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

In our view, Grounds 1, 2, 3 and 4(1) are closely related and are most conveniently dealt with together.

Mr Farrell KC, appearing with Mr Demachkie and Mr Morris, for Nellsar, drew our attention to five paragraphs in the Decision (FTT [211]-[214]) which, in his submission, indicated that the FTT had developed its own theory about the correct accounting treatment and reached a conclusion which was not supported by the evidence. Although not an authority referred to in Nellsar’s skeleton argument, this was a challenge based on Edwards v Bairstow [1956] AC 14 principles.

This error in approach, Mr Farrell said, meant that the FTT erred when it concluded that:

Mr Farrell drew attention to the Decision at [214] which he submitted misrepresented the views of the valuation experts. In short, Mr Farrell’s submission was that the expert witnesses gave a more “nuanced” opinion than the FTT disclosed in the Decision. Mr Farrell based his submission on passages in the oral evidence (Footnote: ⁴). Whilst both experts agreed that there was a possible method of valuing a non-operational care home by reference to an operational care home, Mr Farrell contended that neither valuation expert agreed that this was an “appropriate” method of valuation and Mr Lock expressed reservations to the effect that he was not in fact comparing comparable assets and that this would result in “a lot of opinion” to derive an appropriate valuation if one started with the market value of operational care homes.

Mr Farrell also relied on the evidence of Mr Merris, Nellsar’s accountancy expert witness, and argued that neither accountancy expert had considered that FRS 7.9 could be supplemented by the use of special assumptions. Therefore this was not a finding of fact that the FTT were entitled to reach. Although the RICS Red Book, which did deal with special assumptions, was before the FTT, the FTT was not entitled to fly in the face of the expert evidence.

The decision of the Upper Tribunal in Ball UK Holdings Ltd v HMRC [2018] UKUT 407 (TCC) (Falk J and Judge Cannan) (“Ball UK”) established that a finding as to the correct accounting treatment was a finding of fact and not of law. However, the Upper Tribunal in that case at [41] indicated that the FTT was not entitled to “develop its own theory” as regards the appropriate accounting treatment. On that basis, the FTT were, therefore, wrong to conclude that FRS 7.9 permitted a valuation of one asset which could be derived from a comparison with the sales of others of different types.

Mr Farrell submitted that in carrying out a valuation under FRS 7.9, to arrive at a valuation for the property alone (and not the business carried on in the care home), it was necessary to find a comparison with a closed care home – what he described as a “turnkey care home” i.e. one that was closed but ready to operate. HMRC’s valuation expert, Ms Thorneagle, did not attempt to find such a comparison, because of the way HMRC put their case (i.e. relying on FRS 15, a standard which was inapplicable in the present case and applied to revaluations). (Footnote: ⁵) Mr Lock, Nellsar’s valuation expert, did seek to find a comparison in the relevant periods but concluded that there was insufficient evidence relating to closed care homes. This, Mr Farrell said, was the reason why Nellsar, in its accounts, used the DRC method of valuation.

The whole point of Financial Reporting Standards, Mr Farrell argued, was to give clear guidance to accountants – they are supposed to be, as Mr Merris’ evidence indicated, straightforward and are simply worded.

Mr Jones KC, appearing with Mr Winter for HMRC, argued that because the question of the correct accounting principles under GAAP was a question of fact and not of law (BallUK), Nellsar could only challenge the FTT’s findings concerning the correct accounting treatment on Edwards v Bairstow principles. In other words, Nellsar had to show that there was no reasonable basis upon which the FTT, on the evidence before it, could reach the findings that it did. Nellsar, in Mr Jones’ submission, had come nowhere close to meeting the exacting standards of the Edwards v Bairstow test.

Mr Jones submitted that FRS 7.9 required that the identifiable assets should be valued on a market value basis if a market value could be reliably ascertained. The DRC basis of valuation was a “last resort” (so described by Lewison LJ in Denning) and applied to assets in respect of which there was no open market e.g. power stations and airports. It was agreed that the identifiable assets in the present case were not “specialised properties”.

Mr Lock’s valuation evidence, in Mr Jones’ submission, was to the effect that there were recognised methods of adjusting the open market value of operating care homes to reach a value for a non-operating care home but that Mr Lock was not confident that this method of valuation would comply with FRS 7.9(a). But the question whether this particular method of valuation complied with FRS 7.9(a) was not a valuation question, Mr Jones argued, but rather was one for expert accounting evidence.

The key question, according to Mr Jones, was whether for the purposes of FRS 7.9(a) “assets similar in type and condition” were bought and sold on the open market. Mr Lotay, HMRC’s accounting expert witness, considered that if an open market value could be reliably ascertained for the identifiable assets then that value should be used in preference to DRC. Indeed, according to Mr Jones, both experts agreed that if an open market value could be reliably ascertained, it should be used instead of DRC.

Mr Jones drew attention to the evidence of Ms Thorneagle. She considered that the profits method of valuation provided a means of establishing a market value for the properties. She further considered that the DRC method of valuation was inappropriate – this was reserved for “specialised properties” which were not frequently traded on the open market (e.g. refineries, power stations, docks and specialised manufacturing facilities, public facilities, churches, museums (Footnote: ⁶)).