Gresham House Strategic (GHS ), the UK smaller companies fund that last month fired Gresham House, is seeking to recover £300,000 in fees paid to its former fund manager after learning its net asset value (NAV) has been overstated by 2%.
Harwood Capital, the rival small-cap fund manager that replaced Gresham House, has told the board of the £55m AIM-listed company that provision has not been made for a corporate tax liability arising from an £18.8m gain on the sale of its holding in waste management company Augean (AUG).
As a result, the valuation of GHS has been inflated by £1.3m, representing the £1.6m tax provision minus the £300,000 in management and performance fees and VAT that the board wants back.
All weekly NAVs published since 30 July, when a takeover offer for Augean was made, up to 19 November, when Gresham House published its last valuation, will be recalculated.
The discovery of the tax bill is an unexpected twist to the battle for control of GHS, which earlier this month announced it would wind down after Gresham House and other shareholders representing nearly 47% of the shares called for a general meeting to authorise a return of capital and make changes to the board.
Harwood, founded by veteran smaller company investor Chris Mills, had hired Richard Staveley, GHS’s former fund manager at Gresham House, to take on the mandate. The firm is now faced with the two-year task of winding down the fund and selling its assets, which it has agreed to do without a fee.
The tax bill arises from changes that took effect in April last year limiting the use of capital losses against realised gains to £5m a year. Above that level, 50% of gains are subject to corporation tax.
‘The net effect is that realised gains over £5m per annum are currently taxed at 9.5% and not zero as was previously the case,’ stated the board, whose new chair Simon Pyper took office this week.
The emergence of the liability raises questions for Gresham House (GHE), and GHS’s administrator IQEQ and auditor BDO. GHS, an AIM-listed company that began life as the loss-making internet incubator Spark Ventures, could have shielded itself from the tax by converting to an investment trust.
In a statement, Gresham House said: ‘The NAV for GHS is calculated by the fund administrator IQEQ and then periodically audited by BDO, before being signed off by the board of GHS. Gresham House has supplied the appropriate information to IQEQ as it has done consistently during its role as investment manager.’
IQEQ and BDO were unavailable for comment.
The tax liabilities may not end there. Harwood Capital has also told GHS’s board that were the entire portfolio liquidated at current market prices – which includes the £33m bid this week for the company’s holding in loyalty scheme manager Universe Group (UNG) – that would generate a further gain of £3m and an additional tax of £1.3m.
Numis Securities described the tax blow as a ‘further disappointment’ for shareholders, who have seen their stakes fall 11% in the past month as the wind-down has weighed on its key holdings as the market anticipates a series of forced sales. The shares have stood broadly unchanged at £15.95 since the news.
‘We believe the wind-down was the right result given its small size, and likely struggle to attract demand, but as yesterday’s announcement highlighted, this is unlikely to be simple, or low cost, given the concentrated nature of the portfolio of small caps where the fund has sizeable stakes,’ said Numis.
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