Sale of land – Finance Act 2003 – Stamp duty land tax – Alternative financing – Appellant purchasing freehold of land with assistance of financing from bank under arrangement compliant with Sharia law – Financing arrangement involving onward sale of the land to bank with leaseback and right to call for re-transfer at future date – Whether stamp duty land tax payable on transactions – Whether anti-avoidance provisions of section 75A fo 2003 Act applying – Appeal allowed in part
In January 2008, the secretary of state for the home department disposed of his freehold interest in Chelsea Barracks, London SW1, by a sale to the appellant for £959m pursuant to an earlier contract. The appellant’s purchase was funded by a Qatari bank. To make the financing arrangements comply with Sharia law, a series of transactions were put in place which involved an onward sale of the land to the bank on the same date for £1.25bn, with a leaseback of the land to the appellant and the grant of put and call options designed to lead to the later re-transfer of the land to the appellant.
An issue arose as to whether, and by whom, stamp duty land tax was payable on the transactions under section 42(1) of the Finance Act 2003. The legislative provisions fell to be applied as they had stood between April 2007 and the end of January 2008, although the 2003 Act had subsequently been amended in several respects. It was common ground that: (i) the completion of the sale to the appellant, having occurred at the same time as and in connection with the subsale to the bank, fell to be disregarded under section 45(3); (ii) the subsale to the bank was also exempt from SDLT under the provisions of section 71A concerning “alternative property financing”, the purpose of which was to put a provider of alternative finance such as the bank, which acquired a chargeable interest, in the same position as a funder who acquired an exempt “security interest” under a conventional mortgage; and (iii) consequently, neither the appellant nor the bank would be liable for SDLT unless the transactions were caught by the “anti-avoidance” provisions of section 75A.
The respondents took the view that section 75A applied so as to require the appellant to pay SDLT on a notional transaction involving the appellant’s acquisition of the land from the secretary of state for a chargeable consideration, under section 75A(5(a), of £1.25bn, that being the largest amount given by any one person as consideration for the scheme transactions.
The first-tier tribunal (FTT) found in favour of the respondents and the appellant appealed. It contended that either nil SDLT was payable or that the chargeable consideration was £959m.
Held: The appeal was allowed in part
(1) Section 75A was not limited to cases where the purpose of the transactions or the participants was tax avoidance. It applied in a mandatory way whenever the facts of the case came within its wording.
(2) By section 75A(1)(a), the section would apply where one person (V) disposed of a chargeable interest and another person (P) acquired either it or a chargeable interest derived from it. Assuming that V was the secretary of state, as a person who had disposed of a freehold interest in land, it was next necessary to identify who was P. The bank was not precluded from being P by reason of the fact that its participation in the scheme was solely for the purpose of funding another party. However, the better view was that it was not possible for more than one person to be P and that, in the instant case, that person was the appellant. The disregard of the appellant’s acquisition of the freehold under section 45(3) did not apply in the context of section 75A: DV3 RS Limited Partnership [2013] EWCA Civ 907; [2013] STC 2150; [2013] 03 EGLR 159 distinguished. Further, the respondents had not sought to levy SDLT on the bank, it was not a party to the appeal, and consequently it was not necessary to make any formal determination as to the position in relation to it.
(3) In applying section 75A, the first question, under section 75A(1)(c), was whether the SDLT payable on the scheme transactions was less than that which would be payable on a notional land transaction by which the appellant had acquired the secretary of state’s chargeable interest. The answer was in the affirmative, since the SDLT on the scheme transactions was nil.
(4) The next question, under section 75A(7), was whether section 75A(a)(c) applied only by reason of section 71A, in which case section 75A would be disapplied. The correct answer was that section 5A(1)(c) was not satisfied “only” by section 71A, since the reason for the nil SDLT payable by all the scheme participants flowed from a combination of sections 45(3) and 71A.
(5) The next step was to identify the chargeable consideration for the notional transaction under which the appellant acquired its chargeable interest. By section 75A(5), that meant the largest amount, or aggregate largest amount, given by or on behalf of any one person by way of consideration for the scheme transactions or received by or on behalf of V as consideration for the scheme. The amount received by the secretary of state, as V, was £959m. Although the sum paid by the bank for the freehold was the larger sum of £1.25m, that figure fell to be ignored under section 75B(1) “if or so far as” that scheme transaction was merely incidental to the transfer of the chargeable interest from V to P. Section 75B(1) applied either where the scheme transaction was merely incidental or where it was incidental to some extent; consequently, it could apply to a compound transaction, part of which was incidental and part not. Further, section 75B(1), read with section 75B(6), could apply both where there was a direct transfer from V to P and where P indirectly acquired an interest disposed of by V. In the instant case, the chargeable interest disposed of by V and acquired by P was the freehold, not the leasehold interest. The other parts of the scheme of transactions were merely incidental to that actual transaction. Alternatively, the transactions between the appellant and the bank could be apportioned, so that the part of the transaction in which the bank provided consideration for its acquisition of the freehold was separate from another part, in which the bank agreed to reimburse the appellant in relation to SDLT and to provide further funding. On that analysis, the latter part of the transaction was incidental.
(6) Either way, the result was that the relevant chargeable consideration on the notional land transaction, for the purposes of section 75A, was £959m. The appellant was liable to pay SDLT on that sum.
Note: While agreeing that the appellant was P and was the person liable to pay SDLT, Judge Nowlan considered that the chargeable consideration was £1.25bn. However, the view of Morgan J, as the presiding judge, prevailed under the provisions of the First-Tier Tribunal and Upper Tribunal (Composition of Tribunal) Order 2008.
Roger Thomas QC (instructed by Clifford Chance LLP) appeared for the appellant; Malcolm Gammie QC and Hui Ling McCarthy (instructed by the legal department of HM Revenue and Customs) appeared for the respondents.
Sally Dobson, barrister
Read a transcript of Project Blue Ltd v Commissioners for HM Revenue and Customs here
