On 26 May 2016, the Court of Appeal upheld the taxpayer’s appeal in the long-running Project Blue5 case, the first case to consider in detail the wide-ranging stamp duty land tax (SDLT) anti- avoidance provision (section 75A of Finance Act 2003). Although this latest decision is a clear win for this particular taxpayer, to HMRC’s potential embarrassment the Court held that SDLT was in fact payable – just not by the taxpayer that HMRC has been pursuing. This decision has done nothing to overturn the earlier decisions’ wide interpretation of the scope of section 75A.
Broadly, the case concerned the 2007 agreement for an SPV to buy the Chelsea Barracks from the MoD (at a price of £959m). It was agreed that 20% would be paid on exchange with the balance in equal instalments over four years. To fund the remainder of the purchase price, the SPV used a sharia-compliant finance arrangement. This was arranged between exchange and completion. The SPV acquired the freehold of the property from the MoD in January 2008 and, pursuant to an agreement negotiated prior to completion of the purchase of the property, immediately transferred the freehold to a Qatari financial institution specialising in sharia- compliant finance, for £1.25bn. The bank then immediately granted a 999-year lease of the property back to the SPV.
The parties to these transactions filed three SDLT returns, claiming that no SDLT charge arose, relying on the following arguments:
- in respect of the sale by the MoD to the SPV: SDLT “sub-sale”, or “transfer of rights”, relief applied as the SPV was not the “ultimate” purchaser of the property
- in respect of the sale by the SPV to the Qatari bank: SDLT “alternative property finance” relief applied in respect of the sharia-compliant financing
- in respect of the 999-year lease to the SPV: SDLT “alternative property finance” relief again applied.
HMRC enquired into these returns but, crucially in terms of the implications of the latest ruling, accepted that relief was available for the sale and leaseback arrangements between the SPV and the Qatari bank. HMRC therefore closed its enquiries into these two returns. Instead, HMRC initially assessed the SPV for SDLT in respect of its purchase of the property from the MoD for £959m, relying on section 75A. HMRC later amended its argument to assess the SPV for SDLT on £1.25bn, in respect of the “notional” transaction under section 75A.
Before the First-tier and Upper Tribunals, the taxpayer had argued that the targeted SDLT anti-avoidance rule (section 75A) was not triggered as all steps were commercial transactions carried out for genuine commercial purposes. In each case the taxpayer lost as the Tribunals each held that although section 75A is described as an anti-avoidance provision, the language of the section does not require there to be a tax avoidance purpose for the provision to apply. The Upper Tribunal did, at least, partially overturn the First-tier decision, ruling that SDLT was payable only on the £959m actually paid by the SPV.
Before the Court of Appeal the SPV put forward a new line of argument, that in fact SDLT was payable (on £1.25bn) but by the Qatari Bank rather than by the SPV. This was because the technical conditions for the SDLT relief on sharia-compliant financing were not satisfied on the facts of this particular case due to the fact that the effect of the SDLT “sub-sale” rule is that the Qatari bank is deemed to acquire the land from the MoD (and not the SPV). The Court agreed with the SPV with the result that:
- the Qatari bank was liable for SDLT on £1.25bn
- section 75A could not apply as the amount of SDLT “payable” was not less than an amount of SDLT calculated on any “notional” transaction between the parties.
As the Court found in favour of (this particular) taxpayer on the sharia-financing exemption point, it was not necessary for the Court to consider in any detail the unsatisfactory drafting of section 75A that had so concerned the earlier Tribunals. However the Court did make an obiter comment that it agreed with the Tribunals that 75A can apply even if there is no tax avoidance purpose.
As up to £50m of SDLT is at stake here HMRC may well seek to appeal this decision to the Supreme Court, or else try to find a way to recover the SDLT from the Qatari bank. As HMRC have closed the enquiry into the bank’s return, it is far from clear how (if at all) this might be possible.
The decision can be viewed here.