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 section 71A applying to exempt purchase by bank from SDLT – Whether anti-avoidance provisions of section 75A of 2003 Act applying – Appeal allowed
In January 2008, the Ministry of Defence (MoD) disposed of its 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. Before the first-tier tribunal (FTT), it was common ground that 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).
The FTT found that: (i) 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; but (ii) the “anti-avoidance” provisions of section 75A applied so as to require the appellant to pay SDLT on a notional transaction involving the appellant’s acquisition of the site 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.
On appeal to the Upper Tribunal, the appellant argued that the subsale to the bank was not in fact exempt under section 71A. It contended that if, by virtue of section 45(3), it had not acquired a chargeable interest in the site, then it was likewise unable to dispose of a chargeable interest to the bank, and accordingly could not be “the vendor” for the purposes of section 71A(2) so far as that provision exempted sales by certain types of vendor.
The Upper Tribunal rejected that contention but allowed the appeal to the extent of finding that the chargeable consideration on which the appellant was to pay SDLT was £959m, not £1.25bn: see [2014] UKUT 564 (TCC); [2015] PLSCS 68. The appellant appealed.
Held: The appeal was allowed.
(1) The first question to be determined was whether the purchase of the site by the bank was exempt under section 71A. That turned on whether the appellant was to be treated as “the vendor” on the sale of the site to the bank or, more accurately, whether the vendor on that sale was the appellant under its actual contract with the bank or the MoD under the notional contract created by section 45(3).
The transfer of the freehold from the MoD to the appellant was disregarded for SDLT purposes because it occurred “at the same time as, and in connection with… the completion of the notional secondary contract”. In conformity with section 45(2), the bank was not treated as entering into a land transaction by virtue of its contract with the appellant, but was instead deemed to acquire the site under the secondary contract described in the tailpiece to section 45(3). As part of that exercise, the substituted performance or completion of the original contract between the MoD and the appellant was disregarded and the secondary contract as defined displaced the contract between the appellant and the bank. Therefore, in the SDLT world, the bank was deemed to purchase the site directly from the MoD for £1.25bn and the actual transfer to the appellant dropped out of charge.
The word “vendor”, in the context of section 71A, had to be a reference to the person from whom the bank “purchased” the site, which, by dint of section 45(3), was not the appellant since the appellant had no chargeable interest that would enable it to be regarded as entering into the secondary contract. The architecture of the relevant transaction in a case covered by section 45(3) was part of the central provisions of Part 4 the 2003 Act and section 721A fell to be construed by reference to, and in conformity with, those provisions: DV3 RS Limited Partnership v Commissioners for HM Revenue and Customs [2013] EWCA Civ 907; [2014] 1 WLR 1136; [2013] 3 EGLR 159 applied.
That conclusion was supported by a consideration of the policy of the legislation. The scheme of section 71A was to limit SDLT in all cases to a single charge on the acquisition of the property from the third party vendor, whether by the financial institution or its customer. It would therefore be odd if, in case of a sub-sale or similar arrangement to which section 45(3) applied, both the acquisition of the property by the customer and its later acquisition by the financial institution were SDLT free.
Accordingly, on the proper construction of section 71A, cases falling within section 45(3) were intended to be treated as direct acquisitions by the financial institution from the third party vendor in terms of their tax consequences. It followed that the bank was liable for SDLT on completion of the secondary contract under section 45(3) and was not entitled to claim section 71A relief.
(2) The imposition of a charge to SDLT in such cases was not intended to be intended to be achieved by the operation of section 75A. Section 75A(5) was not tailored to limit the charge to the amount paid to the third party vendor in order to acquire the property. Instead, the whole amount of the development finance became subject to the charge. The reason for that position was that section 75A was drafted as an anti-avoidance provision and not as a means of preventing a double exemption from charge in cases like the present.
Per curiam: If the court were wrong in its main conclusion and section 71 A did apply to exempt the bank’s purchase, then SDLT was still payable by the bank on an application of section 75A. That section was not limited to cases where the object of the relevant scheme transactions was the avoidance of tax. There would be avoidance for the purposes of section 75A where the conditions spelt out in section 75A(1) were met on the facts. What first had to be identified was the disposal and acquisition of a chargeable interest or a chargeable interest deriving from it. Those and any other transactions involved in connection with the disposal and acquisition were then taken into account as part of the comparative exercise under section 75A(1)(c). The legislation was drafted with the possibility in mind that more than one person in the chain would acquire a chargeable interest. It accommodated that possibility by comparing all the scheme transactions with the notional transaction between V (vendor) and P (purchaser) in order to assess whether there was a loss of SDLT. Where a tax loss was identified, then SDLT was recovered by reference to the largest amount of consideration payable under any one of the scheme transactions. In the instant case, the transfer of the freehold to the appellant from the MoD fell to be disregarded. Since the bank acquired a chargeable interest from the MoD by virtue of the operation of section 45(3), then the section 75A(1)(c) condition was satisfied, even taking into account the subsequent lease to the appellant as a scheme transaction. Accordingly, there was nothing in section 75A that excluded the application of section 75A(5) to the acquisition of the freehold at a price of £1.25bn.
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
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