Section 75A applied to SDLT avoidance arrangements
Our pick of this week's cases
InProject Blue v HMRC[2018] UKSC 30 (13 June 2018), the Supreme Court found (one lord dissenting) that, although the combination of Finance Act 2003 s 45 and s 71A brought the stamp duty land tax (SDLT) due to nil, the effect of s 75A was that SDLT was payable.
The issue was the SDLT payable on the purchase of the Chelsea Barracks from the Ministry of Defence (MoD) by Project Blue (PBL), using an Ijara lease, which is a form of Sharia compliant financing (as opposed to an interest-bearing loan). The sale comprised the following steps:
MoD contracted to sell the land to PBL for £959m.
PBL contracted to sell the land to a Qatari bank (MAR). Under leaseback arrangements, PBL was to pay MAR rent (representing instalments of the purchase price).
PBL and MAR granted each other put and call options over the land. The MoD conveyed the land to PBL, which conveyed it to MAR. MAR then leased the land to PBL.
There were two issues: whether both sub-sale relief (s 45) and the exemption for alternative property finance (s 71A) applied; and, if so, how s 75A (the SDLT anti-avoidance provision) should apply to the transaction.
It was accepted that, as a result of s 45, the completion of the contract between the MoD and PBL was disregarded, and that s 71A could cover the arrangements between PBL and MAR. The central question was therefore the interaction between s 45 and s 71A, and particularly the identification of the ‘vendor’ under s 71A. The UT had found that PBL was the vendor under s 71A, whilst the Court of Appeal considered that the vendor could not be PBL because the transaction between the MoD and PBL fell to be disregarded under s 45.
The Supreme Court found that the vendor was PBL, so that MAR’s purchase of the barracks from PBL was exempt as a result of the combination of s 45 and s 71A. The court observed that s 71A uses ‘real world’ language and that whether the ‘customer’ of the financing arrangement (here PBL) has incurred a liability to SDLT before entering into the Ijara arrangements is not relevant to the applicability of s 71A. This approach is consistent with the aim of s 71A, which is to equate Ijara financing with conventional lending. There is nothing in the wording of s 71A, which suggests that the exemption will not apply where the sale by the customer to the financial institution is a sub-sale. Finally, this approach ensures that, in cases where the financial institution purchases the property from its customer, SDLT is not charged on the amount provided by the financial institution, but rather on the actual purchase price paid by the customer.
As to the application of s 75A, like the FTT, the UT and the Court of Appeal, the Supreme Court found that it was not precluded by the fact that it was not established that PBL had entered into the arrangements for tax avoidance purposes. The court observed, inter alia, that there is nothing in the body of the section which expressly or inferentially refers to motivation. It is sufficient, for the operation of s 75A, that a reduced liability results from the series of transactions put in place by the parties. Furthermore, the mischief the section addresses leads to the identification of V and P in each particular case (where one person (V) disposes of a chargeable interest and another person (P) acquires either it or a chargeable interest deriving from it). In the ‘real world’, PBL had acquired the barracks with the benefit of finance from MAR and the loophole which it had used was the combination of s 45 and s 71A; PBL was therefore P for the purpose of s 75A.
Finally, the chargeable transaction on the notional transaction was £1.25bn, as this was the largest amount paid under the arrangements. This was, however, subject to PBL’s right to claim a refund under s 80, if the consideration paid by MAR to PBL before the Ijara arrangement was brought to an end, was less than the amount paid by PBL to the MoD.
Why it matters: The SDLT at stake was £50m and the Supreme Court’s decision is not unanimous and reverses the Court of Appeal’s decision. In this context, the words of Lord Hodge ring particularly true: ‘I recognise the difficulty in interpreting the legislation which has been subjected to incremental amendments and additions since FA 2003, as Parliament has struggled to optimise this new tax.’ Fortunately, since March 2011, the issue of the interaction of s 45 and s 71A no longer arises as a result of an amendment to s 45.
Section 75A applied to SDLT avoidance arrangements
Our pick of this week's cases
InProject Blue v HMRC[2018] UKSC 30 (13 June 2018), the Supreme Court found (one lord dissenting) that, although the combination of Finance Act 2003 s 45 and s 71A brought the stamp duty land tax (SDLT) due to nil, the effect of s 75A was that SDLT was payable.
The issue was the SDLT payable on the purchase of the Chelsea Barracks from the Ministry of Defence (MoD) by Project Blue (PBL), using an Ijara lease, which is a form of Sharia compliant financing (as opposed to an interest-bearing loan). The sale comprised the following steps:
MoD contracted to sell the land to PBL for £959m.
PBL contracted to sell the land to a Qatari bank (MAR). Under leaseback arrangements, PBL was to pay MAR rent (representing instalments of the purchase price).
PBL and MAR granted each other put and call options over the land. The MoD conveyed the land to PBL, which conveyed it to MAR. MAR then leased the land to PBL.
There were two issues: whether both sub-sale relief (s 45) and the exemption for alternative property finance (s 71A) applied; and, if so, how s 75A (the SDLT anti-avoidance provision) should apply to the transaction.
It was accepted that, as a result of s 45, the completion of the contract between the MoD and PBL was disregarded, and that s 71A could cover the arrangements between PBL and MAR. The central question was therefore the interaction between s 45 and s 71A, and particularly the identification of the ‘vendor’ under s 71A. The UT had found that PBL was the vendor under s 71A, whilst the Court of Appeal considered that the vendor could not be PBL because the transaction between the MoD and PBL fell to be disregarded under s 45.
The Supreme Court found that the vendor was PBL, so that MAR’s purchase of the barracks from PBL was exempt as a result of the combination of s 45 and s 71A. The court observed that s 71A uses ‘real world’ language and that whether the ‘customer’ of the financing arrangement (here PBL) has incurred a liability to SDLT before entering into the Ijara arrangements is not relevant to the applicability of s 71A. This approach is consistent with the aim of s 71A, which is to equate Ijara financing with conventional lending. There is nothing in the wording of s 71A, which suggests that the exemption will not apply where the sale by the customer to the financial institution is a sub-sale. Finally, this approach ensures that, in cases where the financial institution purchases the property from its customer, SDLT is not charged on the amount provided by the financial institution, but rather on the actual purchase price paid by the customer.
As to the application of s 75A, like the FTT, the UT and the Court of Appeal, the Supreme Court found that it was not precluded by the fact that it was not established that PBL had entered into the arrangements for tax avoidance purposes. The court observed, inter alia, that there is nothing in the body of the section which expressly or inferentially refers to motivation. It is sufficient, for the operation of s 75A, that a reduced liability results from the series of transactions put in place by the parties. Furthermore, the mischief the section addresses leads to the identification of V and P in each particular case (where one person (V) disposes of a chargeable interest and another person (P) acquires either it or a chargeable interest deriving from it). In the ‘real world’, PBL had acquired the barracks with the benefit of finance from MAR and the loophole which it had used was the combination of s 45 and s 71A; PBL was therefore P for the purpose of s 75A.
Finally, the chargeable transaction on the notional transaction was £1.25bn, as this was the largest amount paid under the arrangements. This was, however, subject to PBL’s right to claim a refund under s 80, if the consideration paid by MAR to PBL before the Ijara arrangement was brought to an end, was less than the amount paid by PBL to the MoD.
Why it matters: The SDLT at stake was £50m and the Supreme Court’s decision is not unanimous and reverses the Court of Appeal’s decision. In this context, the words of Lord Hodge ring particularly true: ‘I recognise the difficulty in interpreting the legislation which has been subjected to incremental amendments and additions since FA 2003, as Parliament has struggled to optimise this new tax.’ Fortunately, since March 2011, the issue of the interaction of s 45 and s 71A no longer arises as a result of an amendment to s 45.
