Care should be taken when interpreting SDLT’s general anti-avoidance rule purposively, writes Sean Randall (KPMG).
The Upper Tribunal decision in Project Blue Ltd v HMRC [2014] UKUT 0564 (TCC) is prompting debate regarding its effect on the scope and application of the SDLT general anti-avoidance rule, FA 2013 s 75A. Devised as the ultimate deterrent to SDLT avoidance, it was inevitable that HMRC would eventually deploy s 75A when the effect of deterrence failed. In Project Blue, it successfully neutralised a tax advantage arising from a defect in the legislation.
But what effect has that had generally: was the damage confined to its target (the scheme) or is the crater much larger? One view is positive: read purposively, s 75A is confined to defeat SDLT advantages that are abusive: see ‘The UT on Project Blue: lessons on s 75A’ (Michael Thomas), Tax Journal, 20 February 2015. I agree that a court is likely to interpret the provision sympathetically where there is no abuse.
But there are indications in the decision and the drafting to suggest that one should approach s 75A with caution. Take the sale of a property by a 50% partner to a newly-established partnership for 100 funded by external borrowing. It should fall within the special computational charging rules in FA 2013 Sch 15 Pt 3 and those rules should result in the chargeable consideration being taken to be 50% of the market value of the property transferred (assuming that the other partners are not connected individuals or group companies and the property is held by the partnership for the purposes of its business). No one could sensibly argue that the tax advantage produced by those provisions is avoidance. So one might approach s 75A casually – after all, why should an anti-avoidance provision be a problem if there is no avoidance? It should not, but arriving at that answer requires care to be taken. This is because, according to the Upper Tribunal, s 75A itself defines what is avoidance for these purposes.
Consequently, one must apply the provision and to do so must determine who makes the disposal and acquisition; what transactions (‘scheme transactions’), including non-land transactions, are involved in connection with the disposal and acquisition; what is the largest amount (or aggregate amount) of consideration given or received for the scheme transactions; and what other SDLT provisions apply to the notional transaction for the purpose of determining the amount of tax chargeable on it? In my example, the partner disposes of the property and the partners acquire it (even where the partnership has separate legal personality), and the consideration given for the scheme transactions is the 100.
But what is the chargeable consideration on the notional transaction? This is the kicker. Under s 75C(8A), the special computational charging rules do not apply to the notional transaction; hence, the amount of tax chargeable under the actual transaction is less than the amount of tax that would be chargeable on the notional transaction. Therefore, s 75A applies, the actual land transaction is disregarded and SDLT is payable on the notional transaction. That cannot possibly have been Parliament’s intention.
To arrive at the right result, one needs to disregard the establishment of the partnership and the other incidental acts, e.g. the borrowing, as scheme transactions. This is consistent with a purposive interpretation, but it does do violence to a plain reading of the legislation. Moreover, in other cases (e.g. where there are multiple transfers) whether or not the tax advantage is abusive may be considerably less clear.
Care should be taken when interpreting SDLT’s general anti-avoidance rule purposively, writes Sean Randall (KPMG).
The Upper Tribunal decision in Project Blue Ltd v HMRC [2014] UKUT 0564 (TCC) is prompting debate regarding its effect on the scope and application of the SDLT general anti-avoidance rule, FA 2013 s 75A. Devised as the ultimate deterrent to SDLT avoidance, it was inevitable that HMRC would eventually deploy s 75A when the effect of deterrence failed. In Project Blue, it successfully neutralised a tax advantage arising from a defect in the legislation.
But what effect has that had generally: was the damage confined to its target (the scheme) or is the crater much larger? One view is positive: read purposively, s 75A is confined to defeat SDLT advantages that are abusive: see ‘The UT on Project Blue: lessons on s 75A’ (Michael Thomas), Tax Journal, 20 February 2015. I agree that a court is likely to interpret the provision sympathetically where there is no abuse.
But there are indications in the decision and the drafting to suggest that one should approach s 75A with caution. Take the sale of a property by a 50% partner to a newly-established partnership for 100 funded by external borrowing. It should fall within the special computational charging rules in FA 2013 Sch 15 Pt 3 and those rules should result in the chargeable consideration being taken to be 50% of the market value of the property transferred (assuming that the other partners are not connected individuals or group companies and the property is held by the partnership for the purposes of its business). No one could sensibly argue that the tax advantage produced by those provisions is avoidance. So one might approach s 75A casually – after all, why should an anti-avoidance provision be a problem if there is no avoidance? It should not, but arriving at that answer requires care to be taken. This is because, according to the Upper Tribunal, s 75A itself defines what is avoidance for these purposes.
Consequently, one must apply the provision and to do so must determine who makes the disposal and acquisition; what transactions (‘scheme transactions’), including non-land transactions, are involved in connection with the disposal and acquisition; what is the largest amount (or aggregate amount) of consideration given or received for the scheme transactions; and what other SDLT provisions apply to the notional transaction for the purpose of determining the amount of tax chargeable on it? In my example, the partner disposes of the property and the partners acquire it (even where the partnership has separate legal personality), and the consideration given for the scheme transactions is the 100.
But what is the chargeable consideration on the notional transaction? This is the kicker. Under s 75C(8A), the special computational charging rules do not apply to the notional transaction; hence, the amount of tax chargeable under the actual transaction is less than the amount of tax that would be chargeable on the notional transaction. Therefore, s 75A applies, the actual land transaction is disregarded and SDLT is payable on the notional transaction. That cannot possibly have been Parliament’s intention.
To arrive at the right result, one needs to disregard the establishment of the partnership and the other incidental acts, e.g. the borrowing, as scheme transactions. This is consistent with a purposive interpretation, but it does do violence to a plain reading of the legislation. Moreover, in other cases (e.g. where there are multiple transfers) whether or not the tax advantage is abusive may be considerably less clear.
