UPPER TRIBUNAL (LANDS CHAMBER)

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

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 20^th 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 1^st and 2^nd 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