UT-2023-000116; - [2025] UKUT 00164 (TCC)

The main disputed paragraphs in the Decision were as follows:

“211.

But equally, we do not accept that, in the absence of a sufficiently active market in sales of non-operating nursing/care homes, this necessarily means that Nellsar is forced back, as it maintains, on using depreciated replacement cost for the purposes of ascribing a fair value to the property.

212.

The reason for this is that FRS7 requires fair value to be based on market value (rather than DRC) “if assets similar in type and condition are bought and sold on an open market”. The parties are agreed that there is an active open market in operating nursing/care homes being sold as going concerns. The question that arises is whether operating nursing/care homes are sufficiently “similar in type and condition” to the “identifiable assets” we are here concerned with to enable market values for the latter to be derived from prices paid on open market sales of the former.

213.

The only material difference between the two for these purposes is that the identifiable assets being valued for FRS7 purposes are the physical land and buildings, as referred to above, without the loose chattels and without the staff, residents, permits, contracts, etc. which would convert the land and buildings into a business. The RICS guidance on valuation of trade-related properties as going concerns sets out a clear method for approaching such valuations, based on assessing the fair maintainable operating profit (“FMOP”) that would be expected to be generated by a reasonably efficient operator from the property, then arriving at a capital value by applying an appropriate multiple to the FMOP. However, as is made explicit in VPGA4, this capital value should then be moderated by reference to appropriate assumptions. One possible assumption is that the property is “non-trading”, in which case it is specifically stated that the difference between an “operational entity” and a “non-trading” valuation could reflect the “cost and time involved in purchasing and installing the trade inventory, obtaining new licences, appointing staff and achieving FMT [fair maintainable turnover]”.

214.

In other words, it is clear that there is a recognised means of adjusting an “operational entity” valuation so as to provide a “non-trading” valuation of the underlying property. Both experts agreed as much, though Ms Thorneagle (Footnote: ⁹) regarded the fact as irrelevant and Mr Lock (Footnote: ¹⁰) expressed some reservations about its usefulness. Given that fact, we consider it to be self evident that the “identifiable asset” represented by the properties as described above (on the one hand) and operating care/nursing homes (on the other) are sufficiently “similar in type and condition” to allow for market values of the former to be established by reference to the open market in the latter in a way which satisfies paragraph 9(a) of FRS7.”

In short, Mr Farrell’s submission was that the expert witnesses gave more “nuanced” evidence. Mr Farrell highlighted the following exchange between Judge Poole and Mr Lock:

“JUDGE POOLE: Yes. The crux of whether 9(a) can and should be used is really the question of whether the trading care homes in which there is a market are assets similar in type and condition to what we are trying to establish the value of, namely, not an empty property but, yes, a property that is not trading that can be sold separately. When unpacking that concept of assets similar in type and condition, and bearing in mind that no two assets are ever going to be the same −− you are always looking at degrees of similarity −− is there a case for saying that, well, the test of whether something is sufficiently similar or not is whether there is some kind of generally acknowledged method of deriving the one from the other? Like, for example, along the lines that you have here.

MR LOCK: Yes, absolutely. I agree. I think the question is whether the amount of subjectivity that takes place in that spreadsheet that we looked at is −− we all know valuation is an art not a science, how much of that is acceptable within this process, and how much of it is truly valuer opinion and takes us beyond that point of comparability.”

[Transcript Day 3 page 67 line 21 et seq]

Mr Farrell also pointed to the following exchange between Judge Poole and Mr Lock:

As regards HMRC’s valuation expert, Ms Thorneagle, Mr Farrell drew attention to the following exchange with Judge Poole (Footnote: ¹¹):

“MS THORNEAGLE: I think there is a slight difference between the bricks and mortar valuation and the approach that Mr Lock has taken, because I think he has made some allowance for the fact that it’s a care home and that it is ready to trade et cetera, it wouldn’t necessarily be considered a bricks and mortar valuation, I don’t think. But in terms of his approach, if I was valuing a care home that was empty and ready to trade, and effectively a turnkey property, which I think is the approach that Mr Lock has taken, then I would adopt something very similar to him. I think I wouldn’t be valuing the goodwill or calling it goodwill and deducting that, but I was valuing a turnkey care home I would do essentially what I have done already, which is to do the fair maintainable operating profit and capitalise that, and then I would be deducting something for a build−up of trade which is what he has done. I wouldn’t personally be saying, well, this is going to be three times the profit and we will deduct that and call it goodwill, but in terms of the basics of what he has done, I think it would be broadly similar.

JUDGE POOLE: Right. So in broad terms the way he has approached it is a recognised approach as far as you are concerned, it is just that you don’t agree that it’s appropriate in this situation, and you might have some sort of slight nitpicky points about the detail of how he has done it?

MS THORNEAGLE: Correct.”
[Day 4 page 3 line 20 et seq]

The FTT was therefore wrong, Mr Farrell submitted, to conclude that:

Mr Farrell argued that the FTT reached its findings having imported a valuation technique, which sought to moderate the valuation of operational to non-operational care homes, which was not prescribed by FRS 7. This was not an approach recommended by either accountancy expert and was not supported by the evidence or the wording of FRS 7. It was the FTT devising its own theory, in the absence of expert evidence, on how GAAP should operate.

We reject Mr Farrell’s submissions. In our view, there was sufficient evidence to enable the FTT to reach the conclusions that it did. As always, in an appeal brought on Edwards v Bairstow grounds, the question is not whether we agree with the FTT’s decision but whether there was sufficient evidence to support it.

As Mr Jones observed, the issue between the parties concerned what he described as the “junction” between accounting and valuation evidence. Mr Merris and Mr Lotay gave accounting evidence for Nellsar and HMRC respectively and Mr Lock and Ms Thorneagle gave valuation evidence for Nellsar and HMRC respectively.

Mr Merris’ opinion was that market value in the context of FRS 7 must be based on market evidence of the property (not including the value of the business) being sold without the trade being attached and not a valuation technique. Due to a lack of suitable transactional evidence, it was not possible to obtain an open market value for the individual asset (i.e. excluding the business) as care homes are rarely sold without the trade attached. Hence, as market value was not available for care home properties without the attached business of goodwill, their fair value should be determined using DRC in accordance with FRS 7 paragraph 9(b). Where there was little or no market evidence for the individual assets (i.e. without the attached business) DRC was the only applicable method of determining the fair value of the properties under FRS 7. Market value of the assets could not be determined, as market value was established only where similar assets (i.e. excluding the attached business) are sold on an open market. Furthermore, the determination of market value should not involve the use of a different basis of valuation adopting a different definition of the asset to be valued using for example FRS 15.

Mr Lotay’s opinion was that market value should be determined using one of the valuation techniques in FRS 15. This would mean that fair value for the property assets should be determined by using Existing Use Value taking into account their trading potential. He considered that the requirements of FRS 7.9(a) were met as he was advised by HMRC’s valuation expert that it was possible to obtain a market value for the properties. On the basis that market values could be established for the properties then FRS 7.9(b) would not be relevant. However, if market value could not be established, then DRC would be used to determine fair value of the property assets acquired. Because such care home businesses were frequently bought and sold (and were trade-related properties), there was an open market and hence it was possible to establish a market value for the care home properties as required by FRS 7.9(a). We note, in this context, that Mr Merris in cross-examination accepted that the real question is whether a market value could be reliably ascertained for each property, although he added that the property was the property without the trade.

Mr Lock considered that the “identifiable assets” were the bricks and mortar and in situ trade furnishings, fixtures and fittings and that, consequently, they were required to be valued without the business. Whilst care homes without the business were bought and sold on an open market Mr Lock was of the opinion that such sales are few and far between and comparable sales will be very difficult, if not impossible, to identify. Therefore, Mr Lock took the view that guidance to valuers was required on whether under FRS 7 it was acceptable to provide a market value on the basis of extrapolation from what is available in the market (information relating to trading care home business sales) to arrive at the bricks and mortar and trade furnishings and fittings elements of the entity or whether, if direct comparables of bricks and mortar and trade furnishings, fixtures and fittings without the business are not available, a DRC approach has to be taken

Ms Thorneagle considered the market value of each property in accordance with her interpretation of the RICS guidance on valuing trade-related property. She considered that there were adequate examples of reliable market transactions that did not include goodwill and therefore an assessment of market value could be made. She valued the properties on the basis that the care homes were open and operational, in line with the facts on the valuation date. Ms Thorneagle considered the FMT and FMOP of each home under the operation of the REO and used this to determine a market value for each property. In other words, she used the profits method of valuation. She did not consider that DRC was an appropriate method of valuing the properties. Quoting the Red Book she considered that DRC should only be used for “Specialised Properties” (i.e. properties much more specialised in nursing homes). (Footnote: ¹²) She was aware that the accountants, informed by their valuation experts, disagreed about whether a market value could be established. Ms Thorneagle considered that a market value for the identifiable assets could be established.

Ms Thorneagle also considered that RICS guidance was clear that even if a property met the definition of specialised property, it should only be valued on a DRC basis if there was no alternative method of valuation. A care home was considered to be a trade-related property that could be valued by reference to their trading potential. In Ms Thorneagle’s opinion it would therefore be contrary to RICS guidance to value care homes using the DRC method.

We consider that it is clear that the FTT rejected Mr Merris’ evidence that the building should be accounted for on a DRC basis and preferred that of Mr Lotay, although it did not fully accept his evidence, as we shall see. In particular, as regards Mr Lotay, the FTT did not accept (FTT: [206]) that each property should be valued on the basis that it was an operational entity. It disagreed with Mr Lotay’s view that, because each property was an operational entity, this was its “condition” for the purposes of FRS 7.9(a). Instead, it considered (FTT: [207]) that the reference in FRS 7.9(a) to the “condition” of the property was to the physical condition of the property and the market conditions at the time of sale and was not intended to widen the scope of the “identifiable asset” which had to be valued.

In our view, the FTT was perfectly entitled to reach these views on the evidence before it. Mr Lotay’s evidence was that if there was a reliable method of valuing the properties then market value should be used under FRS 7.9(a). Ms Thorneagle considered that there was a reliable valuation method, albeit that the FTT, for the reasons given above, rejected the view that the properties should be valued on the basis that they were operational. It was common ground that there was an open market in operational care homes. Thus, in effect, the starting point for the valuation was that of operational care homes and these were care homes which were “assets similar in type and condition are bought and sold on an open market.”

The FTT then considered that the RICS guidance (FTT [209] and [213]) allowed adjustments to be made so that so that a value for non-operational care homes could be derived from the open market values for operational care homes. It is this step, in particular, to which Mr Farrell objected in his submissions.

However, in our view, there was evidence which entitled the FTT to reach this conclusion.

The FTT had before it the text of the FRS 7 which, in the explanation section, included the following commentary on the concept of “fair value”:

“42.

Although the FRS contains specific requirements for determining fair values of different classes of assets and liabilities, the concept of fair value underlying the specific rules is the value at which the asset, or liability, could be exchanged in an arm’s length transaction between informed and willing parties.

43.

Where similar assets are bought and sold on a readily accessible market, the market price will represent the fair value. Where quoted market prices are not available, market prices can often be estimated, either by independent valuations, or valuation techniques such as discounting estimated future cash flows to their present values. In some cases, where quoted market prices are not available, subsequent sales of acquired assets may provide the most reliable evidence of fair value at the time of the acquisition.

44.

Where a fair value is based on a market price, it is important to ensure that such price is appropriate to the circumstances of the acquired business. For example, it may be possible to obtain a price for secondhand plant and machinery of the type used in the business, but the secondhand market may deal in very small volumes; or the items may not be identical in terms of the ability to obtain maintenance or technical support from the manufacturer or for the machinery to be customised to the requirements of the business. In general, unless the acquired business is genuinely able to consider the purchase of second-hand equipment as a viable alternative to purchasing direct from the manufacturer, the fair value of plant and machinery is more appropriately determined from the replacement cost of an equivalent new asset, depreciated where appropriate to reflect its age and condition.” (Emphasis added)

It seems to us that paragraph 43 clearly envisages that, as Mr Jones submitted, direct compatibility was not a requirement for the purposes of FRS 7.9(a) and that “valuation techniques” could be used to establish an open market value.

As regards the Red Book, Practice Statements (“PS”) are binding on valuers whereas, as their name suggests, Guidance Notes (“GN”) are intended to guide valuers but are not binding. We note, in particular, PS3.2 and GN1 and the Appendix 2.3 to PS3, all of which (apart from Appendix 2.3), were before the FTT. Later versions of GN1 (GN2 and VPGA4) were also before the FTT.

Furthermore, PS3.2 of the Red Book, headed “Market Value”, provided that:

“Valuations based on Market Value (MV) shall adopt the definition, and the interpretive commentary, settled by the International Valuation Standards Committee.”

After that definition some additional commentary was added, which included the following at paragraphs 2 and 6:

“2.

In order to apply Market Value to certain property types it may be necessary to add a statement clarifying both what is being valued and any Assumptions that are inherent in the valuation. Examples include property that is normally sold having regard to its trading potential, and Plant & Machinery, both of which are discussed below. The circumstances of the valuation may also require Special Assumptions to be made (see Appendix 2.3). However, it should be recognised that although additional words may be required to clarify the application of Market Value, this is not a different basis, but rather the same core basis with additional Assumptions.

…

6.

There are certain categories of property designed or adapted for particular uses which change hands in the open market as fully operational business units for a strictly limited use at prices based directly on trading potential. The price will include trade fixtures, fittings, furniture, furnishings and equipment. This type of property includes: hotels, bars, some restaurants, movie theatres or cinemas, gasoline or petrol stations. In these cases the valuer will need to supplement Market Value with additional words clarifying whether the valuation assumes that the property changes hands as a fully-equipped, trading entity, or on some other Assumption or Special Assumption (see Appendix 2.2 and Appendix 2.3). Further information on this type of trade-related valuation is also contained within GN1.”(Emphasis added).”

In the Decision the FTT noted, in a footnote to the above extract from PS3.2, in relation to Appendix 2.2 and Appendix 2.3 to PS3.2: “These Appendices were not included in the copy of Practice Note 3 included in our bundle.” It is not clear why Appendix 2.3, in particular, was not provided. We were however provided with a copy. Appendix 2.3 was titled “Special Assumptions” and at paragraph 4 it provided:

“4.

Trading property

4.1

In the case of a trading property the Special Assumptions may include that:

…

- the businesses is closed when it is actually trading from the property;

…”

Guidance Note GN1, entitled “Trade-related valuations and goodwill”, went through a number of versions over the relevant period. The FTT was provided with versions from May 2003, September 2003, January 2006 and unknown dates in 2007 and 2008. In the 2006 version, its title was changed to “Specialized Trading Property valuations and goodwill”, and for the 2007 and 2008 versions its name was changed again to “Trade related property valuations”.

As the FTT noted, the introduction to GN1 remained largely the same throughout these versions. The FTT set out the following text which shows the original version from 2003, with alterations made in the 2007 version (and carried through to the 2008 version) noted in italics:

“1.

Introduction

1.1

The commentary to PS3.2 indicates that special consideration must be given to the application of Market Value to certain categories of property that are normally bought and sold on the basis of their trading potential. Examples of this type of property include hotels, bars, restaurants, movie theatres [movie theatres replaced by “theatres” in 2007 version] or cinemas, gasoline or petrol stations [“gasoline or petrol stations” replaced by “fuel stations” in 2007 version][“, and care homes” added in 2007 version]. The essential characteristics of properties that are normally sold on the basis of their trading potential is that they are designed, or adapted, for a specific use and that ownership of the property normally passes with the sale of the business as an operational entity.

1.2

This Guidance Note [“is restricted to trade related property valuations. It” added in 2007 version] considers the additional criteria that need to be considered by the valuer in these cases. It [“. It” replaced by “, but” in 2007 version] does not concern itself with methodology [“methodology” replaced by “methods of valuation” in 2007 version], which will vary depending upon the trading [“trading” deleted in 2007 version] property to be valued.”

The FTT also set out paragraph 4 of GN2 (a later iteration of GN1) and VPGA4 (a later iteration of GN2) also referred to “Valuation special assumptions”, as follows:

“4.1

A trade related property will usually be valued to market value or market rent, but valuers are commonly asked for valuations subject to special assumptions.

Typical special assumptions are:

(a)

on the basis that trade has ceased and no trading records are available to prospective purchasers or tenants

(b)

on the same basis as (a) but also assuming the trade inventory has been removed

(c)

as a fully equipped operational entity that has yet to trade (also known as ‘day one’ valuation) and

(d)

…” (Emphasis in the original)

Mr Lock touched on the use of “special assumptions” in his evidence (Mr Lock’s report dated 14 October 2019). He said:

“8.5

I consider a property only valuation could have been provided in accordance with Red Book as a Special Assumptions valuation and those assumptions would need to be agreed with the client. In the accounting circumstances we are reviewing I would consider such assumptions may have been:

a)

The property is non-operational;

b)

TFFF&E [Trade Furnishings, Fixtures, Fittings and Equipment] are present or not as per client instructions;

c)

The property is in its existing physical condition;

d)

There are no adverse circumstances that led to the property being non-operational;

such as administration, forced closer under regulation or major new competition.

8.6

Such assumptions would allow a valuer to consider the property as closely as possible to the actual circumstances but without the business.

8.7

There may well be difficulty in assessing the value of the property directly to examples of other non-operational properties that sold in the open market where the Special Assumptions also applied as there would be very few such sales. It would also be difficult in most instances to identify examples of any non-trading care home sales whatever the circumstances of closure as, overall, there are very few sales of non-operational care homes in any one year. I return to this below.

8.8

The vast majority of care homes are sold as fully equipped operational entities. I note FRS 7 does not give any guide as to frequency of sales but, for a valuer, the frequency is very likely to be too little for there to be reliable comparable sales on which to directly base a valuation of the property only. In those circumstances, and I would fully expect those circumstances to arise in all but the rarest of cases, the valuer would normally apply a residual approach to the valuation, commencing with a valuation as a fully operational entity and then making deductions therefrom (as is market practice) to arrive at a non-operational property value that reflects what the market would pay. However, it does not seem to me that FRS 7 allows the valuer to use this alternative approach.

8.9

It would be for the client to decide whether such an approach would be acceptable for the purposes of paragraph 9 a) of FRS 7 and the valuer would be instructed accordingly.”(Emphasis added)

In the italicised words in paragraph 8.8, Mr Lock accepted that a valuer would be able to apply “a residual approach to valuation”. In our view, he explicitly recognised an analogous approach to that adopted by the FTT in the Decision. His only misgiving was whether this approach would comply with FRS 7. However, the requirements of FRS 7, as both Mr Lock and Ms Thorneagle explicitly recognised, were not matters on which they were competent to opine.

Drawing these threads together, it seems to us that taking account of PS 3.2, GN1 and Appendix 2.3 to PS3, which was echoed later in GN2 and VPGA 4, taken together with Mr Lock’s evidence in paragraph 8.8 of his report dated 14 October 2019 and Mr Lotay’s view in relation to FRS 7, that if a market value could be reliably established then market value should be used instead of DRC, there was sufficient evidence before the FTT to support its Decision (at FTT [212]-[214]).

It is fair to say that the FTT did not fully accept the evidence of any of Mr Merris, Mr Lotay, Mr Lock and Ms Thorneagle. Instead, it will be apparent from any fair reading of the Decision that the FTT carefully picked its way through the evidence, being selective in which evidence it accepted – accepting some parts and rejecting others. In adopting this approach the FTT was playing its proper role, as Arnold J said in Smith, as “a specialised tribunal not merely by virtue of its function, but also by virtue of the expertise of its members” and we consider that we should give particular deference to its reasoning and conclusions.

We should add that in his reply Mr Farrell suggested (somewhat tentatively in our view) that the FTT had been wrong to take account of GN2 (which dated from 2011) and of VPGA4 (which dated from 2014) on the basis that that valuation guidance post-dated the transactions in question.

Mr Jones objected to Mr Farrell’s submission. First, no objection had been made to using these materials before the FTT. Secondly, in his submissions before us and before the FTT, Mr Farrell had also relied on these materials as supporting his submissions. Thirdly, Nellsar did not have permission to appeal on this ground.

We agree with Mr Jones’ submissions. It was far too late for this point to be raised and, in any event, permission to appeal had not been granted on this point and we did not understand Mr Farrell to be applying for leave to appeal on that issue. In any event, it seemed to us that the various versions of GN1, GN2 and of VPGA represented a gradual evolution in approach rather than a materially different set of valuation principles. GN2 and was an expanded version of GN1 whilst VPGA4 “entirely echoed” GN2: see FTT [129], [137] and [145].

Therefore, for the reasons advanced by Mr Jones, we see no grounds for impugning the Decision on this basis.

In the present case, Mr Farrell took us to parts of the evidence of Mr Lock, Ms Thorneagle and Mr Merris in order, in his submission, to demonstrate that the FTT’s conclusion was not supported by the evidence before it. In our judgment, that exercise was deficient. It was necessary for Nellsar fairly to lay out allthe relevant evidence before the FTT, both that which supported the FTT’s conclusion and that which might be said to contradict it. In accordance with Georgiou, the criterion is that of relevance to the subject matter of the appeal. Otherwise, a party basing its appeal on Edwards v Bairstow can simply put forward selectively only those parts of the evidence which it considers supports its case. In our view, Nellsar simply failed to put forward all the relevant evidence. Instead, Nellsar selectively cited those passages (mainly) of the oral evidence which it considered supported its case. That is simply insufficient to sustain an Edwards v Bairstow challenge. It amounts to a roving selection of evidence of the sort that was deprecated in Georgiou. If nothing else, for an appellant to be required to lay out all the relevant evidence will bring home to it an understanding of the formidable hill which must be climbed in order to succeed on an Edwards v Bairstow appeal.

Finally, although it does not form part of our reasoning, we merely observe that in relation to Sonya Lodge three different valuations setting out different market values were provided by the valuers at the time of its acquisition. Those valuations are summarised by the FTT at FTT [66]. All three valuations involved the use of Special Assumptions. The third valuation included four Special Assumptions, one of which was that the business was closed. It appears that reaching a market value on the basis of an assumption that the business was closed was not an unusual valuation technique.

Accordingly, we dismiss Nellsar’s appeal on Ground 1.

As regards Ground 2, Nellsar argues that the FTT misconstrued FRS 7.9(a) and imported a valuation technique there was not prescribed by FRS 7.9. Mr Farrell accepted that Ground 2 largely overlapped with Ground 1.

Ground 2 appears to be a challenge to the FTT’s finding of fact in relation to the correct accounting treatment i.e. what GAAP required in the circumstances. It follows, therefore, that Ground 2 also fails for the same reasons as Ground 1. In any event, we accept HMRC’s submission that FRS 7 does not prescribe any valuation techniques but only principles, although it does recognise that valuation techniques may need to be applied (FRS 7.44). In addition, we note that Mr Farrell submitted that the fact that there were possible valuation techniques does not mean that they should be read into FRS 7.9 (a) without clear words. Mr Farrell cited FRS 7(43) in support of his case. However, as we pointed out at paragraph ‎139 above, FRS 7(43) supports HMRC’s case by contemplating the use of valuation techniques in order to establish market prices.

We therefore dismiss Nellsar’s appeal on Ground 2.

In relation to Ground 3, Mr Farrell argued that the FTT’s conclusion was inconsistent with FRS 7.44 and paragraph “e” of the Summary to FRS 7. We note that FRS 7.44 was not referred to in argument before the FTT. Again, this is effectively an attack upon the FTT’s findings of fact, viz the correct treatment under GAAP. In our view, for the same reasons given in respect of Grounds 1 and 2, Ground 3 falls well short of what is required under the Edwards v Bairstow principle. In relation to paragraph “e” of the Summary to FRS 7, this provision states:

“Unless they can be measured at market value, the fair values of non-monetary assets will normally be based on replacement cost.”

It seems to us that, rather than supporting Nellsar’s argument, this paragraph contradicts it. As we read this provision, it indicates that it is only if the fair values of non-monetary assets cannot be measured at market value that the use of DRC is required.

We therefore dismiss Nellsar’s appeal on Ground 3.

In relation to Ground 4(1), Nellsar argued that the FTT erred in concluding that its accounts were not GAAP-compliant and that, in any event, the allocation was just and reasonable.

Mr Farrell submitted that for the reasons set out in Grounds 1-3 the FTT had incorrectly concluded that FRS 7.9 required that the value of the properties had to be assessed by market value with assumptions being applied. Therefore, it was said, Nellsar was entitled to take the view that it was not appropriate to base the value on market value given the difference in type and condition between the hypothetical identifiable asset and the nature of the open market in operational care homes. FRS 7.9 was expressed disjunctively and therefore DRC was an appropriate method of calculation.

However, because Ground 4(1) is predicated on Grounds 1-3 and because we have dismissed Nellsar’s appeal on Grounds 1-3, it seems to us that Ground 4(1) must also fail.