of the right to use the relevant mastheads) were the only credible acquirers of the licences, he suggested that the appropriate valuation was based on that figure, but discounted to take account of the uncertainty created by possible exercise of the power of removal under clause 3.8. He suggested a figure of up to 35% of the cost of recreating the UTMs, i.e. £3.8m.

HMRC submit that the purported assignments of UTMs in this case are purported assignments in gross (i.e. not as part of a business) and that a UTM (as opposed to a registered trade mark) cannot, as a matter of law, be assigned in gross. The TMAs in this case are, in HMRC’s submission, ineffective.

Our conclusion in relation to the issue is therefore that the purported assignments of UTMs in this case by the respective subsidiaries to INML were assignments in gross and were void for mistake as to the assignability of the subject matter of the purported assignments (see: Halsbury’s Laws, 4th Edition 2007 Reissue, Vol. 13, Deeds and other instruments, paragraph 71 and the cases there cited). It follows that no UTM has been validly transferred to INML or licenced back to INML, and on this basis the subsidiaries’ appeals in relation to their claims to write down for tax purposes the acquired licences of UTMs fall to be dismissed.

This case demonstrates that experienced valuers can arrive at substantially different figures: £51.4m and £3.8m.  It also demonstrates that a purported assignment of an unassignable asset is void for mistake.

Nigel Eastaway OBE


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Nigel Eastaway is a tax partner at MHA MacIntyre Hudson and an expert on share valuations, forensic matters and the taxation of intellectual property.

 He is co-author with Diane Elliott, Shân Kennedy, Chris Blundell and Cameron Cook of Practical Share Valuation, Sixth Edition (Bloomsbury Professional), which helps practitioners to understand and tackle the issues involved in preparing and reviewing a valuation of unquoted shares or intangible assets.

Written by Ellie MacKenzie

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