The decision in Project Blue Ltd v HMRC [2014] UKUT 0564 (TCC) has been much anticipated. The headline result is unsurprising. The taxpayer’s argument that it was liable to pay no SDLT – despite having acquired the Chelsea Barracks for £959m – failed again. However, the decision raises some points of wider interest, including because HMRC prevailed by using FA 2003 s 75A, the SDLT general anti-avoidance rule. The case discusses s 75A in considerable detail; and Mr Justice Morgan and Judge Nowlan do not agree on the precise end result.
The issues in Project Blue Ltd v HMRC [2014] UKUT 0564 (TCC) (reported in Tax Journal, 9 January 2015) arose in the following way. Project Blue Ltd (PBL) acquired the freehold land for £959m. It sold the land on to a Qatari bank (MAR) for £1.25bn. MAR then granted PBL a leaseback with a right to repurchase.
This was a financing arrangement which complied with sharia law; and it was clear from the First-tier Tribunal’s (FTT’s) findings of fact that the transactions were influenced by a desire for PBL to have sharia-compliant finance. Both PBL, in respect of the leaseback and right to repurchase, and MAR claimed the benefit of FA 2003 s 71A, which provides relief for this kind of finance. Crucially, PBL also claimed the benefit of what is generally known as sub-sale relief, which was then provided for by FA 2003 s 45. PBL’s position, therefore, was that it was not liable to pay any SDLT as a result of the transactions.
In the Upper Tribunal, but not the FTT, PBL argued that MAR was liable to SDLT on a consideration of £1.25bn. However, MAR was never assessed by HMRC and this argument was rejected. HMRC relied solely on s 75A and argued that PBL should be assessed to tax on a consideration of £1.25bn, as the FTT had decided.
HMRC, of course, prevailed on s 75A, although the chargeable consideration was found to be £959m. In a careful and considered judgment, Morgan J, whose judgment takes precedence, was critical of ‘the labyrinth’ of s 75A and raised concerns about it being used to overcome a defect in the legislation which was later amended. The most important aspects of the decision are Morgan J’s comments on s 75A. These have been the source of some alarm in certain quarters, with a concern being raised that s 75A might be applied to catch entirely innocent transactions which have no tax avoidance purpose. In the author’s view, this concern is misconceived.
It is essential to separate two issues which PBL understandably sought to elide. One is whether s 75A must be construed purposively. As to this, there is no doubt that s 75A must be so construed, in common with every other statutory provision. Morgan J recognised this and quoted a passage summarising what purposive interpretation requires, to which readers will need no introduction, following Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51.
The other issue is whether a taxpayer needs to have any kind of purpose in order to bring s 75A into play. PBL’s primary submission was that s 75A only applies where the relevant purpose of the transactions or the participants in the transactions is tax avoidance. Transactions are, of course, inanimate and cannot have purposes. In other words, PBL was seeking to argue that s 75A requires a subjective bad purpose by reference to the taxpayer’s motive. This argument was rejected. In doing so, Morgan J stated that s 75A is ‘not confined to cases where there is a purpose of tax avoidance’.
This statement has to be understood in the context of PBL’s submission. What Morgan J rejects is the proposition that s 75A requires the taxpayer to have a purpose of avoiding tax. This does not mean that s 75A is not to be construed in accordance with its purpose, which is obviously to counter schemes designed to save SDLT in an abusive way. In the author’s view, the decision could have made this distinction clearer.
It is not surprising that the tribunal rejected the argument that s 75A’s application is limited by some kind of subjective purpose test. Subjective purpose tests are problematic for two reasons. First, there is no known reliable mechanism for reading people’s minds. Second, if the subjective purpose is decisive, this tends to reward the badly advised and those with an aggressive approach to risk. In other words, the courts do not wish to admit a defence that the taxpayer did not realise that what he or she was doing might be abusive.
For these reasons subjective motive tests have generally been rejected in English law unless expressly incorporated into the statutory wording; see Slade LJ’s comments in Page v Lowther [1983] STC 799. Similarly, EU law requires that there is an objective purpose of tax avoidance for the purposes of the VAT abuse of rights test; see Halifax [2006] STC 919. The Halifax test looks at whether it is apparent from objective factors that the essential aim of a transaction is to obtain a tax advantage, rather than by examining the individual taxpayer’s motives.
However, having identified that s 75A needed to be applied purposively by reference to the objective nature of the transactions, Morgan J then ran into difficulty. The problem with a wide statutory anti-avoidance rule, such as s 75A and the GAAR, is that inevitably a value judgment must be made as to what is abusive and is therefore caught by that provision. This gives rise to inevitable uncertainty. Such uncertainty is the reason for much of the complex drafting in ss 75B and 75C, together with the notorious double unreasonableness test and the controversial advisory committee in the GAAR regime.
Accordingly, the next issue for the tribunal to decide was whether the transactions in question possessed the requisite criteria to bring s 75A into play. All parties agreed that the reality in Project Blue is that, in the absence of s 75 A, the analysis would have resulted in PBL acquiring land for £959m free of SDLT; whether or not this is the result of a happy coincidence remains undetermined in the absence of any definitive facts. This result is not in line with the policy of the tax, however. Accordingly, the facts are sensibly amenable to s 75A, whether or not PBL deliberately sought to exploit the relevant statutory provisions. As an aside, the author is aware that this arrangement was sold as a planning scheme. Against this background, it is not surprising that the tribunal applied s 75A to achieve a sensible result. However, Morgan J does not expressly address any of this at all. Instead, he says that his rejection of the subjective purpose argument leaves him no alternative but to apply s 75A. This contrasts with the approaches of both the FTT and Judge Nowlan; they essentially conclude that the result which would otherwise arise means it is appropriate to use s 75A against PBL.
The following 43 paragraphs of Morgan J’s reasoning are devoted to the detailed application of s 75A; and to the two issues of identifying the relevant vendor and purchaser and ascertaining the chargeable consideration. Ultimately, he concludes that PBL is correctly identified as the purchaser and that the chargeable consideration was £959m. This produces a fair and sensible result. However, the way in which this conclusion is reached is not straightforward.
As regards the identity of the purchaser under s 75A, after much analysis, Morgan J concludes that MAR is also potentially the purchaser for the purposes of s 75A and records significant concern that there could be two purchasers. He is able to resolve this difficulty because only PBL is assessed. In the author’s view, the better approach is that taken by Judge Nowlan, who construes s 75A purposively and concludes that PBL is the purchaser. In other words, by taking a purposive interpretation to s 75A, it is much easier to operate it sensibly and identify the purchaser.
Perhaps unsurprisingly, taking a mechanical approach to a widely worded anti-avoidance provision such as s 75A inevitably leaves it open to nonsensical interpretations.
Morgan J’s approach to identifying the purchaser is in marked contrast to how he deals with the issue of the amount of the chargeable consideration. Here, Morgan J takes a sensible purposive construction of s 75A and concludes that the chargeable consideration is only £959m, being that paid to the vendor, rather than the higher figure which MAR paid PBL. Morgan J reaches the conclusion notwithstanding that s 75A(4) says that the consideration is the largest amount given for any of the scheme transactions. Judge Nowlan reluctantly takes the opposite view and this time it is he who concludes he is constrained by ‘mechanical rules’.
Are there wider lessons to be drawn from the decision? A taxpayer who wants to show that his structuring is for good commercial reasons needs to provide clear evidence to support this. However, a land purchase is exactly the kind of linear transaction which is amenable to being effectively recharacterised under s 75A, which can be viewed as a modified statutory Furniss v Dawson. Even a taxpayer who can show good commercial reasons for what he has done will be hit by s 75A if the result would otherwise be abusive. The bottom line is that section 75A can be used to stop taxpayers, intentionally or not, taking advantage of flaws in the legislation to acquire land free of SDLT. Finally, what the decision shows is that s 75A, including all of the detailed provisions, can and must be interpreted purposively, otherwise unfair results will arise.
The author is sometimes asked whether SDLT planning is now dead. The short answer is that s 75A has indeed – and particularly since HMRC belatedly started actually using it – stopped the kind of contrived planning that it was intended to hit. However, there are sometimes favourable results to which particular transactions lend themselves. Situations where family partnerships are involved and development joint ventures are two examples of this. Readers should be wary of arrangements which seek to reduce the rate of tax on transactions which would otherwise be taxed at the new higher rates for residential property by adding a commercial element.
