HMRC has won at the First-tier Tribunal in an SDLT avoidance case involving a claim for sub-sale ‘relief’ using an unlimited company purchaser which then made a distribution of the property by way of a final dividend to its parent. The case is Vardy Properties and Vardy Properties (Teesside) Ltd v HMRC [2012] UKFTT 564 (TC). The time limit for an appeal in this case is 1 November 2012 but Vardy has apparently decided not to appeal. HMRC’s victory was based squarely on the flawed implementation of the scheme involving a failure by the taxpayer to follow the Companies Act's requirements for accounts to be prepared for certain distributions in specie. The point about the failure to prepare accounts was taken by HMRC only just before the hearing of the case and although it won the case for HMRC, it rather undermines HMRC’s desire to use the decision as a test case on the technical merits of the scheme. Although the tribunal went on obiter to explain why it would also have found for HMRC had there not been an unlawful distribution, the tribunal’s reasoning seems open to criticism and in any event seems to provide some encouragement for other versions of sub-sale schemes.
The basic structure in the caseVardy Properties (Teesside) Ltd (C) wished to acquire a property for £7.25m from VV Stockton LP (A) without paying SDLT. Accordingly its advisers devised a scheme with the following steps:
Both B and C said that this was a sub-sale arrangement combined with a transfer to C for nil consideration so that no SDLT was chargeable on the acquisition by both B and C. In particular, the acquisition by B fell to be ignored under FA 2003 s 45(3) because completion of that contract occurred at the same time as the transfer to C and C’s acquisition was for no consideration being a dividend.
HMRC said that:
1. C never became entitled to call for a conveyance because B had not prepared the initial accounts required by the Companies Act 1985 ss 263–270 and so C only ever held the property as constructive trustee for B, so FA 2003 s 45 was not satisfied (the unlawful distribution);
2. even if FA 2003 s 45 applied so that there had been a sub-sale, C had ‘indirectly’ paid £7.25m consideration because this was a pre-ordained scheme in which C provided the purchase monies to B which B used to pay A and so C was taxable on the £7.25m and not on nil;
3. the declaration of the distribution in specie by B was not a ‘transaction’ within FA 2003 s 45 because it lacked any consensual element; and
4. C never became entitled to call for a conveyance before completion of the A to B contract.
The tribunal decided the case by agreeing with HMRC’s argument in 1 above. As a result B was liable for SDLT on £7.25m on its acquisition from A because, due to the unlawful distribution, the sub-sale rules in FA 2003 s 45 had never been engaged. The tribunal went on to say obiter however that in the absence of the unlawful distribution, s 45 would have been engaged so that B’s completion of its acquisition would have been disregarded. However, in that case the tribunal said that C would have been liable for SDLT because it had ‘indirectly’ paid consideration for its acquisition of the property when subscribing for shares in B as argued by HMRC in 2 above. The tribunal rejected HMRC's arguments in 3 and 4 above.
The taking by HMRC of the unlawful distribution point just before the hearing began in a sense ‘ambushed’ the taxpayer and may also have shot themselves in the foot. A victory is always satisfying but in what was meant to be a test case on the technical merits, did HMRC really wish to win so strongly on flawed implementation? One wonders whether the appeal would have proceeded if the point had been raised earlier.
The point is also an interesting one because under Companies Act 1985 s 263(2)(c) a distribution by way of a reduction in share capital (which some other versions of the sub-sale scheme used) does not require initial accounts. The taxpayer does not appear to have argued for this even though there was a reduction in share capital by B. This may have been because of the way that the distribution in Vardy was structured meant that it was not technically by way of a reduction in share capital because the reduction was followed by a declaration of a final dividend by way of a distribution in specie.
The tribunal’s reasoning that C had ‘indirectly’ paid consideration under FA 2003 s 45(3)(b)(i) seems flawed if one asks what would happen if C had actually paid B for the property as well as subscribing for shares. In that case s 45 could still have been engaged. However, C would have paid SDLT on the indirect provision of the £7.25m by way of share capital plus the consideration C actually paid to B. The judges tried to rule out such a result by asserting that there should be no double-counting but the logic of their interpretation leads to double-counting. It seems reasonably clear that s 45(3)(b)(i) was intended by Parliament to catch assignments of contracts and not sub-sales and is not apt to catch consideration paid by C to B which was intended to be caught under s 45(3)(b)(ii). This point seems ripe for an appeal and other taxpayers may well take up the challenge.
While the decision is bad news for taxpayers who undertook this version of the unlimited company sub-sale scheme, it does provide some encouragement for those schemes where either accounts were prepared or were not required and B was able to self-fund its acquisition. Those taxpayers who arranged for B to be self-funded but failed to prepare accounts will of course be rather upset.
The decision is also encouraging for those who undertook other versions of sub-sale schemes which did not involve company distributions and where C only ever gave a low or nominal consideration to B because the decision endorses the engagement of s 45 but leaves HMRC unable to point to any meaningful consideration given directly or indirectly by C.
It should be borne in mind however that the case involved a pre-FA 2003 s 75A scheme and schemes that seem to have been supported (doubtless unintentionally) by this decision but were done after s 75A came into effect will have to be tested against that provision as well.
Assuming that there will not be an appeal in Vardy, HMRC will be hoping that the decision will persuade those taxpayers with open enquiries and appeals on similar schemes to now settle by paying the SDLT assessed plus interest. Indeed it seems that HMRC will be writing directly to taxpayers concerned to suggest that they do so. However the decision in Vardy has not provided HMRC with the sort of clarity that will guarantee the settlement of all open cases. This is because HMRC won on bad implementation which really only affects those other schemes which suffered from the same defect. Many similar schemes either had accounts or did not require them and either self-funded B or were done in ways that did not involve the payment of indirect consideration. The tribunal’s comments about s 45 being engaged but that there was indirect consideration are respectively unhelpful and helpful to HMRC but were only obiter. The indirect consideration point is at least arguably wrong and might be overturned on an appeal.
Accordingly those taxpayers sitting on schemes which are not vulnerable on the Companies Act point for lack of accounts may not be persuaded that Vardy means that the time has come to settle. Although it is understood that two SDLT avoidance cases listed for later this year have been withdrawn it is likely that there will be an appeal in due course which is intended to test the indirect consideration point and no doubt the application of the general SDLT statutory anti-avoidance rule in s 75A as well.
Nor will victory be plain sailing for HMRC. Many of the companies involved as B in the type of scheme undertaken by Vardy no longer exist (the scheme in Vardy was done six years ago) and would need to be reinstated (or in the case of overseas companies, the tax recovered from the company secretary, which may also be a company which may no longer exist). This will require considerable resources and effort. When HMRC get around to the schemes that were used predominantly for residential purchases, victory here may also bring with it the potentially messy problem of many taxpayers not having the financial resources to pay the tax and interest and having to be forced to sell the family home as a result. Whether the courts dealing with the enforcement of unpaid tax will be terribly keen on making families homeless is something that HMRC will have to consider. Will ministers wish the consequences of the moral repugnance of the parents visited on the children?
Patrick Cannon, barrister at Tax Chambers, 15 Old Square
See also Patrick Cannon's webcast (May 2012) on the SDLT planning landscape
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