Supreme Court upholds application of SDLT GAAR

The Supreme Court has given a wide reading to the application of the SDLT general anti-avoidance provision in Finance Act 2003 s.75A.

The Supreme Court has held that the Stamp Duty Land Tax (SDLT) anti-avoidance provision in FA 2003 s.75A applied to prevent a potential loss of tax from arrangements involving a sub-sale combined with an Islamic financing transaction: Project Blue Ltd v HMRC [2018] UKSC 30. The court has confirmed that the application of s.75A does not require HMRC to show any tax avoidance motive on the part of the taxpayer.

While the particular case is only of historic interest (since the particular loophole was closed some time ago), the decision of the Supreme Court as to the correct approach generally to this wide SDLT anti-avoidance provision remains important.

Background

In 2007, Project Blue Ltd (PBL) contracted to buy Chelsea Barracks from the Ministry of Defence (MOD) for £959m. In January 2008, completion of the sale took place. Under the completion arrangements, PBL exchanged contracts to sell the Barracks to a Qatari Bank, MAR, for £1.25bn, on Sharia-compliant Ijara (purchase and leaseback) terms. Accordingly, on completion, the MOD transferred the Barracks to PBL for £959m, PBL transferred them on to MAR for £1.25bn and MAR granted a lease back to PBL. MAR and PBL also entered into put and call options in relation to the freehold.

PBL claimed sub-sale relief on the transfer from the MOD under FA 2003 s.45 (which has since been replaced). MAR claimed relief under s.71A (alternative property finance) on the PBL to MAR transfer. As such, no SDLT was paid under the transactions and HMRC opened enquiries into the arrangements. Eventually, HMRC sought to apply the anti-avoidance provisions in s.75A to recover £50m SDLT from PBL (based on the £1.25bn consideration).

PBL appealed to the First-tier Tribunal (FTT), which held that in favour of HMRC, agreeing that the anti-avoidance provisions in s.75A applied to the arrangements. Before the Upper Tribunal (UT), PBL changed its position and argued that MAR was not entitled to s.71A relief because, on a proper understanding of the related provisions of FA 2003, the MOD was the “vendor” of the barracks for the purposes of s.71A(2). (By this time, HMRC had closed its enquiry into the PBL-MAR transfer and would have been unable to recover SDLT from MAR if the court held the Islamic finance exemption did not apply.) The UT rejected this argument and concluded that PBL was the “vendor.” However, the Court of Appeal found that the “vendor” was the MOD, and not PBL, with the result that s.71A(2) did not exempt MAR from charge. In addition, the Court of Appeal considered that the application of s.75A as relied on by HMRC would have produced a “particularly inapt and harsh result” by requiring PBL to pay SDLT on the larger sum which MAR provided to it rather than on the purchase price it paid to the MOD.

Decision of the Supreme Court

The leading judgment of the Supreme Court was given by Lord Hodge (with whom three other Lords agreed). Lord Briggs dissented. On the application of the exemption in s.71A, Lord Hodge considered it significant that Parliament had chosen to use “language of the real world transactions”. In the present case, the answer to the question of who sold the barracks to MAR was clearly PBL (not the MOD). This approach was consistent with the aim of s.71A of seeking to equate Ijara financing with conventional lending in the UK by taxing the purchaser of the property and exempting the lender (just as security interests are exempt from SDLT).

The Court of Appeal had considered that Parliament could not have intended that a transaction involving a sub-sale financed by Ijara arrangements should have been free from SDLT for over a year in between the introduction of SDLT and the enactment of the anti-avoidance provisions in s.75A. This influenced its interpretation of s.71A. The Supreme Court rejected this analysis. Given that SDLT was a new tax and required repeated amendments to make it effective, it was not surprising that lacunas may have existed in the early years of its application. HMRC indeed explained to the court that s.75A was indeed introduced in response to the formulation of tax avoidance schemes that combined reliefs (including sub-sale relief) and exemptions in ways Parliament had not intended.

Accordingly, the Supreme Court concluded that, in the absence of s.75A, the combination of sub-sale relief (as it operated at the time) and the exemption for Islamic financing exempted the transactions from any SDLT.

Section 75A: anti-avoidance

Section 75A applies where “one person (V) disposes of a chargeable interest and another person (P) acquires either it or a chargeable interest deriving from it” and the sum of the amounts of SDLT payable in respect of the scheme transactions ”is less than the amount that would be payable on a notional land transaction effecting the acquisition of V’s chargeable interest by P on its disposal by V”.

The Supreme Court agreed with the lower courts that PBL’s argument that s.75A could not apply because it had not been established that the parties entered into transactions for the purposes of tax avoidance must fail. Although the section is headed “Anti-avoidance”, that is the only indication in the section which could support PBL’s contention. The Supreme Court considered that the heading is relevant to an assistance of the understanding of the mischief which the section addresses, but “says nothing as to the motives of the parties to the scheme transactions. There is nothing in the body of the section which expressly or inferentially refers to motivation.” The court regarded it as sufficient that tax avoidance, in the sense of a reduced liability or no liability to SDLT, resulted from the transactions which the parties put in place, irrespective of their motivations.

Turning to the application of s.75A to this case, it was agreed that “V” was the MOD. But who was “P”, MAR or PBL? The mischief that the section addresses and the context must provide the answer, adopting a purposive approach. In the real world, the court considered that the nature of the transaction was clear: “PBL acquired the barracks with the benefit of finance from MAR. The sub-sale to MAR and the lease back to PBL were transactions “involved in connection with” the disposal by MoD of its chargeable interest, the freehold in the barracks, and the acquisition by PBL of its chargeable interest, the leasehold interest. The loophole which has enabled the avoidance of tax is the combination of sub-sale relief under section 45(3) with the exemption conferred on Ijara financing when the customer of the financial institution sells its freehold interest in land to the institution and then leases back the land”.

The court noted that the approach later taken by Parliament to close this loophole was to remove the sub-sale relief where the secondary contract was exempt from SDLT. Whilst the method taken by Parliament to subsequently remove the loophole was not decisive, it was instructive. In any event, the court considered that the error in the legislation lay in the failure to disapply the sub-sale relief. To remove the exemption on the Islamic financing might lead to SDLT on the financing transaction (rather than the purchase transaction), which would be inconsistent with the overall intent of the legislation.

As such, the court concluded that, in this context, PBL was “P”. For the purposes of s.75A, the court concluded that the “notional transaction involves PBL acquiring MOD’s freehold interest”. Since s.75A(5) provides that the chargeable consideration on the notional transaction is the largest amount (or aggregate amount) given by any one person for the scheme transactions, the court agreed with HMRC that was the £1.25bn purchase price paid by MAR to PBL. As such PBL’s SDLT liability under s.75A was £50m. In particular, the court considered that it was inappropriate simply to look at the initial MOD-PBL transfer as that would ignore the subsequent transactions and such an approach would be “inconsistent with the purpose of section 75A, which is to prevent a tax loss which would otherwise occur because of the totality of the connected transactions which have taken place in the real world”.

The £50m SDLT liability is, of course, greater than the liability had sub-sale relief not applied (£38.3m). PBL contended that this was either contrary to its human rights or should be reduced under the provisions in s.75B dealing with “incidental transactions”. The court rejected both of these arguments. None of the relevant transactions were “incidental” and any discriminatory impact on PBL of s.75A was justified. In any event, the court pointed out that, if as PBL claimed, the Ijara financing was brought to an end prematurely and that had in fact resulted in lower amounts having been paid by MAR to PBL, then that could and should be dealt with properly by the s.80 reclaim made by PBL which had been held in abeyance pending the court’s decision on s.75A.

Comment

The application of the anti-avoidance provisions to these particular arrangements is only of historic interest, of course. Nevertheless, the decision is important for what it says about the application of s.75A more generally. The Supreme Court has given a wide reading to the anti-avoidance provisions of s.75A and, in particular, held that there is no requirement to show any tax avoidance motive in the arrangements. Indeed, the court’s decision has endorsed that fact that the provisions dealing with the consideration for the “notional transaction” may in fact lead to a larger SDLT liability than if the transactions had not given rise to a tax loss. Given the lack of any need for a tax avoidance motive, this appears to be an especially harsh conclusion (albeit one that follows from the strict reading of the legislation).

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