Sean Randall considers the implications of the latest SDLT appeal in Project Blue
Key points
- The Upper Tribunal has increased the uncertainty about the SDLT general anti-avoidance provision
- The provision applies even where there is no tax-avoidance motive, but should its anti-avoidance purpose be taken into account when interpreting it?
- Applying it robotically in non-avoidance cases potentially produces results that Parliament cannot have intended, eg, it could overrule special charging provisions in such cases
Late in 2014 the Upper Tribunal (UT) released its decision in Project Blue Ltd v HMRC [2014] UKUT 0564 (TCC). The case concerns the application of the stamp duty land tax general anti-avoidance rule under section 75A of the Finance Act 2003 (section 75A) to the purchase of Chelsea Barracks in 2007 by Project Blue Ltd (PBL) on its disposal by the secretary of state for defence (SSD). The decision was eagerly anticipated; but those hoping that it would illuminate clearly the scope and application of section 75A to benign transactions have been disappointed.
To give effect to sharia-compliant financing, PBL purchased the land from the SSD for £959m and immediately sub-sold it to a Qatari bank (MAR) for £1.25bn plus a leaseback for the finance period (999 years) and a call option entitling PBL to buy back the freehold. PBL self-assessed that it had no SDLT liability due to a combination of sub-sale relief (as it then was) and alternative property finance relief. HMRC agreed that no liability arose under those provisions, but assessed PBL to tax at £50m (4% of £1.25bn) under section 75A. The First-Tier Tribunal (FTT) dismissed PBL’s appeal.
The FTT held that section 75A, while an anti-avoidance provision, contains no requirement that the taxpayer should have a tax avoidance motive or purpose as a precondition to its application. Even if it did, PBL had not demonstrated that the transactions were not motivated by SDLT avoidance.
However, account must be taken of the provision’s anti-avoidance purpose when construing it. Therefore, the person liable under section 75A must be a person who has avoided SDLT, being in this case PBL.
Arguments for motive
On appeal to the UT, PBL argued that section 75A applies only where the relevant purpose of the transactions was tax avoidance. Further, there was no tax avoidance purpose and in so far as the FTT made adverse findings in relation to a tax avoidance purpose, those findings were not sustainable. Therefore, it argued, section 75A did not apply, but if it did MAR was liable. In any event, the taxable consideration for the purposes of section 75A was not £1.25bn.
The UT dismissed PBL’s appeal. It held that section 75A did apply, that PBL was liable to tax under the provision but that the amount of the taxable consideration was £959m, not £1.25bn. The two judges disagreed on the last point and the presiding judge used his casting vote.
Application of section 75A
Although it is unlikely to be the ultimate decision in the case, the decision is significant for a number of reasons.
The UT clearly ruled out any motive test: the provision’s language does not go “anywhere near far enough” to impose some limitation on the operation of section 75A so that it only applies where there is a relevant purpose of tax avoidance. One judge said that the provision contains strict and mechanical rules that are not capable of purposive interpretation. Another considered that the omission of a motive test was deliberate, as the provision itself defined “avoidance”. Therefore, a case that comes within section 75A is a case of avoidance.
However, both judges encountered difficulties applying the provision to the facts, finding that there were numerous alternative permutations that produced different taxpayers and different amounts of tax. They acknowledged that this was unsatisfactory and pulled no punches in criticising the drafting of section 75A.
The judges accepted that PBL was the taxpayer, but this was driven by practical reasons rather than by the language in the legislation. They disagreed on what amount should be taxed. The presiding judge was attracted to a related provision that ignores consideration given under an incidental transaction. He used this to ignore the £1.25bn given by MAR or the amount by which it exceeds the £959m initial purchase price.
The other judge disagreed, referring to a carve-out that, possibly in error, prevented the disregard from applying to the facts. Although conceding that the result was incoherent, he felt compelled to determine that PBL should be liable to tax on the £1.25bn received by it.
Unintended consequences?
Arguably, the decision increases rather than decreases the uncertainty regarding the application of section 75A to benign transactions involving real estate.
That section 75A applies where there is no purpose of avoiding tax (or that section 75A itself redefines avoidance) means that all land transactions involving other transactions – not necessarily land transactions – are potentially vulnerable to be taxed on the highest amount given under any of the transactions. A judge makes passing reference to this by saying that section 75A potentially operates in a “wide way”. That is an under-statement.
For example, unless specifically restricted to avoidance cases, section 75A would effectively repeal the special code for land transactions involving partnerships where consideration passes. That cannot have been Parliament’s intention. HMRC has said that it will not update its guidance until the final decision in Project Blue is released.
Unless Parliament uses order-making powers to exclude with retrospective effect specified situations, and as long as the decision of the UT in Project Blue remains the only substantive case law on section 75A, those entering into complex land transactions will need to take a robust view on the effect of the provision. The difficulty encountered by the two judges in interpreting section 75A and applying it to the facts in the case and the potential scale of the effect of the provision demonstrate the need to exercise caution and take specialist advice.
Sean Randall is head of stamp taxes at KPMG LLP
