The controversial rules in FA 2003 s 75A were enacted to counter a swathe of SDLT tax avoidance schemes that were perceived to be undermining the effectiveness of the SDLT regime. Although the wide drafting and lack of motive exemption caused consternation at the time, this was ameliorated in part by HMRC’s assurance that s 75A would only be applied where there was tax avoidance. Project Blue Ltd v HMRC (TC02777) is the first case to consider the construction of this controversial piece of the tax code.
What did the case decide?
The case concerned the sale of the Chelsea Barracks to Project Blue Ltd (Blue) by the Ministry of Defence (MoD). The transaction involved a sale to Blue with a subsequent Shari’a complaint sub-sale and leaseback financing. Blue claimed that no SDLT was payable as a result of the interaction of the sub-sale relief rules (as then drafted) and the exemption for alternative finance transactions. HMRC argued that the conditions for s 75A were satisfied and, accordingly, that SDLT should be payable on the largest amount of consideration given for any of the transactions (here, the £1.25bn advanced under the Shari’a financing rather than the £959m paid to the MoD).
The tribunal found in favour of HMRC and, unfortunately for Blue, found that SDLT was chargeable on £1.25bn.
The transaction structure was widely used and so this HMRC victory should raise an even more significant sum for the exchequer than the £50m at stake. The case also has wide implications for the application of s 75A to a variety of transactions.
HMRC won. Should taxpayers be concerned?
There are two aspects of this judgment that will be of concern.
First, despite assurances given at the time of enactment that s 75A was intended only to counter avoidance, and despite the heading of s 75A (which reads ‘anti-avoidance’), the tribunal declined to read a motive defence into the legislation. However, as explained below, whether or not there has been tax avoidance is not completely irrelevant.
Second, the tribunal confirmed that HMRC has no discretion in determining when s 75A should apply and cannot decide not to pursue transactions they consider to be commercially motivated. This does not sit easily with HMRC’s published guidance that it ‘will not seek to apply s 75A where it considers that transactions have already been taxed appropriately’. It will be worrying if the judgment forces HMRC to pursue every case where a s 75A analysis could theoretically produce more tax.
Is there any ‘good news’?
Mindful perhaps of the huge breadth of s 75A, the tribunal found some limitations to its operation.
The first is that tax avoidance is not irrelevant. One of the conditions for s 75A to apply is that ‘one person (V) disposes of a chargeable interest and another person (P) acquires it’. The tribunal found that ‘P’ must be a person who has avoided SDLT that would otherwise have been payable and that it was not open to HMRC to pick parties at random and apply a mechanical test. In Blue’s case, there had been a real acquisition from the MoD and, as a result of the sub-sale relief and alternative financing exemptions, SDLT had been avoided. HMRC had therefore correctly identified Blue as ‘P’. However, the fact that ‘P’ must be a person who has avoided SDLT should give taxpayers comfort that, where there is no inherent avoidance, s 75A should not apply just because there may, in theory, be another course of action which would result in a greater SDLT charge. The issue this leaves, of course, is what is the level of ‘real’ avoidance needed to bring s 75A into play.
Another condition of liability is that ‘a number of transactions are involved in connection with the disposal and acquisition’. The word ‘involved’ was construed as limiting the application of s 75A.
In particular, ‘a transaction which is part of a series of transactions will not be ‘involved’ with other transactions simply because it is part of a series or sequence of successive conveyancing transactions. The linkage must be more than merely being a party in a chain of transactions and the test must be more than a ‘but for’ test. In finding that the Shari’a financing was ‘involved in connection with’ the disposal and the acquisition, it was significant that the financing steps happened straight after and were dependent on the sale from the MoD to Blue and enabled the disposal to take place.
Although the tribunal’s explanation of its ‘more than a “but for” test’ is confusing, it may not be unreasonable to conclude that, where a series of steps is planned in advance but each step is complete in itself and does not necessitate the taking of the other steps, s 75A should not apply to the totality.
Final thoughts?
This case is helpful in clarifying the scope of s 75A to an extent. However, the application of the principles to different fact patterns will not be easy. An appeal is likely, so watch this space.
