Nellsar Limited v The Commissioners for HMRC

For acquisition accounting, fair value of an identifiable tangible asset should be based on market value where a reliable market value can be established by appropriate valuation techniques. Directly identical comparables are not required. The market value of a trade-related property may be derived from sales of operational properties and adjusted by appropriate assumptions, while excluding assets and rights that are separately identifiable from the property.

Depreciated replacement cost is a method of last resort. It is unavailable merely because few non-operational properties are sold. For corporation tax, non-compliant accounts are treated as if correct accounts had been prepared. For SDLT, a just and reasonable apportionment is properly anchored in the independent market values of the assets acquired.

Nellsar acquired five care homes as going concerns and allocated the purchase prices between properties, fixtures and fittings, and goodwill. HMRC issued corporation tax assessments and SDLT closure notices, challenging the goodwill and property allocations.

The FTT held that the properties should be valued at market value under FRS 7.9(a), using appropriate adjustments to values derived from sales of operational care homes, rather than at depreciated replacement cost. It also held that the SDLT consideration should be apportioned using market values. Nellsar appealed on five grounds. HMRC appealed on two grounds concerning the assumptions identified by the FTT. The central questions were whether the FTT’s accounting conclusions were open to it on the evidence and whether its directions imposed counterfactual valuation assumptions.

1. Both appeals dismissed. The FTT’s decision was affirmed.
2. The correct accounting treatment under GAAP was a question of fact. On an appeal under Edwards v Bairstow, the Upper Tribunal asks whether sufficient evidence supported the FTT’s finding, not whether it would have reached the same conclusion. The FTT was entitled to assess the expert evidence selectively and to give considerable weight to its specialist composition and first-hand evaluation of the evidence.
3. FRS 7.9 did not require directly identical sales. The FRS 7 explanation contemplated independent valuations and valuation techniques for estimating market prices. The FTT was entitled to find that operational and non-operational care homes were sufficiently similar in type and condition, and that RICS materials supported adjustments from an operational-entity valuation to a non-trading property valuation. DRC was therefore unavailable on the facts as a substitute for market value.
4. The FTT correctly held that Nellsar’s accounts were not GAAP-compliant and that the corporation tax computation had to proceed as if correct accounts had been prepared. Paragraph 105(3)(b) of Schedule 29 did not permit the taxpayer to replace the required accounting treatment with an apportionment based on the same DRC method that made the accounts non-compliant.
5. For SDLT, “just and reasonable” in paragraph 4 of Schedule 4 to the Finance Act 2003 took its meaning from the statutory context. The FTT was entitled to prefer an apportionment anchored in independent market values. Leedale v Lewis arose under materially different legislation and facts.
6. The FTT’s reference to valuing only the identifiable asset did not impose counterfactual assumptions that the care homes were closed or lacked staff, contracts or chattels. Read fairly and as a whole, the passage defined the asset to be valued. The actual valuation, if disputed, remained for the Lands Chamber.

• Upper Tribunal (Tax and Chancery Chamber): appeals against the FTT decision released on 11 August 2023 dismissed; the FTT’s decision affirmed.