Ben Roberts, senior associate at RPC, analyses this eagerly-awaited decision ( UKUT 0564) of the Upper Tribunal (UT), which has largely dismissed the taxpayer’s appeal in the first case to consider in any detail the wide-ranging SDLT anti-avoidance provision in section 75A of the Finance Act 2003 (FA 2003).
In 2007, the taxpayer (PBL) agreed to buy the Chelsea Barracks freehold property from the Ministry of Defence (MoD) for £959m.
To fund the purchase price, PBL used a sharia-compliant finance arrangement, the steps of which can be briefly summarised as follows:
• PBL and MoD exchanged on the sale of the property (the original contract);
• before completion, PBL contracted to sell the property to a Qatari bank (the Bank) for the then sterling equivalent of £1.25bn;
• the Bank then agreed to lease the property back to PBL for a term of 999 years. The rent under the lease would give the Bank a sufficient return for funding PBL’s acquisition;
• the original contract completed;
• PBL executed a TR1 in favour of the Bank in relation to the property; and
• the Bank immediately granted a 999-year lease of the property to PBL.
PBL and the Bank submitted stamp duty land tax (SDLT) returns, on the basis that no SDLT was payable. PBL relied on section 45 of the FA 2003 (at the relevant time, the SDLT ‘transfer of rights’ provisions). The Bank relied on section 71A of the FA 2003 (the SDLT exemption for sharia-compliant ‘alternative property finance’).
It was common ground between the parties that, but for any application of section 75A, the arrangements described above would have resulted in no SDLT charge for any party. This was subsequently recognised to be a ‘defect’ in the SDLT legislation.
HM Revenue & Customs (HMRC) argued that section 75A applied to the arrangements. Section 75A applies, in very broad terms (and applying to the facts of the case), where:
(i) there is a disposal (by ‘V’, or the MoD, as argued by HMRC) and acquisition (by ‘P’, or PBL, as argued by HMRC) of land;
(ii) a number of transactions are ’involved’ with the land disposal / acquisition. The freehold sale by the MoD, the sale of the freehold by PBL to the Bank, and the lease back to PBL were all ’involved’ transactions, according to HMRC; and
(iii) the total SDLT payable on the involved transactions, ignoring any actual land transactions, is less than would be payable on a simple ’notional’ land transaction from V to P.
As SDLT is charged under section 75A on the largest aggregate amount payable on the involved transactions, HMRC sought SDLT on £1.25bn (taking into account both the purchase price of £959m and the Bank’s financing return).
PBL argued, amongst other things, that section 75A did not apply to the facts of the arrangements, as the participants did not possess a tax avoidance motive or ‘purpose’.
Leaving aside any analysis of the application of the SDLT rules concerning sharia-compliant financing, and ‘transfers of rights’, this Spotlight focuses on the UT’s interpretation of section 75A. It is this aspect of the case that has generated most interest.
The UT held (on the main issue) that section 75A is not restricted to cases where there is a tax avoidance purpose. However, in a split decision, the UT did at least reverse the earlier decision on the chargeable consideration subject to SDLT. The UT held this should be limited to £959m.
Why is it important?
The UT, unsurprisingly, held that section 75A should be construed purposively.
Despite acknowledging that the drafting of section 75A ‘left a lot to be desired’, the UT was able to uphold the original decision that section 75A could apply regardless of any tax avoidance purpose.
This was because the wording of section 75A itself spells out what, for section 75A purposes, is meant by ‘avoidance’. It is a mechanical piece of tax legislation. In other words, in order to become operative, the provision does not need to rely on – and a proper construction of section 75A does not allow the reading in of – a subjective avoidance purpose.
In the wider context, the fact that an anti-avoidance provision has been held to apply to a case which lacked a tax avoidance purpose has troubled many commentators.
One school of thought is that, not for the first time, the tribunal has chosen to apply a piece of tax legislation in such a way as to achieve a ‘sensible’ or even (to use a word that provokes much debate amongst tax professionals) ‘fair’ result. The UT recognised that the legislation the parties (absent section 75A) were relying on was defective.
How does this fit into existing law and practice?
Both the original decision and UT appeal decision were eagerly-awaited, as section 75A had not previously been considered by the tribunals.
Section 75A is described as an ‘anti-avoidance’ provision, yet does not contain the language, often found in other tax (and indeed SDLT) provisions, that for the legislation to bite, there must be a tax avoidance purpose (or main purpose) behind the arrangements in question.
HMRC’s published guidance states that: ‘Section 75A is an anti-avoidance provision … HMRC therefore takes the view that it applies only where there is avoidance of tax. On that basis, HMRC will not seek to apply s.75A where it considers transactions have already been taxed appropriately.’
With the introduction from July 2013 of the general anti-abuse rule (GAAR), which also applies to SDLT and was intended to apply to the most abusive of arrangements, the position of section 75A is somewhat unclear. However, in light of the UT decision, there is an argument that section 75A provides HMRC with a more powerful weapon in tackling perceived SDLT avoidance.
In what ways does this affect practitioners?
As Project Blue is the first case to consider section 75A, and as the First-tier Tribunal decision was (largely) upheld by the UT, it is fair to say it doesn’t, to a large extent. Practitioners have for almost two years been on notice that the First-tier Tribunal shares HMRC’s interpretation of section 75A.
If the overall result of a combination of transactions that are involved with a simple disposal / acquisition of land (even if undertaken for commercial reasons) has the effect of lowering the SDLT that would otherwise be payable on such acquisition, then the arrangements are susceptible to HMRC challenge under section 75A.
The UT decision simply gives this a higher level of judicial authority.
However, there is a difference of opinion amongst tax professionals as to whether the tribunals would apply section 75A to all cases (even so-called ‘innocent’ ones) where the mechanical conditions are satisfied, or whether the tribunals would look to apply section 75A only where some sort of ‘abusive’ arrangement is involved (despite the clear authority that an abusive purpose is not required).
An appeal to the Court of Appeal has been granted, to be heard in May 2016.
What, if anything, should I be doing differently as a result?
SDLT has long been an area of particular focus for HMRC. The avenues for possible SDLT planning have been closed over the years; following this latest decision, practitioners should exercise even greater caution when it comes to property acquisition structuring that appears to exploit defects in the SDLT legislation.