Simon Wilders v The Commissioners for HMRC

The appeal concerns a closure notice dated 16 February 2022 issued by HM Revenue & Customs (HMRC)to Mr Simon Wilders (Appellant) removing the Appellant’s claim for share loss relief (Relief)in the sum of £99,360 and thereby refusing a repayment claim of £48,117.40 for the tax year ended April 2011.    The Relief was claimed in respect of an investment made in early 2011 in Shantaram Search and Verification Limited (SSVL), a company formed to participate in a marine salvage venture. The investment resulted in a loss following the failure to locate a specific shipwreck (Wreck).

The appeal has been identified as a lead case.  There are other taxpayers with appeals stayed generally pending the outcome of this appeal. Some of those taxpayers were investors in SSVL. As we understand the position others invested in other entities relating to other searched but using the same investment model.

The Wreck to which the search related was that of the Merchant Royal (codenamed Shantaram) which was recorded to have sunk in 1641 and was believed to contain a valuable cargo. A previous search had recently been undertaken. Although that search did not locate the Wreck, it did identify a debris field on the seabed, including artefacts consistent with a vessel of the relevant period. That debris field was identified using a research file compiled by Odyssey Marine Exploration Inc (OME), a specialist marine exploration company.

The estimated value of the cargo, derived from historical records, was believed to be in the region of £400 million, albeit subject to acknowledged uncertainties and risks. Following the initial search, it was decided that a further, more extensive search should be undertaken. That second search was to be funded by admitting a new investor company into the existing joint venture which had been responsible for the initial search.

SSVL was incorporated for that purpose. Its role was to raise capital from investors and to contribute funds to the joint venture, alongside the existing participants, Shantaram Research Ltd (SRL) and Linbaba Marine Ltd (LML). The joint venture was structured so that, if the Wreck were located and the cargo successfully recovered or sold in situ, the net proceeds would be shared between the joint venture and other participants in agreed proportions, after deduction of costs.

In January 2011, SSVL issued an Information Memorandum (IM) setting out the proposed investment. The IM explained that SSVL intended to raise £7,992,000 through the issue of 9,250 ordinary shares of 1p each at a price of £864 per share. The funds were to be used primarily to enable the joint venture to procure specialist marine services to verify the debris field and to search for the remainder of the Wreck and its cargo (the material terms of the IM are discussed below at paragraphs 20 to 51).

As part of the investment structure, subscribers for shares in SSVL were offered the opportunity to fund part of the subscription price by way of loan finance. The IM explained that a loan facility of up to 75% of the subscription price would be made available to investors through Sterling Credit Guarantee Company Ltd (SCGC), subject to individual eligibility.

The Appellant was introduced to the investment opportunity by his advisors S4 Financial plc (S4). He received a suitability letter (Suitability Letter) and the IM, and in January 2011 he agreed to subscribe for 115 shares in SSVL at a total subscription price of £99,360. Of that amount, £24,840 was to be paid from his own resources, with the balance of £74,520 to be funded by loan finance.

On 27 January 2011, the Appellant completed and signed the relevant subscription documentation, including a declaration as a high net worth individual, a letter of subscription for the shares, and an authorisation to solicitors to pay the cash element of the subscription and the loan arrangement fee. He also applied for, and was offered, a loan (Loan)from SCGC in the amount of £74,520.

The Loan was governed by an agreement under which SCGC agreed to lend 75% of the subscription price. It was secured by a charge over the shares and was supported by a guarantee given by Charlesworth Marine Ltd (CML). The Loan was repayable in specified circumstances, including after a period of 60 months or on the winding up of SSVL, subject to the contractual terms (the material terms of the Loan agreement are discussed below at paragraphs 52 - 59).

On 7 February 2011, the Appellant paid the cash element of the subscription price, to the solicitors acting in the transaction. The investment arrangements were completed on 10 March 2011, on which date a large number of interlocking agreements were executed.

The financing structure involved a series of connected loan and guarantee arrangements. SCGC made loans to the investors, including the Appellant. The funds for those loans were provided to SCGC by CML, which in turn was funded by a loan from Burgos Investments Ltd (BIL). Security was put in place at various levels, including charges over bank accounts, guarantees, and set-off arrangements.

In order to effect the physical search CML had entered into charter arrangements with Global Marine Search Ltd (GMSL), which in turn chartered the search vessel and equipment from OVH Inc (OVH). Under the Shantaram “A” Completion Agreement (A Agreement), GMSL and OVH both agreed to defer a substantial portion of their charter fees and instead to take an interest in the proceeds of any successful recovery (the relevant terms of the A Agreement are discussed below at paragraphs 71 - 86).

The search commenced in April 2011 and continued through the remainder of that year and into early 2012. OVH produced periodic reports detailing the progress of the search. Despite the extended search, the Wreck was not located. Following a final visit to inspect the remaining targets in February 2012, it was concluded that the funds having been exhausted it was not proposed or recommended that further capital be raised to continue the search.

As a result, SSVL’s shares became worthless. The Appellant made a claim for relief in respect of the loss on his shares by way of an amendment to his self-assessment return for the tax year ended 5 April 2011. The amended return was submitted on 23 March 2012 on his behalf by S4 Taxation Services Ltd (we were not told the relationship between this company and S4 but consider it reasonable to infer there was some relationship). HMRC later disallowed the claim by way of the closure notice under appeal.

The basis on which HMRC disallowed the claim gives rise to five disputed issues between the parties:

We were provided with a bundle of documents comprising 1442 pages included within which were witness statements from the Appellant, Colin Emson, Chairman of SSVL and Fiona Hotson-Moore who had been appointed by the Appellant as an expert witness to value his shares at the time of purchase.

Although not an overly document heavy appeal we nevertheless reminded the parties that in accordance with the guidance given by the court of appeal in Swift & others v Fred Olsen Cruise Lines [2016] EWCA Civ 785 at [15] and endorsed by the Upper Tribunal in Adelekun v HMRC [2020] UKUT 244 (TCC) in which it was stated:

Our attention was drawn to comparatively few documents.

We provide a review of the IM first by providing a general overview of it and then by considering the following topics covered by it: (1) the project to be funded; (2) the business plan, financing for the project, and costings; (3) estimated returns to subscribers and how they were determined; (4) risks and potential for loss; (5) tax implications for subscribers; and (6) regulatory status of the investment.

The IM was dated January 2011 and was issued by SSVL. Its stated purpose was to invite subscriptions for ordinary shares in SSVL in order to fund participation in a marine search project directed at locating and verifying the Wreck.

The structure of the IM is that of a conventional private placement or investment promotion document. It begins with a summary of the offer, including the amount sought to be raised, the price per share, the identity of the Company and its joint venture partners, and a high-level description of the project. This is followed by corporate information, including details of directors, advisers, registrars and the Company’s registered office. A definitions section is included to establish consistent terminology. Included within the list of directors were Colin Emson, Nicholas Pilbrow and Gabriel Ruhan. Mr Pilbrow’s expertise is noted as in international taxation. Mr Ruhan is noted as a shipwreck search specialist.

A substantial portion of the document is devoted to describing the historic background to the Wreck, drawing on archival material from English, Spanish and other European sources. This material appeared intended to support the proposition that the Wreck would be found and that it carried a valuable cargo of silver, gold and jewels, and that the cargo was privately owned rather than subject to sovereign immunity.

The IM also summarised the proposed structure of the joint venture, the contracts to be entered into for search and verification, the technical methodology to be employed, and the phased approach to the project from research through to recovery and sale. Schedules provide budgetary information, vessel specifications, risk factors, and legal and regulatory considerations. The document concludes with subscription procedures, forms, and declarations required from prospective subscribers, including a certified high net worth individual statement.

The IM identifies the three principal components of a shipwreck search as (1) the research file representing the review of historical files and practical knowledge; (2) the search box i.e. an area identified through research where the shipwreck was expected to lie; and (3) the search vessel.

The Wreck was described as a 17th‑century armed merchant vessel which was said to have been lost in the Western Approaches or Western English Channel while carrying a substantial cargo of bullion and valuables. The IM explains that because the ship under investigation was a merchant vessel, rather than a warship, it was considered that it was not considered to be subject to sovereign immunity and thus there was no legal precedent for refusal of salvage. It acknowledged that legal claims to ownership may be lodged but expressed the view that even subject to such claims up to 90% of the value of the cargo may be awarded to the salvor.

The IM sets out a summary of the research file which had been compiled by OME. Detail of the historical records as to location and value of the cargo is provided. The historical records are unsurprisingly not entirely consistent.

According to the IM, SRL and LML had already conducted preliminary research and remote-sensing surveys and had identified a site containing cannon and debris consistent with a merchant vessel of the relevant period. Through this process a search box known as Site 30E was identified as possessing the features anticipated for potentially finding the Wreck and which demanded further study “for positive or negative identification”. Pursuant to the initial phase the IM reports that within Site 30 there were scattered remains of a “probable armed merchant vessel wrecked in the same period as the Wreck and within the parameters of location consistent with the historical records as to where the Wreck had sunk. This was described as “extremely important” and justified a view that there was a high degree of historical probability that the wreckage identified was likely to be English. Whilst noting that there were material uncertainties it was considered “on the basis of current evidence, Site 30E remains a compelling candidate for part of” the Wreck.

The funded project was to carry out further analysis and verification of that site, with the objective of locating the main hull and cargo. The immediate phase to be funded was a Search and Verification Contract, under which specialist contractors would conduct geophysical surveys, visual inspections and analysis over an estimated period of up to 99 days. This phase was presented as a necessary precursor to any recovery operation and as the point at which the location and identity of the Wreck, if found, could be reasonably confirmed or excluded. The plan involved recovery of some of the artefacts identified from the debris trail for verification as to relationship to the Wreck; make further searches to map the debris and follow any debris trail; use technology to identify if the hull was hidden under sand waves on the seabed; and carry out further searches within an additional 100 square mile area following analysis of the previous information.

If the Wreck were confirmed as the Shantaram, the project contemplated subsequent phases, including legal processes to establish salvage rights and ownership, followed by archaeological recovery, conservation and sale of artefacts and cargo. These later phases were acknowledged to require additional funding beyond that raised under the IM.

The business plan set out in the IM centres on raising equity capital to fund the SSVL’s contribution to the joint venture for the search and verification phase of the project. The proposal was to raise up to £7,992,000 through the issue of 9,250 ordinary shares of 1p each at a subscription price of £864 per share. Upon full subscription, subscribers would hold 92.5% of the SSVL’s issued share capital, with the remaining 7.5% retained by founding shareholders.

The capital raised was to be applied primarily to the Search and Verification Contract. A budget was provided, showing an aggregate projected cost of £7,472,750 for the search operation itself. This budget included mobilisation, vessel transit, operational days, specialist technology days, weather contingency, port calls, equipment, conservation transport, project management and specialist equipment use. The estimated operational period was 99 days, excluding certain transit periods, with daily rates specified for different categories of activity.

In addition to the search costs, allowances were made for capital raising and project assembly costs, legal costs, and a small residual balance to remain within SSVL as working capital. The IM discloses the availability of a loan facility from SCGC of up to £5,994,000, intended to provide “Available Finance” alongside the equity subscriptions, such financing for use either directly by SSVL or to subscribers.

The business plan acknowledges that, if the Wreck were identified and recovery pursued, further substantial expenditure would be required. These additional project costs would include legal proceedings to establish salvage rights and ownership, archaeological recovery operations, conservation, storage, transportation, insurance, security and marketing of recovered items. The IM states that such costs might be funded by borrowing against anticipated recovery value, by asset sales, or by further equity arrangements, but no firm financing structure is fixed for those later phases.

The plan therefore envisages a staged approach, with subscriber funds applied only to the initial search and verification phase, and any decision to proceed further taken in light of the results of that phase and the availability of additional finance.

The IM is explicit that no formal forecast of returns could be given. Nevertheless, it provides illustrative estimates of potential returns in order to indicate the scale of upside contemplated by the promoters. These estimates were said to be derived from historical research into the likely cargo of the Shantaram and from assumptions about the division of proceeds within the joint venture.

The document states that, based on archival material, the cargo and artefacts could have had an original value in excess of £400 million in modern terms, depending on condition, composition and market circumstances. This figure appears to be derived from historical valuations of silver, gold and jewels reportedly carried by the vessel, converted to contemporary values by reference to bullion prices and comparative metrics.

The IM then sets out an illustrative allocation of proceeds. It suggests that the joint venture’s share of recoverable value could exceed £137 million. Of that sum, the SSVL’s share, divided in proportion to joint venture capital contributions, is stated to be in excess of £47 million. After deducting costs of search, recovery, realisation and corporation tax, funds available to shareholders are illustrated as being approximately £34.7 million.

These figures are not presented as predictions but as scenarios contingent on a series of assumptions: successful identification of the Wreck; recovery of cargo in commercially saleable condition; favourable legal outcomes in relation to ownership and salvage rights; controlled marketing of artefacts to avoid depressing prices; and cost containment within budgeted levels.

The IM also outlines potential exit strategies, including sale of cargo through auction houses or dealers, sale of artefacts through specialist channels, or other forms of realisation. It notes that realisation could take a significant period of time to maintain a controlled market. The estimated returns are therefore presented as highly sensitive to factual, legal, market and operational variables, and the document cautions that subscribers could receive substantially less than the illustrative figures or nothing at all.

The Memorandum contains an extensive risk section emphasising that the investment is speculative and of high risk. It states plainly that subscribers may lose the entirety of their investment. The risks identified span operational, legal, financial, regulatory and market domains.

Operationally, the search and recovery of deep-sea shipwrecks is described as inherently difficult and hazardous. Weather, sea conditions, equipment failure and unforeseen seabed conditions are identified as giving rise to delay or preventing operations altogether. The material risk that the Wreck may not be found, may already have been salvaged, or may not be the Shantaram is identified. Further, it is highlighted that even if a wreck, either the Shantaram or any other vessel, was found, it may not contain valuable cargo, or the cargo may be degraded beyond commercial value.

Legally, the Memorandum highlights the possibility of competing ownership or salvage claims by governments or private parties, particularly if the Wreck lies in UK territorial waters. Regulatory intervention was stated to have the potential to prevent recovery, export or sale of artefacts. It was also noted that laws and regulations may change, and political or governmental interference could halt the project.

Financial risks identified include lack of control by SSVL over key contractors, absence of any established market for the shares, currency fluctuation risk, and the possibility that recovery costs exceed the value of recovered items. Further, that additional funding required for later phases may not be available on acceptable terms.

The research underpinning the project is itself identified as a risk. Historical and archival data relating to shipwrecks are identified as potentially being incomplete, inaccurate and based on assumptions, legends or misinterpretations. Investors are reminded that reliance on such data may therefore be misplaced.

The IM stresses that the list of risks is not exhaustive and is not presented in any order of priority.

The IM includes a discrete section addressing taxation, while emphasising that it does not constitute tax advice and that subscribers should seek independent professional advice.

At the SSVL level, it is stated that SSVL will pay full United Kingdom corporation tax on trading profits arising from the project. It was recognised that if SSVL were to incur losses, no group relief or other loss relief would be available.

For individual subscribers resident in the United Kingdom, the IM states that any gain arising on the disposal or other realisation of their shares would be subject to capital gains tax at the prevailing rate, which at the time of the IM was stated as 28%. Losses arising on disposal or realisation of the shares were identified as constituting capital losses for taxation purposes which could be set against capital gains or income, subject to applicable tax rules. It does not explicitly indicate any form of tax sheltering or preferential treatment. The tax position is presented as conventional, with returns taxed in accordance with general UK tax principles applicable at the relevant time. Subscribers are expressly warned that tax treatment depends on individual circumstances and may change.

The IM makes clear that the investment was promoted as an unregulated financial promotion. It states prominently that the content of the promotion had not been approved by an authorised person within the meaning of the Financial Services and Markets Act 2000.

The offer was restricted to individuals certified as high-net-worth individuals under the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. Subscribers were required to sign a statutory declaration confirming their status and acknowledging that they may lose significant rights, including rights to complain to the Financial Services Authority or the Financial Ombudsman Service, and rights to compensation under the Financial Services Compensation Scheme.

The loan documentation comprises a specimen letter setting out principal terms, a loan application form, and a formal loan agreement between SCGC and the borrower.

The stated purpose of the Loan is to fund up to 75% of the borrower’s subscription price for shares in the Company. The loan amount is defined by reference to the subscription and is advanced in a single instalment following satisfaction of specified conditions precedent. Drawdown is conditional upon delivery of agreed security and confirmation from the SSVL’s solicitors that full subscription monies have been received in accordance with the information memorandum, considering the borrowing from SCGC.

The documentation identifies two forms of security. First, the borrower grants a first legal charge over the entirety of the shares acquired in the SSVL. Secondly, a guarantee of repayment is provided by CML, described as a founder shareholder of SSVL. The specimen terms state that the loan is “with full recourse to yourself as the borrower”, although the detailed agreement qualifies enforcement rights in a number of respects. A fee, described as a documentation and guarantee fee, is payable to SCGC on drawdown, calculated as a percentage of the loan amount.

Interest accrues over the life of the loan and is expressed not as a fixed rate on principal but as an amount calculated by reference to 10% of any gain realised by the borrower on a sale or other realisation of the charged shares. Principal and accrued interest are contractually repayable 60 months from drawdown, subject to earlier repayment mechanisms linked to realisation events.

The agreement contains provisions governing the application of proceeds. If the borrower sells any shares while the loan remains outstanding, the proceeds must be paid directly to SCGC and applied in repayment of the loan. In the event of a winding up of SSVL, the borrower irrevocably instructs SSVL or any liquidator to pay to SCGC any monies otherwise due to the borrower, for application towards repayment. These mechanisms operate through the terms of the charge.

The lender’s enforcement rights are structured. SCGC agrees that it will not enforce its rights against the borrower under the loan agreement or the charge unless and until it has first called upon the guarantor to make payment under the guarantee. Before calling for repayment from the borrower, SCGC must give 30 days’ notice, during which the borrower may nominate a third party to acquire SCGC’s rights under the agreement. If such nomination is made, the agreement provides for novation of the lender’s rights for consideration calculated by reference to the market value of remaining shares or a minimum sum of £1000.

The borrower gives representations and warranties as to legal capacity and enforceability of obligations, subject to the enforcement sequencing provisions. Ongoing undertakings restrict disposal of the shares other than on terms requiring proceeds to be applied in repayment. Further undertakings require the borrower to exercise shareholder voting rights so as to procure the appointment and retention of directors nominated by SCGC while any part of the loan remains outstanding.

The agreement includes standard provisions as to payment without set-off, waiver, severability, execution in counterparts, and is governed by the law of England and Wales with exclusive jurisdiction of the English courts.

The Suitability Letter dated 19 May 2010, records advice given to the Appellant in relation to an investment in SSVL. The assessment of suitability is expressly based on the Appellant’s status as a certified high net worth individual, with the stated premise that such status confers both an understanding of, and capacity to absorb, the risks of a highly speculative venture.

The letter outlines the commercial background of the project by reference to the experience and track record of OME, described as a leading operator in deep sea shipwreck exploration and recovery. It recounts a series of past discoveries and recoveries of significant monetary and historical value, together with anticipated media involvement. The historical background of the Merchant Royal is summarised, including estimates of the scale and potential value of its cargo. Prior search activity is described, alongside scientific uncertainty as to identification of a particular site, which is said to justify further verification work.

There is some hyperbole in the letter’s description of the project including a statement the investors having an “opportunity to participate in something that has the potential to make history which will be covered at all times by the television team from the Discovery Channel”.

The project was said to be managed by Robert Fraser Marine Ltd (RFML) a subsidiary of Robert Fraser Asset Management (RFAM). These organisations share common directors with CML, GMSL and SSVL. RFML said to have and provide expertise and finance in the location and recovery of historical shipwrecks. We understand this expertise to be a reference to Gabriel Ruhan.

The investment opportunity is presented as participation in a defined programme of verification and search operations, expected to commence in March 2011 and last approximately 99 days. The Appellant was invited to acquire shares in SSVL, whose stated purpose was to carry out the activities described in the IM. The potential gross value of any recovered cargo was estimated to be substantial, subject to condition, recovery and marketing. The letter repeatedly characterises the investment as speculative, while also emphasising the scale of potential upside if the project proved successful. It stated that a potential return on initial cash invested of 809% could be achieved within 9 months.

The recommended investment was £99,360, structured through a combination of personal funds and borrowing. The Appellant’s direct cash contribution would be £24,840 (plus fees), with the balance funded by the Loan of £74,520. The use of gearing was presented as a means of obtaining enhanced exposure to the potential profitability of the project. Illustrative projections were included, showing that, if successful, the investment could yield a significant return relative to the Appellant’s cash contribution within a relatively short timeframe, while also stating that the value realised could be lower or nil.

Any return was anticipated to arise from the successful completion of the project and the realisation of value, rather than from ongoing trading receipts. Liquidity risk was highlighted, with no established market for the shares, and the Appellant was warned that he may be unable to dispose of his holding. It is also explained that, if the Wreck is found, additional funding may be required to meet legal, archaeological, recovery, conservation, transportation, storage and sale costs, with such funding potentially raised through borrowing against anticipated value or, subject to shareholder approval, by seeking further equity contributions.

Tax treatment is addressed in a distinct and substantive section of the letter. It states that the investment is designed to make a profit and that, if profitable, SSVL would be subject to corporation tax, with the Appellant subject to capital gains tax on any profits realised on disposal of his shares. It is further stated that it is not the intention of SSVL to pay dividends, but that, if dividends were paid, they would be subject to income tax in the normal way.

The letter also addresses the tax consequences in the event that the investment was unsuccessful. It explained that, if the project did not generate a profit, the Appellant may become eligible to claim capital losses. Those losses were described as potentially capable of being offset either against current or future capital gains or, alternatively, set against income of the current or prior year of assessment. Reference is made to the possibility of relief being available under cessation of trade rules for close companies, subject to the investor having paid sufficient tax in the relevant periods. The letter expressly notes that tax treatment depends on prevailing legislation and practice, that rates and rules are subject to change, and that HMRC may not approve a claim at any stage.

The loan arrangements are summarised as forming part of the overall investment structure. The Loan is described as full recourse to the individual borrower, but secured against the shares and supported by a guarantee from CML. The letter explains that, although the bank would have no recourse to the investor’s personal assets beyond the investment vehicle, the debt would remain outstanding and could pass to the guarantor if the project were unsuccessful. It is also noted that variations to the Loan might be considered under a deed of novation.

The letter concludes by emphasising the speculative nature of the venture, the specific operational risks associated with locating and recovering the wreck, and the importance of reading the IM in full. Suitability was framed in terms of the investor’s high net worth status, risk tolerance and capacity to bear loss, with express reference to both the potential for significant commercial returns and the availability, in certain circumstances, of tax reliefs if the investment does not succeed.

This agreement is a consolidation and participation agreement entered into between CML, OME, OVH, GMSL, Robert Fraser and Partners LLP and RFAM. It is executed against the background of earlier contractual arrangements relating to the search for, recovery and potential exploitation of the Wreck.

A central feature of the agreement is the variation of the effective price payable under earlier contracts so as to introduce a significant contingent element. In particular, the agreement records that CML had entered into an agreement with OME for the acquisition of the research file and confidential information relating to the Wreck for a total stated consideration of £6.5 million. Of that sum, only £99,151 was payable on contract and £1 million within 30 days, with the substantial balance of £5,400,849 expressly payable only out of any proceeds of sale or other realisation of the cargo recovered from the Wreck.

The agreement also operates to align and consolidate the interests of the various participants by setting out a single scheme for the recovery of costs and the distribution of proceeds. Recovery costs, defined broadly to include inspection, recovery, storage, security, cleaning, cataloguing, marketing and sale costs, are to be recouped in priority by the party that has funded them from 100% of the first proceeds arising from any sale or realisation of the cargo. Only after those costs had been fully recouped did the agreement contemplate the creation of “Net Proceeds of Sale”.

Following total recoupment, the Net Proceeds of Sale were to be distributed between the parties in agreed proportions, with CML receiving 40%, OVH 35%, OEM 15% and Robert Fraser and Partners 10%. The agreement therefore replaced any fixed or unconditional payment obligations with an allocation of upside linked directly to the success of the venture.

RFAM is appointed to administer the agreement. It is responsible for opening and operating a collection account, receiving all sale proceeds, settling recovery costs and making distributions in accordance with the agreed waterfall. The agreement contains provisions for audit, tax mitigation, confidentiality, termination and governing law, and makes clear that, in the event of any inconsistency between apportionments under this agreement and any other agreement between the parties, this agreement prevails.

Overall, the agreement provides a comprehensive framework which restructures earlier arrangements so that the price and returns payable to the parties are substantially contingent on the recovery and successful monetisation of the Shantaram cargo, rather than being fixed obligations payable irrespective of outcome.

Each of the witnesses served witness statements pursuant to directions that their statements stand as their evidence. After being sworn each witness was cross examined and re-examined. Mr Emson was asked some initial clarificatory questions. We accept that each of the witnesses gave evidence as they honestly believed the position to be. However, we do not accept all of their evidence. We explain where evidence has not been accepted and why in our findings of fact.

The Appellant accepted that he is a highly educated and experienced professional with a long career in senior roles within the information technology sector. By 2011 he was employed as a senior business development executive at Cisco Systems Limited. His role involved responsibility for business plans, revenue targets, and the coordination of complex commercial relationships.

In 2011, the Appellant and his wife had personal wealth of circa £1.5m, at that time they were renting property. Mr Wilders’ income in that year was approximately £184,000. He accepted that he had significant income against which losses could be set. His expenditure commitments at the time were also substantial, including the purchase of a new home and school fees for his children.

Since around 2000, the Appellant had used financial advisers to source and assess investment opportunities. By 2010–2011 he was advised by S4, who would periodically bring investment proposals to his attention. His portfolio included conventional investments, such as funds held within a SIPP, and a smaller number of more specialised investments. Some of those specialist investments involved tax reliefs. He had previously participated in film partnership investments which involved loan funding and tax deferral or relief. In those arrangements, he understood the loans to be guaranteed and accepted that the presence of guaranteed loans could be indicative of tax planning. He regarded such guarantees as important in protecting him from unforeseen liabilities.

Against that background, the investment in SSVL was introduced to him by S4, in late 2010 or early 2011. The Appellant’s recollection of the detailed sequence of events was limited, but he accepted that matters moved quickly once he expressed interest. He relied heavily on the documentation provided, in particular the suitability letter and the IM, both of which he said he read carefully, although he accepted that he did not read every word of every document and relied on his adviser’s explanations.

The Appellant understood the proposal to be an investment in a second search for the Wreck. He said that the IM described how an earlier search had identified artefacts, including cannons, within a defined search cell (Site 30E), and that this materially narrowed the likely location of the Wreck. He was impressed by the involvement of OME, which he understood to be an experienced and reputable operator with a strong track record in locating historic wrecks. He did not undertake independent research into OME, its experts, or the underlying archaeology or marine science, but accepted that he relied on the IM and the professional reputation presented there.

The Appellant consistently maintained, both in his witness statement and in oral evidence, that he believed there was a good prospect of success. He described his assessment as a “more than 50%” chance that the Wreck would be found. That belief was not based on technical expertise, but on what he regarded as a compelling combination of physical evidence (notably the artefacts already found, particularly the cannons), the methodology described in the IM, and the experience of the search company. He accepted that the documentation repeatedly described the venture as speculative and high risk but said that he regarded such statements as worst‑case disclosures rather than a reason to doubt the overall prospects. He did not consider inconsistencies in the historical sources or estimates of cargo value to be decisive and said that the overall picture conveyed by multiple sources was that the vessel carried cargo of very substantial value.

It was accepted that tax considerations formed part of his thinking in 2011 when assessing investments. He was aware that, if the search failed, a capital loss might arise which could potentially be relieved against income. He also understood that the loss would be calculated by reference to the gross subscription price, including the loan‑funded element. However, he denied that the primary or main purpose of entering into the investment was to obtain tax relief. He repeatedly stated that he invested because the project was interesting and exciting, with the potential for an exceptionally large commercial return if successful. He described the prospect of an estimated 809% return as attractive, while acknowledging that it depended on a series of contingencies.

The structure of the investment involved a subscription for shares costing £99,360, of which approximately £25,000 was paid from Mr Wilders’ own funds and the balance funded by a loan. The Appellant said that the loan element was important to him only because he understood it to be fully secured. His consistent evidence was that he believed, at the time of investment, that he would never be required to repay the loan from his own resources. That understanding was influenced by his experience of earlier film investments, in which guaranteed loans had never resulted in personal liability. He accepted that the suitability letter contained references to novation but said that this was not explained to him in a way that caused him to appreciate that the loan might later become his responsibility.

Following the failure of the search, the Appellant was informed that SSVL’s resources were exhausted and that no further capital would be raised. He described this outcome as disappointing, given the scale of the potential upside he had anticipated. He left the handling of the resulting tax position to S4. Claims were made for negligible value relief and for the loss to be set against income. Those claims were subsequently challenged and ultimately disallowed by HMRC, leading to the present appeal.

Sometime after the failure of the search, the Appellant was advised that the loan should be novated to his wife. He said that this came as a surprise. He and his wife signed the deed of novation and paid a fee to “close things down”. He accepted that, following novation, his wife could enforce the loan against him, although the loan has not been called in and remains outstanding. He rejected the suggestion that there was never any real expectation of repayment, stating that he regarded the obligation as genuine and intended to repay it in due course.

Throughout cross‑examination, the Appellant was challenged on whether, given his experience and the repeated warnings in the documentation, he could genuinely have believed that the investment was commercially viable. It was put to him that the lack of a formal profit forecast, the uncertainty as to location, cargo, ownership, and recovery costs, and the limited extent of the search undertaken all pointed away from a genuine commercial venture. The Appellant did not accept that characterisation. He maintained that, viewed as a funded first‑phase but follow on search with a defined scope, the investment was commercially rational, albeit high risk. He rejected the proposition that the subject matter of the investment was irrelevant to him or that the arrangement had no real purpose beyond generating tax losses. It was, however, accepted that the Appellant did not understand there to be any real downside risk: the investment would be profitable or would generate tax losses in excess of his cash investment.

Mr Colin Emson’s evidence was directed primarily to the conception, design and operation of the SSVL investment, including the commercial rationale for the wreck‑search business model, the financing and loan structure, the role of research files, and the expectations as to profitability and risk. He was not presented as a specialist in shipwreck salvage or taxation but as a commercial finance professional and architect of the investment structure.

Mr Emson’s background evidence emphasised his long experience in commercial loans, corporate finance and shipping‑related ventures. He explained that the Robert Fraser Group had become involved in wreck searches after observing that traditional wreck‑search companies often failed because of the high upfront and ongoing costs of vessels and the low frequency of successful finds. The core problem, as he described it, was how to design a structure that would allow high‑risk capital to be raised while avoiding what he termed the “corporate graveyard” of insolvent search companies. The solution, in his evidence, was a hybrid model in which vessel owners agreed to forego part of their charter remuneration in return for a participation in the proceeds of a successful find, while investors assumed a significant share of the risk.

As to the Shantaram project specifically, Mr Emson said that it followed an earlier unsuccessful search undertaken by related entities, in which a partial wreck and a debris trail had been located. On that basis, it was considered commercially justifiable to incorporate SSVL to fund further verification and an expanded search area. He described the objective of SSVL as verifying whether the wreck already identified was the Wreck. If the Wreck was found there would be further phases to follow in order to recover the cargo but those investing in the search phase would derive significant value from a find. He accepted that the search was speculative and high risk but maintained that this was inherent in wreck searching generally and was made clear to investors.

A central theme of Mr Emson’s evidence was his view as to the commerciality of the enterprise. He maintained that searches were only pursued where an independently verified research file suggested that the value of the cargo was at least five times the anticipated cost of the search. He said that some research files had been rejected on that basis and that, in the Shantaram case, the estimated value of the cargo (said to be in excess of £400 million) comfortably exceeded that threshold. In cross‑examination, he accepted that the estimates were uncertain and illustrative, that no formal forecast was provided, and that there were numerous uncertainties as to whether the wreck existed, whether the cargo was intact, and whether it could be economically recovered. He nevertheless maintained that, at the relevant time, he and others genuinely believed there was a strong or at least realistic prospect of success.

Mr Emson also considered that what he considered to be the commerciality of the model used had been justified in a separate venture which had found the Enigma established to have on board a valuable cargo. This was so despite his acceptance that none of the investors in that model had yet received any financial benefit from the find because the ownership of the cargo is the subject of a series of legal disputes.

Mr Emson was questioned closely about the absence of legal advice in advance of the search concerning ownership of any recovered cargo. He accepted that multiple jurisdictions might potentially assert claims and that no such advice had been taken. His explanation was that taking comprehensive legal advice in advance would have been prohibitively expensive and, in any event, largely theoretical until a wreck and cargo were actually located. He said that in wreck‑search practice, ownership issues were typically addressed after recovery, often through the Receiver of Wrecks, and that disputes were common even where searches were conducted in international waters. He rejected the suggestion that the absence of early legal advice indicated that no recovery was genuinely expected.

In relation to the IM, Mr Emson accepted that it repeatedly described the project as speculative and high risk and that it set out numerous uncertainties. He accepted that the IM did not guarantee success and that the figures used were illustrative. He nonetheless stood by statements in the IM and in his witness statement suggesting that there was a “strong possibility” of success, explaining that these reflected the contemporaneous belief based on the research file and prior search results, rather than certainty.

A substantial part of the cross‑examination focused on the financing and loan structure. Mr Emson accepted that the main purpose of the financing was to attract investors and that gearing was used to make the investment more attractive. He described gearing as a normal commercial technique and rejected the characterisation of the structure as artificial. He considered the gearing to be particularly important in the context of having a structure with sufficient value to justify the commerciality of the arrangement fees needed to promote the investment. He maintained that the loans advanced to investors formed part of the true capital at risk, because they were, as a matter of contract, fully repayable in all circumstances and on commercial terms. He emphasised repeatedly that the tax relief available to investors on an unsuccessful search would, in his view, be materially less than the investors’ total exposure when the loan obligations were also considered.

When taken to the practical operation of the loan arrangements, Mr Emson accepted that the loan monies were not paid into investors’ personal bank accounts but were applied directly towards their share subscriptions. He accepted that, following the failure of the search, investors were entitled to nominate a third party to take an assignment or novation of the lender’s rights for consideration of £1,000 or the value of the shares if higher. He accepted that, so far as he was aware, all, possibly bar one, investors exercised that right and that there was no evidence in the bundle of any investor having repaid the loans in full. He nevertheless maintained that the loans remained legally enforceable and that the ability to novate did not negate the existence of a genuine repayment obligation. He gave an example, not evidenced in the bundle, of a case in which a novated loan was being pursued following a divorce.

Mr Emson was challenged on whether the novation mechanism meant that there was never a real expectation that the loans would be repaid. He rejected that proposition, maintaining that the contractual terms governed the position and that commercial reality required the structure to be assessed by reference to those terms. He accepted, however, that the ability to novate was included from the outset and that it formed part of what made the investment attractive to investors. He considered that it was reasonable for CML to have agreed the terms of the guarantee such that it would lose the right to recover the guaranteed sums were the loans novated because that term was agreed up front and in the anticipation that the search would be successful such that the imperative was to obtain the funding to undertake the search.

On the conduct of the search itself, Mr Emson accepted that only a limited proportion of the designated search area was surveyed and that the cannons and other artefacts identified did not conclusively prove the identity of the Wreck. He accepted that statements in reports suggesting that additional days of searching demonstrated “genuine commercial effort and intent” were oddly phrased and that an additional seven days of searching did not, of itself, prove commerciality. He nevertheless maintained that a real search was carried out, with specialist vessels and equipment, at substantial cost, and that the decision not to continue beyond April 2012 reflected the exhaustion of funds and a commercial judgment that further expenditure was not justified.

Throughout his evidence, Mr Emson consistently rejected the suggestion that the Shantaram project, or the wider Robert Fraser wreck‑search business, was carried on other than as a genuine commercial venture with a view to profit. He explained that careful consideration had been given to each search funded through this model. He said that at least one opportunity had not been pursued because the risk and potential reward equation did not, in his view, justify it only subsequently for there to have been a valuable find. He also explained that in respect of further fund raising associated with Enigma he had formed the view that the prospects of establishing ownership did not justify further fund raising but contrary to his view the investors had agreed to make further contributions.

Mr Emson accepted that tax consequences were considered and disclosed, and that the availability of loss relief was an intended and sensible feature of the structure if the search failed. He denied, however, that the generation of tax losses was the main purpose of the enterprise, maintaining that tax outcomes followed from, rather than drove, the commercial decisions taken.

Ms Fiona Hotson Moore gave evidence as an expert witness instructed on behalf of the Appellant. Her instructions were to opine on (i) the market value of the shares in SSVL at the date of subscription and (ii) whether, if different, the “value” of those shares for the purposes raised by HMRC in their statement of case. Her analysis proceeded on the basis of the International Valuation Standards 2011 (“IVS 2011”). She emphasised, both in her report and in oral evidence, that her conclusions depended upon the completeness and accuracy of the information supplied to her, principally the witness statement of the Appellant and the IM. She did not undertake any independent verification of figures or assumptions and was explicit that inaccuracies or omissions in the source material might affect her conclusions.

In her report, Ms Hotson Moore concluded that the market value of the shares at subscription was the subscription price, £864 per share. She reasoned that the transaction involved a willing buyer and a willing seller acting at arm’s length, after proper marketing, and that the parties acted knowledgeably and prudently within the meaning of IVS 2011. She rejected HMRC’s contention that the absence of an existing business, the speculative nature of the venture, or the lack of a secondary market rendered the shares valueless at acquisition. In her view, speculative start‑up ventures may have value derived from expected future returns, assessed by investors against perceived risk.

Central to her reasoning was the income approach, albeit applied in a limited way. She accepted that she had not carried out her own discounted cash flow analysis and had not generated independent projections. Rather, she relied on the illustrative projections contained in the IM and on the description in the Appellant’s witness statement of the basis upon which he decided to invest. She considered that, of the three standard valuation approaches recognised by IVS 2011, the market and cost approaches were inapplicable, leaving the income approach as the only potentially relevant methodology. However, she acknowledged that her use of that approach was confined to reviewing, at a numerical level, the projections provided, without assessing their realism or probability.

In cross‑examination, Ms Hotson Moore accepted a series of propositions directed to the assumptions underlying her opinion. She agreed that if key figures in the IM were inaccurate or incomplete, this could affect her conclusions. She confirmed that she had no expertise in shipwreck recovery or in valuing recovered maritime assets, and that she was not qualified to assess the likelihood of success of the search, the existence of the wreck or cargo, or the accuracy of estimated costs of search, recovery and sale. Her report assumed, rather than tested, statements in the IM and in the Appellant’s witness statement that there was a “good” or “very good” chance of locating the wreck and cargo, and that OME had a strong track record.

She accepted that the estimated potential cargo value of £400 million was a critical input. She agreed that a reduction in that estimate would reduce anticipated returns, although she maintained that it would not necessarily, of itself, negate her conclusion on market value. She accepted that if the true value were nil, that would influence her assessment. She also accepted that the IM expressly acknowledged the possibility that the Wreck might not exist, that the cargo might never have been loaded, or that it might have been removed, in which circumstances the chance of recovery would be zero. Her report treated those scenarios as part of the overall risk profile of the venture, rather than as distinct possibilities requiring separate valuation treatment.

Ms Hotson Moore further accepted that she did not analyse all categories of cost referred to in the IM. In particular, she confirmed that, in addressing the effect of costs on market value, she focused on capital raising and project assembly costs and legal costs identified in the IM, and did not independently analyse the larger search, recovery and sale costs set out elsewhere. She accepted that her conclusion assumed there were no other significant relevant costs beyond those she identified and that she had no expertise to assess whether the stated costs were realistic.

A substantial part of the cross‑examination concerned the loan facility available to investors and its relevance to market value. Ms Hotson Moore maintained that, under the IVS 2011 definition of market value, the manner of financing is excluded from the assessment. She relied on paragraph 31(a) of IVS 2011, which excludes prices inflated or deflated by atypical financing. She interpreted this as requiring the valuer to ignore financing arrangements altogether when determining market value. She accepted that she did not analyse whether the loan facility constituted “atypical financing” in market terms, nor did she strip out any value attributable to the loan or its risk‑mitigating features. She accepted that she did not know the detailed facts of how the loans operated in practice, whether loan monies were ever repaid, or whether loan risk was in fact nil. Notwithstanding those uncertainties, she maintained that the existence or terms of the loan facility did not affect her market value conclusion.

HMRC challenged her analogy between the loan facility and consumer car finance. Ms Hotson Moore accepted that she did not have sufficient facts to determine whether the analogy was exact. She nevertheless maintained that financing arrangements, even if unusual, do not alter market value as defined by IVS 2011.

In relation to HMRC’s alternative case under section 30 TCGA 1992 and the concept of “value” rather than market value, Ms Hotson Moore accepted that the legislation did not define the relevant basis of value. She proposed investment value as the closest IVS concept. She concluded that, on an investment value basis, the value of the shares to the Appellant equated to the subscription price being the price he was willing to pay on the basis of the information provided. She accepted, however, that she did not have sufficient information to quantify what the value would have been if the loan facility, its terms, or the fee arrangements had been removed. She further accepted that if the Appellant’s primary motivation had been tax relief rather than participation in a commercial venture, that could be relevant to an assessment of value, but she stated that she could not comment on his motivation and had relied on his witness statement and the business plan.

Taxation of Chargeable Gains Act 1992:

Income Tax Act 2007

We are grateful to the parties for their clear skeleton arguments, oral submissions and willingness to engage with our questions. We set out below a summary of their submissions.