Stamp duty — Grant of lease for premium — Premium defined as product of stated figure and price of 13.75% Treasury Loan Stock on stated day following execution — Whether instrument chargeable — Assessment
On August 14 1993 St John’s College,
Cambridge, granted two leases of commercial premises. In each case the leases
provided for the payment of premiums to be calculated by reference to a
formula. The premiums were to be the product of 4,179 in one lease, and 833 in
the other lease, and the price on the 25th business day following execution of
13.75% Treasury Loan Stock. The purpose of defining the premiums in this way
was to minimise stamp duty. The tenants applied by way of a case stated under
section 13 of the Stamp Act 1891 to have determined whether the leases were
chargeable and, if so, to have the duty assessed. They contended that ad
valorem stamp duty was not chargeable by reference to consideration the
amount of which was unascertainable at the time the instrument was executed.
valorem basis as the amount of consideration could be ascertained in the
circumstances existing at the date of the leases. The closing price of 13.75%
Treasury Loan Stock on the day prior to the execution of the leases was
£102.125; this figure should be used for the purposes of the calculation.
The following cases are referred to in
this report.
Cory (William) & Son Ltd v Inland Revenue
Commissioners [1965] AC 1088; [1965] 2 WLR 924; [1965] 1 All ER 917; [1965]
1 Lloyd’s Rep 313
Coventry City Council v Inland Revenue
Commissioners [1979] Ch 142; [1978] 2 WLR 857; [1978] 1 All ER 1107
Independent Television Authority v Inland Revenue
Commissioners [1961] AC 427; [1960] 3 WLR 48; [1960] 2 All ER 481
Underground Electric Railways v Inland Revenue Commissioners
[1916] 1 KB 306, CA
Underground Electric Railways v Inland Revenue
Commissioners [1904] 2 KB 198; [1905] 1 KB 174, CA; [1906] AC 21, HL
This was an appeal by LM Tenancies 1 plc
by way of a case stated under section 13 of the Stamp Duty Act 1891 against the
determination of the respondent Inland Revenue Commissioners as the duty
payable on two leases.
Roger Thomas (instructed by Taylor
Vintners) appeared for the appellants; Michael Furness (instructed by the
solicitor to the Inland Revenue) represented the respondents.
Giving judgment, Carnwath J said: This is an appeal
by case stated under section 13 of the Stamp Act 1891 against an assessment of
the Commissioners of Inland Revenue. Unusually, such appeals come direct to the
High Court, without any hearing before special or general commissioners. By
section 13(3) the court is required to determine the question submitted and if
the instrument in question is found to be chargeable, to assess the duty.
On August 14 1993 the relevant
authorities of St John’s College, Cambridge, granted two leases, respectively
of premises at the Warehouse, Bridge Street, Cambridge, and 4 Richmond Terrace,
Thompson’s Lane, Cambridge, for terms of 99 years from June 24 1993. Clause 3
in each lease provided for the payment of a premium by the tenant to the
landlord. The clause in the first lease provided for calculation in accordance
with the following formula:
a X b where ‘a’ is Four thousand one
hundred and seventy nine (4,179) and ‘b’ is the price at close of business on the
twenty fifth business day following the execution of this Lease of 133/4 Treasury Loan Stock 1993 …
The second lease was in the same terms
save that the figure of 833 was substituted for the figure of 4,179. This
formula was admittedly devised with a view to minimising stamp duty. The
background is explained in an affidavit of Mr Reid, senior bursar of the
college. The college had received advice as to:
the basis whereby premiums in leases
could be expressed in a way which had in a number of cases successfully
resulted in the stamp duty payable on such leases being minimal.
As will be seen, the key to this was to
find a formula under which the amount of the premium could only be ascertained
subsequently to the date of the instrument. The details of the scheme are not
material to the issue I have to decide. However, it is clear that the figures
included in clause 3 of each lease were based on ‘target values’, which had
been agreed in advance as representing the appropriate market premium. The
figures represented the multiplicands necessary to secure that value, taking
account of what was expected to be the price of the relevant stock at the
anticipated date.
The commissioners have taken the view
that the leases are chargeable with ad valorem duty in respect of the
premiums in accordance with Schedule 1 to the Act. For this purpose they have
taken the closing price of the stock on Friday, August 13 1993, as being that
prevailing on the date of execution of the lease (August 14 being a Saturday).
(An alternative basis using the ‘value’ of the stock is no longer pursued.) The
appellants however contend that the leases are chargeable only with fixed duty
of £2, on the basis that the consideration was not capable of being ascertained
at the date of execution of the lease.
By way of introduction to the discussion
of the law, I should observe that the Act itself provides little guidance, and
it is necessary to analyse the somewhat technical case law which has built up
since 1891. The commissioners do not seek to derive any assistance from the
fact that this is unashamedly a tax avoidance scheme. The only question is
whether or not it falls within the statutory language of the charge as
interpreted.
Section 1 of the Act provides for stamp
duty to be charged on the instruments specified in the First Schedule to the
Act. The relevant provision of the First Schedule is that dealing with ‘Lease
or Tack’. Para (3) refers to a lease for any definite term:
where the consideration or any part of
the consideration moving either to the lessor or to any other person consists
of any money, stock or security.
The duty is chargeable ‘in respect of
such consideration’ and is ‘the same duty as a conveyance on a sale for the
same consideration’. By para (4), leases not covered by the specific provisions
are chargeable at a rate of £2.
Thus, in its simplest terms, the question
is whether this is a lease for a definite term where the consideration or part
of the consideration consists of money. Put like that, the answer might seem
simple, since clearly the premium provided for in clause 3 is consideration to
be paid in money. However, the matter does not stop there, because it is long
established that stamp duty is charged by reference to the circumstances which
exist at the time the instrument is executed: see William Cory & Son Ltd
v Inland Revenue Commissioners [1965] AC 1088, at pp1105F, 1109G. As a
consequence of this, ad valorem stamp duty may not be levied on an
instrument by reference to consideration the amount of which is unascertainable
at the time when the instrument is executed. This much is not in dispute
between the parties. Again, if the matter stopped there, the answer would
appear relatively straightforward. The consideration under clause 3 was not
ascertainable at the time the instrument was executed, since it was carefully
designed not to be.
However, again, the matter does not stop
there, because, no doubt to mitigate to some extent the artificiality of the
principle to which I have just referred, the courts have developed what is
referred to as the
in Independent Television Authority v Inland Revenue Commissioners
[1961] AC 427, at p443:
I take it, therefore, to be a
well-settled principle that the money payable is ascertained for the purposes
of the charge without regard to the fact that the agreement in question may
itself contain provisions which will in certain circumstances prevent it being
payable at all. If that is so, there is at least no better reason for adopting
a different principle when there are found clauses which merely vary the amount
to be paid according to specified contingencies. Nor does it matter for this
purpose whether the effect of such a clause is to make it possible for the sum
to be increased or to be diminished … What is necessary is that it should be
possible to ascertain from the agreement that there is some specified sum
agreed upon as the subject of payment which may perhaps fairly be called the
prima facie or basic payment. Even that minimum condition may have to be
restated in relation to certain kinds of securities, such for example as
guarantees, in which the ad valorem charge is calculated according to
the maximum sum contingently payable, or, to put it another way, the amount of
the guarantee …
(Emphasis supplied.)
Lord Radcliffe derived this principle,
and its qualifications, from a number of authorities of which the most relevant
for present purposes are the two Underground Electric Railways v Inland
Revenue Commissioners cases, the first of which went to the House of Lords
[1906] AC 21 and the second to the Court of Appeal [1916] 1 KB 306. Put very
shortly, the issue in the present case depends on whether the formula adopted
by clause 3 can be used to establish a ‘prima facie or basic payment’ as
at the date of the execution of the instrument, based on the then closing price
of treasury stock, any subsequent variation in that price in the 25 days up to
the date specified in clause 3 itself being treated as a ‘contingency’ to be
disregarded.
The case for the appellant, as
attractively put by Mr Roger Thomas, is simple. He says that there was in the
agreement no ‘specified sum agreed upon as the subject of payment’ as at the
date of the instrument. The only sum agreed upon was one ascertainable 25 days
later. To substitute the closing price on the day immediately before the
instrument is to rewrite the terms of the agreement.
It is undoubtedly the case that, in most
of the authorities, there has been a specific sum ascertainable at the date of
the agreement which was then subject to variation upwards or downwards. Thus,
in the Independent Television Authority case itself the agreement
specified a fee at a rate of £495,600 a year for the first two and a half
years, which was subject to increase or decrease by a formula related to the
Retail Prices Index. It was this that was referred to by Lord Radcliffe as the
‘specified sum’, and stamp duty was chargeable by reference to such sum.
The potential artificiality of the
principle is evident from a more recent case, Coventry City Council v Inland
Revenue Commissioners [1979] Ch 142. In that, the rent payable on an
underlease included a sum equivalent to a fixed percentage of the total
expenditure on the development of the site up to a maximum of £1.3m. Ad
valorem duty was assessed on the basis of that maximum amount, even though
in practice the rent actually payable might turn out to be substantially less.
That was regarded as a contingency which had to be disregarded under the
contingency principle. Brightman J summarised the crown’s submissions based on
the authorities, as follows at pp145 to 146:
It was submitted that the authorities
established the proposition that where ad valorem duty is payable on an
instrument by reference to a sum payable thereunder, the duty is charged not
only by reference to any sum which is unconditionally payable but also by
reference to a sum specified in the instrument which is payable contingently or
conditionally, that is to say, on a sum which may become payable. That, it was
said, is a principle of general application under the Stamp Act. If, per
contra, the form of the instrument is such that a sum is payable but the
instrument does not name what that sum is, or what it may be, so that the sum
could, in theory, be any figure, subject to due quantification by reference to
some formula, then there is nothing by reference to which ad valorem
duty can be calculated. If a minimum sum is expressed as that which may be
payable, ad valorem duty is to be assessed on that minimum sum. If a
maximum sum is expressed, ad valorem duty is to be assessed on that
maximum sum as a sum which may be payable …
Brightman J appears to have accepted that
as a generally accurate summary of the law, and he held that the lease was
chargeable on the maximum amount of rent. Mr Thomas relies on the per contra,
that is the case where a sum is payable but the instrument does not name what
the sum is or what it may be. Although that case was dealing with rent rather
than premium, that case and the other authorities show that the contingency
principle applies to all the various charging heads of the Stamp Act.
Mr Michael Furness, for the
commissioners, relies on the decision in the first Underground Electric
Railways case, which he says is for material purposes indistinguishable
from the present case. It is necessary to look in some detail at the facts of
that case and the judgments at each level.
The facts are most fully stated in the
judgment of the court at first instance at [1904] 2 KB 198, although the actual
judgment of Channell J was reversed on appeal. The case concerned the sale of
the undertaking of a railway company. Part of the consideration was to be based
on the profits of the transferee company. Clause 3 provided that the profits
available for dividend in respect of each year might be applied, inter alia:
In paying to the traction company or its
assigns as a further part of the consideration for the said sale such a sum as
shall be equal to a dividend of 3 per cent for such year on the amount for the
time being paid up on such of the original ordinary share capital of 5,000,000
in the new company as shall for the time being have been issued by the new
company.
It was held in the Court of Appeal [1905]
1 KB 174 and the House of Lords that the further consideration of 3%, although
payable on a contingency, was ‘money payable periodically’ within the meaning
of the Stamp Act.
The discussion in the judgments was
addressed principally to the question whether the fact that payment depended on
the availability of profits was something which affected the liability to
charge. On this, the judges in the Court of Appeal and the House of Lords were
agreed that the words of the statute:
… include money which may never become
payable unless the particular event happens — that is, in this case, unless the
amount of profits is sufficiently large to make all the preliminary payments
before the obligation to pay a sum equivalent to a 3 per cent dividend arises.
Unless and until that condition is fulfilled the money will not be paid: still
it is money which will become payable if that event happens, and therefore it
is covered in my judgment by the wording of the section, and the duty is
payable.
— Collins MR in the Court of Appeal at
pl82.
However, that was not the only
contingency affecting the amount of the payment. It was also dependent upon the
amount of paid up capital at the time when a payment became due. It was found,
as a matter of fact, that the amount of paid up capital at the date of
agreement was £1.3m, although this was not stated in the agreement. In the
Court of Appeal this was treated as a fixed minimum amount at the date of the
agreement. As Collins MR said at p180:
… if I once find that there is a fixed
minimum already reached at the date of the agreement, it does not seem to me
that the fact that the minimum may be afterwards exceeded alters the fixity of
that which has already been ascertained, namely, the sum below which the
capital cannot fall …
The Master of the Rolls noted the
argument that the amount of paid up capital might not be certain in that sense
in so far as the company might by proper steps reduce it. He held, in agreement
with the Attorney-General’s argument (pl80) that it was properly treated as ‘an
absolutely fixed and permanent factor upon which the sum of 3 per cent will
have to be paid’ (pl81). It is not clear to me whether this was because, as a
matter of construction of the agreement, it provided a fixed factor for the
later calculations; or because, as a matter of stamp duty law, the crown were entitled
so to treat it.
In any event the point was put slightly
differently in the House of Lords. The case was heard by three law lords. The
only substantive speech was given by Lord Lindley and the Earl of Halsbury
agreed with him. Lord Robertson simply adopted the judgments of the Court
of Appeal. Lord Lindley’s reasoning therefore must be taken as the majority
view. He referred to the sum in question as ‘a minimum sum’ and one which was
‘liable to be increased, but not to be diminished, except in certain events, to
which I will now allude’ (p22). He dealt with the possibility of reduction in
this way (p23):
Then it is said that the purchasing
company may be wound up, or may at some future time reduce its capital and so
reduce in future the minimum sum payable periodically to the selling company.
No doubt these are possible events, but at most they are merely other
contingencies on which the payment of the minimum sum depends. Unless the
contingency of winding up or reducing the capital happens, the minimum sum
continues to be payable. The fact that the minimum sum is payable on more
contingencies than one is in my opinion quite immaterial. They merely affect
the ability of the purchasing company to pay, which is the only contingency of
any importance.
The importance of this case for Mr
Furness’ argument is that the so-called ‘minimum payment’, or specified amount,
was ascertained not simply from the terms of the agreement, but by reference to
an external factor, namely the amount of capital actually paid up at the date
of the instrument; and that the amount was determined at the date of the
agreement, even though the contract required the determination to be made, not
at that date, but at the later dates when profits from year to year came to be
ascertained. The ability to determine a figure at the date of the instrument
was accepted as giving the amount sufficient fixity for the purpose of the
contingency principle, even though it was liable to be increased or reduced
before the time when the formula came to be applied under the contract.
Although Lord Lindley referred to it as ‘a minimum amount’, he acknowledged (as
appears from the passage quoted above) that it might be reduced as well as
increased. Thus, Lord Radcliffe, in the Independent Television case to
which I have referred, mentioned the first Underground Electric Railways
case as one where ‘the variation might have been upwards or downwards’ (p443).
If that is the correct interpretation of
the first Underground Electric Railways case, then the same reasoning
is, in my view, applicable here. Although the formula used by the agreement
cannot in terms be applied as at the date of the instrument, since it refers to
a date 25 days thereafter, none the less it is possible to ascertain the price
of the relevant Treasury Stock as at that date (subject to one point to which I
will come). The ordinary principle, as confirmed by the Cory case,
requires one to ascertain the consideration by reference to the circumstances
at the date of the instrument. In the first Underground Electric Railways
case it was accepted that that involved looking at the amount of issued capital
on that date, even though the contract itself anticipated calculation by
reference to the paid up capital at a later date. So, in this case, it is
consistent with that approach to take the closing price applicable at the date
of the instrument, even though the agreement itself specifies a later date. As
Mr Furness submits, relying on the first Underground Electric Railways
case:
… provided an amount of consideration can
be ascertained in the circumstances existing at the date of the instrument (ie
by applying the formula as at that date rather than the date or dates envisaged
in the instrument) stamp duty is chargeable on the figure produced.
For the reasons given, I accept this
submission.
I should add that, although in an area as
technical as this one may not be able to attach too much weight to the wording
of the statute itself, I am comforted by the fact that this conclusion seems to
me to accord to the language and intention of the Stamp Act. The question under
the Act is whether there is consideration consisting of money. That wording has
to be applied in a context where it is necessary to ascertain the amount at the
date of the instrument. Commonsense would suggest that the substantive question
— whether there is consideration in money — would not be affected by the date
at which the formula is to be applied; but that in calculating the amount one
would (if reasonably practicable) apply the formula as at that date. That is
what the commissioners’ approach achieves in this case.
The only other question is whether there
is a closing price of the relevant Treasury Stock applicable at the time of the
instrument. Evidence was put before me without objection showing that the
‘closing price’ of a gilt is generally accepted to be the price ascertained by
the compiler of the London Stock Exchange Daily Official List as the average of
the prices indicated by market makers in that gilt at 4.30pm (the time when
business in the market closes) on each day for which the market is open for
business. Since the market is closed on a Saturday, there is no closing price
on that day. Furthermore, apart from that ‘closing price’, it is not possible
to point to any other generally accepted meaning of the expression ‘the price’
of any gilt (other than the prices fixed on individual transactions). Thus, Mr
Thomas submits, even if it is permissible to apply the formula as at the time
of the instrument itself, there was no closing price at that time.
I agree with Mr Furness, that once one
has got over the conceptual difficulty of applying the contractual formula at a
different point in time from that envisaged by the contract, there is no
practical difficulty in fixing the amount. The appropriate price is that which
can fairly be regarded as the ‘closing price’ at the date of the instrument,
that is the one most recently available. As I understand it, there is no
dispute that the closing price for the day immediately preceding the instrument
was £102.125: see case stated para 4. In my view, that is the figure that
should be taken for the purposes of the calculation.
Accordingly, I reject the appellants’
primary contention. I determine that the two leases in question are chargeable
with duty and that the duty should be assessed in accordance with the formula
specified in clause 3 of each lease, applying the closing price of the Treasury
Stock as at August 13 1993 (that is £102.125).
