The £959m sale of Chelsea Barracks, which used sharia financing, will generate no SDLT, the Court of Appeal has ruled. Alex Barnes looks at the implications of the case
HM Revenue & Customs (HMRC) has at last been defeated in the long-running stamp duty land tax (SDLT) dispute concerning the acquisition of the Chelsea Barracks in 2008.
The defeat means a loss of up to £50m of SDLT and for this reason it is unlikely that this will be the last we hear on this case. HMRC is no doubt licking its wounds but also plotting its next move.
Background
The Barracks were acquired by a company, Project Blue, controlled by the sovereign wealth fund of the State of Qatar for £959m. Project Blue acquired the site using the ijara form of sharia financing, which led it to selling the site on to a Qatari bank for the US dollar equivalent of approximately £1.25bn and then taking a long lease back of it with an option to reacquire the site from the bank at some point in the future.
Both Project Blue and the bank claimed that no SDLT was payable by either of them owing to a combination of SDLT subsale relief and a relief from SDLT for transactions involving alternative property finance.
Understandably, HMRC disputed this and, pursuant to the anti-avoidance legislation in section 75A of the Finance Act 2003, it wanted SDLT paid on the highest sum paid, namely the £1.25bn. The First-tier Tribunal agreed with HMRC and ruled that SDLT was payable by Project Blue on £1.25bn. The Upper Tribunal concluded that SDLT was payable by Project Blue but that this was only on £959m.
However, HMRC appealed from the Upper Tribunal to the Court of Appeal seeking an increase in Project Blue’s SDLT liability and Project Blue appealed in an attempt to reduce its SDLT liability.
The Court of Appeal decision
The Court of Appeal ruled that Project Blue was not subject to SDLT. It determined that the alternative finance exemption relied on by the bank to relieve it from paying SDLT did not apply and that consequently the bank should have been liable to SDLT. Unfortunately for HMRC, it has already closed its inquiry into the bank’s SDLT return and therefore it could not be liable for SDLT.
The Court of Appeal also ruled that section 75A, which had been so clumsily and confusingly applied in the Upper Tribunal, did not apply. HMRC had been trying to use this legislation to argue that the purchaser liable for SDLT in this matter was Project Blue (and not the bank).
Section 75A is often HMRC’s fallback if it wants to challenge what it considers to be aggressive SDLT planning. This legislation essentially allows HMRC to deconstruct a transaction to determine who the vendor and purchaser actually are, regardless of any other scheme transactions.
Having done that, SDLT is then payable on the largest amount or aggregate amount of the consideration given by or on behalf of any person for the scheme transactions and the sum received by or on behalf of the vendor or any person connected with the vendor.
Implications
HMRC will certainly be reeling as a result of this decision. After all, it is not every day that a transaction on this scale incurs no SDLT.
HMRC’s loss is equally not confined to the SDLT in this matter as there may be other users of similar planning that are awaiting settlement of their situation pending the outcome of this case. This result will give them heart that no SDLT will be payable by them or, if paid, that it can be recovered from HMRC, subject to any appeal by HMRC in this case.
Section 75A has been heavily criticised since its introduction. It is very unclearly drafted, difficult to apply and despite HMRC’s assurances that it was to be used only to challenge tax avoidance, it has in the past too often been its go-to legislation to tackle any SDLT planning where it considered there has been a failure to pay the appropriate amount of SDLT.
The Upper Tribunal expressly acknowledged the difficultly in applying section 75A when it said it gave rise to points of interpretation that were “high up on the scale of difficulty” and it is disappointing that the Court of Appeal did not take the opportunity to give some much-needed clarity to this legislation.
Worryingly, the Court of Appeal has now confirmed that the Upper Tribunal was correct to conclude that it was not necessary for there to be a tax avoidance motive for section 75A to apply. This can make it difficult to advise with any certainty whether a particular transaction will be caught by this legislation which could, for those who are risk-averse, cause them to abandon any sensible SDLT planning and to simply pay the maximum SDLT (which of course is what HMRC wants).
The rules concerning SDLT sub-sale relief have changed considerably since this transaction and in addition to section 75A we now have the general anti-abuse rule introduced in 2013, which HMRC can also use to challenge SDLT planning.
Sensible commercial SDLT planning is still possible but those looking to reduce their SDLT liability cannot sleep easy that HMRC will not challenge this using either section 75A or the general anti-abuse rule if they consider that less SDLT has been paid than could potentially have been payable.
Alex Barnes is a tax partner at Irwin Mitchell
