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

The FTT considered that the crucial issue revolved around a precise delineation of the nature of the “identifiable asset” referred to in the Companies Acts and, based on that legislation, in FRS 6 & 7. Given the parties’ agreement that a nursing/care home was an asset that can be disposed of separately from any business carried on within it up to the time of disposal, the FTT concluded that the “identifiable asset” was the land and the buildings on it (including any fixtures which, as a matter of real property law, are so annexed as to become part of the land). Loose chattels (such as movable furniture), consumable stores and the like were not to be included because they constituted separate “identifiable assets”: FTT [204-205].

The FTT rejected HMRC’s argument that each property should be valued on the basis that it was an operational entity, because that was its “condition” and to do so would therefore “reflect the conditions” at the time of the sale: FTT [206]. The references in FRS 7 to “the condition” of the property and “the conditions” at the time of sale referred, respectively, to the physical condition of the property and the market conditions at the time of sale and are not intended to widen the scope of the “identifiable asset” that is to be valued: FTT [207].

The FTT acknowledged that it was clear from the RICS guidance notes (and reinforced by the Court of Appeal decision in Denning at [66]) that in using the profits-based method of valuing a trade-related property, the valuation which was arrived at was a valuation of the property (which includes its inherent trading potential but no separate element of goodwill specific to the owner’s business). Nonetheless, it was equally clear that the property which was primarily in contemplation in both the RICS guidance notes and Denning was a property which was being valued as an integral part of, albeit independently of, a going concern business which is being operated from it: FTT [208].

The FTT noted (FTT [209]):

“The RICS guidance has, throughout all the versions of GN1, GN2 and VPGA4 (Footnote: ³) provided to us, recognised that it is possible, by the application of appropriate adjustments, to convert an “operational entity” valuation to an “empty property” (or similar) valuation. Both experts agreed with this proposition. The effect of this is that whilst it is still “the property” that is being valued, that property can nonetheless be valued in different “states” whilst complying with RICS guidance.”

The FTT began its analysis of whether market value or DRC applied by considering the nature of the identifiable assets which were to be assessed for FRS 7.9 purposes. The FTT stated at FTT [210]:

“We consider that the paramount requirement under FRS7 to ascribe a fair value to the property which comprises the “identifiable asset” means, when the true nature of that asset is properly considered, that the property must be valued as a separate asset from which a business is capable of being carried on, rather than as an integral part (or even the embodiment) of an existing business being carried on from the property. In doing so, the focus should be on the property itself, with loose chattels of any type which do not, in law, form part of the property, being excluded, along with contractual rights and obligations of the business, staff, residents, associated permits, etc. This simply reflects the requirement of FRS6 & 7 to evaluate each identifiable asset and liability separately” (underlining in the original).

The FTT did not accept that the absence of a sufficiently active market in sales of non-operating nursing/care homes necessarily meant that Nellsar was forced back on using DRC for the purposes of ascribing a fair value to the property: FTT [211].

The FTT recorded that the parties were agreed that there was an open market in operating nursing/care homes being sold as going concerns: FTT [212]. The question therefore arose as to whether , under GAAP, operating nursing/care homes were sufficiently “similar in type and condition” (FRS 7.9 (a)) to the “identifiable assets” to enable market values for the latter to be derived from prices paid on open market sales of the former: FTT [212].

In answering this GAAP question, the FTT held that the “only material difference” between an operating care home and the “identifiable assets” was that the latter properties would lack the loose chattels, staff, residents, permits, contracts, and so forth which would convert the land and buildings into a business: FTT [213]. The FTT considered that the RICS guidance on the valuation of trade-related properties as going concerns “sets out a clear method for approaching such valuations”, based on the 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: FTT [213]. The FTT continued at FTT [213]:

“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]”

The FTT therefore concluded (at FTT [214]) that the expert valuation evidence showed that there was a “recognised means of adjusting” an “operational entity” valuation in order to produce a non-trading valuation of the underlying property. The FTT commented that the expert valuation witnesses for both parties (Mr Lock – the expert valuer for Nellsar – and Ms Thorneagle – the expert valuer for HMRC) “agreed as much, though Ms Thorneagle regarded the fact as irrelevant and Mr Lock expressed some reservations about its usefulness.” Given that fact the FTT considered it to be self-evident that the “identifiable asset” represented by the properties as described above, i.e. non-trading care homes (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 satisfied FRS 7.9(a).

At FTT [215] the FTT rejected Nellsar’s valuation approach. The FTT could see no basis in the RICS guidance for the approach which Mr Lock advanced for making this adjustment. His approach involved assessing a separate goodwill value for the business, based on the time, cost and risk of building up to the FMT, and then deducting that value from the purchase price (also deducting appropriate values for the loose chattels), thereby arriving at what he considered to be the value of the property by means of a “residual” approach. It seemed to the FTT that, rather than value the property, this approach was an attempt to derive a property value by reference to deductions from the price actually paid – thereby having no regard to the open market itself.

The relevance of FRS 15 did not in the FTT’s view, arise. However, the FTT’s approach to FRS 7 did not, in the FTT’s view, conflict with FRS 15 in that both proceeded on the basis of market value rather than DRC. FRS 7 simply imported a specific concept of the “identifiable asset” which went beyond what was found in FRS15, which was primarily concerned with revaluations of assets which would be operational nursing/care homes: FTT [216(1)].

The FTT’s conclusion was, therefore, that “open market” fair values could properly be allocated to the care homes the subject of the appeal under FRS 7.9(a) and therefore the allocation of DRC figures under FRS 7.9(b) would not have complied with FRS 7, meaning that Nellsar’s relevant accounts were not drawn up in accordance with GAAP: FTT [217].

The FTT then outlined the consequences of its decision: FTT [218]-[221]

Since the FTT considered that Nellsar did not draw up its relevant accounts in accordance with GAAP, for the reasons given above, and since the FTT preferred HMRC’s argument as to the consequences (see paragraphs ‎33-‎38 above), the FTT considered that the allowances available to Nellsar should, in principle, be recomputed as if “correct accounts” had been drawn up on the basis of revised valuations of the various properties: FTT [218].

The FTT emphasised that it was not laying down any particular assumptions or adjustments which it considered should apply in preparing the revised valuations – that was a matter for professional valuation opinion upon which the Lands Chamber of the Upper Tribunal would in due course, if necessary, adjudicate: FTT [219].

The FTT recorded that the parties were agreed that the role of the FTT in relation to this appeal was limited to adjudicating on the meaning and effect, in the context of the facts of these appeals, of the statutory framework within which a determination of any value must be carried out: FTT [10]. In the light of that agreement, the FTT’s decision was limited to stating that in valuing the properties in question, the method to be adopted was to value them pursuant to paragraph 9(a) of FRS 7 on the basis set out in the RICS guidance referred to above but in accordance with FRS 6 and 7 valuing only the “identifiable asset” in each case i.e. assuming there to be no current staff, residents, contracts, permits or other accoutrements of the business and excluding any chattels which, as a matter of real property law, did not form part of the land at the time of Nellsar’s purchase: FTT [220].

At FTT [221], the FTT stated:

“We should emphasise that in doing so, regard may be had to the trading history of each property, which we consider to be, at least in part, an inherent aspect of the property itself. Both valuation experts agreed that in valuing a closed down nursing home, some account may well be taken of the “stigma” attached to the property, depending on the reason for the closure. Obviously no such stigma should be assumed in the present cases, and it may be that the valuers’ view of the risk, cost and time involved in reaching FMT will be informed, at least in part, by the trading history of the relevant property. We would also consider that the status of a property as effectively “grandfathered” for the purposes of National Minimum Standards would also be assumed to continue for the purposes of the valuation exercise: the fact that the property must in our view be separately valued as an “identifiable asset” in the way we have outlined does not mean that it should be regarded as closed and would therefore require bringing up to National Minimum Standards before it could be re-opened.”