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UPPER TRIBUNAL
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UT Neutral citation number: [2013] UKUT 304 (LC)
UTLC
Case Number: TMA/159/2012
TRIBUNALS,
COURTS AND ENFORCEMENT ACT 2007
TAX – Capital Gains Tax –
freehold office premises – value as at 31 March 1982 – rental values – value
relativities between floors – yield – comparables – value determined at £137,500
– Taxation of Chargeable Gains Act 1992
IN
THE MATTER OF AN APPEAL AGAINST AN
AMENDMENT
OF A SELF ASSESSMENT UNDER
SECTION
9C OF THE TAXES MANAGEMENT ACT 1970
BETWEEN MICHAEL
BERNARD BLUM Appellant
and
HER MAJESTY’S
REVENUE & CUSTOMS Respondent
re:
48 Station Road, Harrow Middlesex HA1 2SQ
Before:
P R Francis FRICS
Sitting
at: 43-45 Bedford Square, London WC1B 3AS
on
17
June 2013
Michael MacVeigh, Accountant,
for the appellant taxpayer
Cain Ormandroyd,
instructed by Her Majesty’s Revenue & Customs for the respondent
DECISION
Introduction
1.
This is an appeal by the taxpayer, Mr Michael Bernard Blum, made under
section 46D (2) (a) of the Taxes Management Act 1970 against an amendment of a
self assessment for the year ended 5 April 2007 under section 9C of that Act,
whereby Her Majesty’s Revenue & Customs (HMRC) disputed the reported market
value of 48 Station Road, Harrow (the appeal premises) entered for Capital
Gains Tax (CGT) purposes at £200,000 as at 31 March 1982. HMRC assessed the
market value under ss35(2) and 55(1) of the Taxation of Chargeable Gains Act
1992 (TGCA 1992) initially at £100,000 but this was subsequently revised on
review to £130,000.
2.
A few days prior to the hearing, the appellant taxpayer had indicated to
the Tribunal his intention to present evidence in person due to the fact that his
formerly appointed surveyor, Mr John Wretham FRICS, who had valued the premises
for CGT purposes, was seriously ill, un-contactable and thus unable to attend.
Mr Wretham had initially had some discussions with HMRC’s appointed valuer and
it had been intended that he would provide an expert witness report on the
matter. However, the appellant was himself taken ill on the day of the
hearing and did not appear. He was represented by Mr Michael MacVeigh, his
accountant, who made no application for the hearing to be adjourned. I
indicated that I would attach appropriate weight to the appellant’s filed
evidence, and the hearing proceeded. Mr Cain Ormandroyd of counsel appeared
for the respondent and called Mr Martin Single BA MRICS, a Principal Valuer
within the Westminster office of the Valuation Office Agency who gave expert
valuation evidence.
Facts
3.
The parties produced a statement of agreed facts. From this, together
with the evidence and my external inspection of the subject premises and
surrounding area on 21 June 2013, I find the following facts. The appeal
premises comprise an early 20th C semi-detached gable fronted building
originally constructed as a house of rendered brickwork under slated roofs. It
is understood that it was converted to offices in the 1970s (which was its
continuing use at the valuation date) although it has since reverted to
residential use and is now three flats. As at 31 March 1982 it had accommodation
on three floors – ground, first and roof space rooms at second floor. There was
a small courtyard at the front, behind the pavement, which was used for parking
of a maximum of two cars, and there was an approximately 80 ft deep garden area
to the rear. The areas of internal accommodation are agreed between the
parties as:
Ground floor: 4 rooms and
staff wcs 62.70 sq m 675 sq ft
First floor: 5 rooms and staff
wcs 63.45 sq m 683 sq ft
Second floor: 4 rooms 20.71
sq m 233 sq ft
Total 146.86
sq m 1,591 sq ft
4.
The appeal premises front on to the busy A409 Station Road between
Harrow-on-the-Hill and Wealdstone, close to Harrow and Wealdstone stations and
the Civic Centre and in an area dominated by secondary commercial offices and
shops and some residential uses. They were acquired by the appellant on 7
December 1970 for £6,500 and at the valuation date were occupied as offices by
his close company, Brandone Machine Tool Ltd although there was no tenancy
agreement between Mr Bland and that company. The appeal premises were sold in
May 2006 for £482,000 which constituted a disposal for CGT purposes.
5.
The interest to be valued as at 31 March 1982 is required for re-basing
under section 35 of the TCGA 1992 and indexation allowance under section 55.
Issues
6.
In order to determine the value of the freehold interest with vacant
possession as at 31 March 1982, it is agreed that it should be valued on the
investment basis, and the following issues are in dispute:
1. The rental value of the premises
2. The relativity of rental values as between floors
3. The appropriate yield
to apply.
Appellant taxpayer’s case
7.
Mr Wretham’s valuation for the appellant dated 22 January 2008 assessed the
rental value at £17,000 pa based upon £12 per sq ft (psf) (£129.16 psm) for the
ground floor, £10 psf (£107.60 psm) for the first (a reduction of 17.5% from
ground floor value) and £6.50 (£69.96 psm) (a 45% reduction) for the second
floor accommodation together with three car parking spaces at £50 pa each. He
had adopted a yield of 8%, giving a multiplier of 12.5 and thus a capital value
of £212,500. Calculated on an overall basis, the rental value became £10.55
psf (£113 psm). Mr Blum’s “adoption” of Mr Wretham’s valuation report stated
that Wrethams had been operating in the Harrow area since 1948 and the
supporting evidence for his figures had been obtained from the firm’s own
archives and records.
8.
Following subsequent negotiations with HMRC’s appointed valuer (then a
Mr Timmis MRICS of the Shrewsbury office of the VOA) Mr Wretham had sent him a
letter dated 30 October 2009 querying why he had used £65 per sq m (psm) (£6.00
psf) overall whereas his comparables ranged from £66 to £83 psm and it had been
agreed that these premises were overall in good condition. Mr Wretham went on
to refer to a comparable at 35 Station Road, Harrow, a nearby ground floor
printers and stationers with storage at the rear, which he said clearly
supported his rental value assessments. Those premises, which had an overall
area of 434 sq ft (40.3 sq m) had been subject to a rent review in December 1983
to £12.67 psf. He had allowed some discount from this to allow for time in
assessing the rental value of the ground floor of the subject premises at
£12.00 psf (£128 psm). As to yield, Mr Wretham indicated that his records
showed 8% to be appropriate.
9.
In his written comments submitted in response to Mr Single’s report, Mr Blum
said that the comparables he had used at 38 Station Road, 184B Station Road, and 12 and 104 College Road, Harrow were all first or second floor units. With
the adjusted values (for size, location and time) reflecting £5.87 to £7.59 psf
(£63.20 to £81.77 psm) he said this justified £12 psf (£129.16 psm) for ground
floor accommodation to reflect ease of general and disabled access and the
premium that a purchaser would be prepared to pay for a vacant freehold and
premises which were not in mixed use. In Mr Blum’s view there was no
justification for Mr Single’s adoption of a uniform rate for ground and first
floor accommodation.
10.
Regarding yield, Mr Blum pointed out that Mr Single had said, at
paragraph 15.15 of his report, that it had been difficult to find evidence of
pure office investment transactions at around the valuation date, and had
looked at a range of predominately dissimilar mixed use investment sales over a
very wide area that had been sold at auction during the relevant period. This
was misleading in the extreme, and indicated the dearth of office investments
in the Harrow area, which would indicate a more favourable yield percentage. Mr
Single’s yield comparables also ranged from 4.52% to 16% which was a further
indicator of how diverse and inappropriate his analysis was. Furthermore, it
was suggested by Mr Blum that auction sales were not a good guide as they
tended to be forced or distressed sales.
Respondent’s case
11.
Mr Single is a chartered surveyor and is a member of the Statutory
Valuation Team within the VO responsible for all valuations for capital
taxation purposes, and has over 15 years experience in both residential and
commercial valuations for taxation and other purposes within the London
Boroughs. He said that, for the market value of an asset is defined in
section 272 of the TCGA 1992 as “the price which those assets might reasonably
be expected to fetch on a sale in the open market…no reduction shall be made in
the estimate on account of the estimate being made on the assumption that the
whole of the assets are to be placed on the market at one and the same time.”
12.
As to the description and condition of the appeal premises, he said that
this had generally been agreed in the negotiations with Mr Wretham, but it was
his view that there was only room for the parking of a maximum of two cars on
the forecourt.
13.
Mr Single approached the valuation in two ways – firstly to adopt the
investment method (also used by Mr Wretham and the appellant), normally used
for valuing commercial premises. In analysing the comparables to which he
referred in establishing the rental value, Mr Single said that he was of the
view that there was no difference in the weighting of the ground and first floor
accommodation in small office premises with no lift such as this (which he
calculated on the basis £75 psm (£6.96 psf)), but applied a 12.5% discount for
the second floor (£65.50 psm (£6.08 psf)). He said there was only room on the
forecourt for two cars at most. An appropriate yield, he thought, from an
analysis of admittedly not directly similar comparables was 8.5%. His
valuation was thus:
Ground and first floor offices
126.15 sq m @ £75 psm £ 9,461
Second floor
offices 20.71 sq m @ £65.5 psm £ 1,356
2 car parking spaces @ £50 pa
£ 100
Rental value as at 31 March
1982 £ 11,000 pa
YP in perpetuity @ 8.5%
11.765
£129,415 – say £130,000.
14.
Secondly, as a check to establish that the potential for alternative
uses did not result in a higher capital value, Mr Single considered two
transactions relating to nearby properties that were in different uses. These
did not produce a higher figure.
15.
Mr Single referred to 38 Station Road, North Harrow a smaller first and
second floor unit of 71.1 sq m close to North Harrow station but not within Harrow town centre. There was again no lift, and the premises were subject to a rent
review in May 1982 to £4,700 pa which analyses to £69.60 psm in terms of its
main space. The location was considered to be not quite as good as the subject
premises.
16.
No. 184B Station Road, Harrow, which is about ¼ of a mile to the south
of the subject premises, consists of 42.8 sq m first and second floor offices
above a shop in a more modern purpose built building in a busier, more
commercial location closer to the town centre. This office had been the
subject of a new lease from June 1983 on an internal repairing at £3,700 pa.
Mr Single said he adjusted the rent downwards by 5% to allow for the fact that
the landlord was responsible for external repairs and said there might have
been some slight upward movement in the market in the period since March 1982.
His analysis became £81.77 psm.
17.
Two further transactions referred to were 104 and 12 College Road, Harrow which were in the town centre close to Harrow-on-the-Hill tube station. Both were
internal repairing only with the landlords also being responsible for
insurance. No. 104 was a new letting of 158.6 sq m purpose built offices in a
1960s block from February 1982 at £13,100 pa. Adjusting the rent downwards by
7.5% for the repair and insurance provisions, the analysis became £76.30 psm.
No. 12 was 1st and 2nd floor offices over shops with no
lift, and this analysed on the same basis to £63.30 psm.
18.
Finally, 2 – 8 Elmgrove Road, Harrow was a two-storey inter-war office
building close to the town centre but in a generally similar location to the appeal
premises and occupied in conjunction with an adjacent building, 124-130 Station Road, Harrow. It was much larger at 696 sq m and was let fully refurbished
and modernised from 1983 at £50,000 pa. This analysed to £71.84 psm.
19.
Mr Single said that his choice of £75 psm for the appeal premises was
close to the £76.30 for 104 College Road which was similar in terms of size but
in better “office” area. It was also less than the £81.77 at 184B Station Road which was a very small suite and in his view small suites can command a slight
premium. Overall, it was his view that the comparables demonstrated that Mr
Wretham’s assessment of £113 psm was very substantially overstated, and there
were no transactions of which he was aware that came anywhere close to this.
20.
Turning to the yield, Mr Single produced a schedule of yields achieved
in auction sales that occurred in 1981 and 1982, including a block of mixed
retail and commercial premises in Station Road (9.23%), a shop with residential
above at 227 Northolt Road, South Harrow (7.76%) and shop with offices above at
119 Kenton Road, Harrow (4.52%). The latter comparable had a reversion due
shortly on the offices, hence the lower yield. Details were also provided of
investments in Great Russell Street, central London and Hackney. Whilst
acknowledging that the information was limited, Mr Single concluded that 8% was
appropriate on the basis of what comparable transactions were available, and
that Mr Wretham’s assessment was too high.
21.
Finally, commenting upon Mr Wretham’s reliance upon 35 station Road in
seeking a rental value in the region of £12 psf, Mr Single pointed out that it
appeared he had used a Zoning basis, as it was a retail property, and if the
rental was calculated on an overall basis the rental equates to around £70 psm
– a little less than he had applied to the ground floor of the appeal premises.
Conclusions
22.
Firstly, on the question of relative values between floors, whilst there
was little if any evidence to support either of the parties’ arguments, I am
satisfied that there would be unlikely to be any difference between ground and
first floor values in a building such as this. None of the comparables
produced, which were predominately for first and second floor offices, showed
any differences between them, and in my view the question of reduced security
at ground floor would be balanced by the minor access difficulties to upper
floors caused by the need to climb stairs. I therefore find in favour of Mr
Single’s evidence in this regard. As to the second floor, the appellant’s
valuer discounted that rental value by 45% whereas Mr Single only applied a
12.5% discount. In my opinion, that deduction was if anything generous to the
appellant. The second floor accommodation, requiring two flights of stairs for
access, having restricted ceiling heights in part and undoubtedly being darker
owing to its principal windows giving onto the side and looking directly at the
gable wall of the adjacent property, would, if anything, warrant a larger
discount. However, in the circumstances I conclude that Mr Single’s
observations on relativities should be accepted particularly as he said he was
mindful of the VO’s approach in rating valuations.
23.
The issue that has the largest impact upon the outcome of the valuation
is rental value and, whilst I have taken account of Mr Wretham’s views
expressed in negotiations with Mr Timmis following his initial valuation, and
Mr Blum’s written comments, the fact remains that the appellant has produced no
convincing evidence to support his concluded rental value figures. There was
simply nothing to support suggested rental values of anywhere near £120 psm for
the ground floor or £107 for the first floor, and in my judgment the
appellant’s suggested figure of £69 for the second floor accommodation is much
closer to the mark for the lower floors.
24.
Although Mr Single’s comparables produced a wide range of values and
several of the comparables were quite dissimilar in terms of location and size,
taking an overall view I cannot see any justification for a rental value higher
than he suggested. It certainly does seem to fall at the upper end of the
range and in all the circumstances I accept his evidence.
25.
It is, in my view, the question of yield that is the most subjective
and, as Mr Single admitted, his research had produced little concrete evidence
to support his conclusion. Although I have to accept that the appellant
produced no evidence at all on this issue, and Mr Blum’s views were, as he said
in his comments upon Mr Single’s report, not those of a qualified professional
valuer but simply “common sense”, I am generally persuaded by his arguments.
It does seem to me that yields achieved on the sale of wholly different types
of investment in central and east London are of little assistance, but I do
think the 7.76% initial yield on 227 Northolt Road was illuminating. That was
a shop with storage and residential above with a rent review due in March
1982. Doing the best that I can, therefore, on the limited evidence
available, I conclude that the yield should be 8%.
26.
Finally, having inspected the appeal premises externally shortly after
the hearing, I accept that there is only parking for a maximum of two, very
small cars on the forecourt, and the parking of any more vehicles in that
limited space would be impossible.
27.
The valuation therefore becomes:
Rental value
as at 31 March 1982 £11,000 pa
YP in
perpetuity @ 8% 12.5
£137,500.
28.
This decides the substantive issue in this appeal, and I determine the
value of the freehold interest in the subject premises as at 31 March 1982 in
the sum of £137,500. The decision will take effect when, and not before, the
question of costs is determined. A letter regarding submissions on costs
accompanies this decision.
DATED
4 July 2013
P
R Francis FRICS
ADDENDUM
29.
Submissions on costs have now been received from the parties. Mr
MacVeigh referred to a Calderbank offer that he had made to HMRC on 7 May 2013
“in the spirit of mediation and as a measure to prevent further costs accruing”
in the sum of £182,500. It was proposed that if that figure was acceptable,
each party should bear its own costs up to the date of acceptance and that a
joint application should be made to the Tribunal for an appropriate consent
order to dispose of the appeal. The offer was in response to an offer in
similar terms that had been made by HMRC on 30 November 2012 in the sum of
£150,000, the time for acceptance of that offer having expired on 4 January
2013. Mr MacVeigh submitted that despite the fact that the appellant
taxpayer’s offer had not been beaten by the Tribunal’s determination, the fact
that an offer had been made should be taken into account in determining the
question of costs and that, in the overall scheme of things, no award of costs
should be made.
30.
HMRC also referred to the two Calderbank offers and to an email that had
been sent to Mr MacVeigh on 25 April 2013 (before the appellant’s Calderbank
offer had been submitted) highlighting the potential costs position and
pointing out that, as a general rule, under the standard procedure, the winning
party may be entitled to all of their casts of the proceedings. HMRC
considered itself to be in a very strong position, and in the light of the fact
that counsel was being instructed, there was a strong possibility that the
appellant could be liable for significant costs.
31.
It was submitted that the Tribunal should take into account HMRC’s
Calderbank offer (that was for a higher valuation than had in fact been
determined) and should therefore determine that each party bear its own costs
up to and including the date when HMRC’s offer expired – 4 January 2013, and
that HMRC be awarded its costs from 5 January 2013 on the standard basis.
32.
I am satisfied for the reasons set out by HMRC that it should have its
costs from 5 January 2013, and so determine. Such costs, if not agreed, to be
determined on assessment by the Registrar.
DATED
24 July 2013
P
R Francis FRICS
