In the latest twist in the long-running saga of the Project Blue Limited SDLT case, the Court of Appeal has found in favour of the taxpayer – not because no SDLT was payable on the scheme as implemented, but rather because it was payable, just not by this particular taxpayer!
In essence, the decision was that the company providing the finance for the transactions using a sale and lease back arrangement was the company liable to pay SDLT, not the taxpayer company that ultimately acquired the land under the lease back, and that the amount of SDLT due should have been calculated by reference to the full amount of finance provided, even though that amount was not only for the land acquisition, but also for expected development costs. However, since the financing company had filed an SDLT return in respect of its land acquisition and HMRC had enquired into that return and closed the enquiry on the basis that no SDLT was due in respect of it, the suggestion now is that HMRC is unable to recover the tax that should have been paid.
In April 2007, the taxpayer company, PBL, contracted to acquire the freehold interest in Chelsea Barracks from the Secretary of State for Defence for £959m. Completion was deferred until January 2008 to allow for the re-quartering of the troops in the barracks. In the period between exchange and completion, finance was obtained from a bank (MAR) using a sharia'h law compliant sale and lease back structure under which MAR acquired the freehold from PBL for the US dollar equivalent of £1.25bn and then leased it back to PBL on deferred payment terms.
In relation to these transactions, PBL and MAR filed three SDLT returns: one for the acquisition of the freehold by PBL from the Secretary of State for Defence, the second for MAR's acquisition of the freehold from PBL and the third for the leaseback granted by MAR to PBL. Each of the returns showed no SDLT due by virtue of a combination of the then rules for subsales (Sections 44 and 45 Finance Act 2003) and the relief for sale and leaseback transactions of this type (Section 71A Finance Act 2003).
HMRC enquired into all of this and accepted that the relief for the sale and leaseback transactions between PBL and MAR was available and so closed the enquiries into MAR's return for its freehold acquisition and PBL's return for its lease acquisition on the basis that no SDLT was due. However, HMRC assessed PBL for £38.36m of SDLT (4% of £959m) in respect of its freehold acquisition on the basis that there was a scheme involving a number of steps which gave rise to a notional transaction under the SDLT targeted anti-abuse rule (in Section 75A Finance Act 2003) for which the chargeable consideration was £959m.
In the First Tier Tribunal, HMRC amended its argument to say that the actual amount of SDLT due was £50m on the basis that the chargeable consideration for the notional transaction should in fact be the £1.25bn paid by MAR - and the Tribunal agreed. In the Upper Tribunal, by Chairman's casting vote, it was decided that SDLT was still payable by PBL but only on the £959m it paid for the freehold interest, not on the £1.25bn.
Court of Appeal decision
PBL appealed against this decision and HMRC cross-appealed that the proper amount of chargeable consideration was £1.25bn.
In reaching his decision, Patten LJ (who gave the leading judgement) decided that a new line of argument put forward by PBL could be allowed to be heard. This argument was that the proper analysis was that MAR, not PBL, was liable to pay SDLT on the £1.25bn it paid to acquire the freehold interest because, technically, the relief under Section 71A for the sharia'h law compliant financing was not available. The reason for this was that, for the relief to apply, MAR's acquisition needed to be from PBL (Section 71A(2)) but following the earlier decision of the Court of Appeal in DV3 RS LP v. Revenue and Customs Commissioners (2013) EWCA Civ.907, the subsale rules in Sections 44 and 45 had the effect of disregarding PBL's acquisition of the freehold interest from the Secretary of State for Defence and so for SDLT purposes MAR's acquisition of that interest was not from PBL, rather it was from the Secretary of State. Further and as a result of this, the targeted anti-abuse rule could not apply because the amount of SDLT "payable" (as opposed to "paid") in the scheme transactions was £50m payable by MAR, which was not less than the amount that would be "payable" on the notional transaction postulated by HMRC (Section 75A(1)(c)).
Patten LJ agreed with this argument and noted that, although PBL had taken the lease back from MAR, PBL could not thereby be the purchaser under any notional transaction under the targeted anti-abuse rule because that notional transaction could only be an acquisition of the land interest actually disposed of by the seller, which in this case was the freehold interest (Section 75A(4)(b)).
The thrust of this decision is that HMRC made a mistake in closing the enquiry into MAR's SDLT return without assessing it for £50m of SDLT, a mistake which (perhaps) HMRC cannot now correct.
Given that some £50m of SDLT is at stake, it is considered unlikely that HMRC will leave it here and it may well be that there will be an appeal to the Supreme Court or possibly an attempt to assess the correct taxpayer if an appropriate mechanism can be found.
(Project Blue Limited (formerly Project Blue (Guernsey) Limited v. The Commissioners for Her Majesty's Revenue and Customs (2016) EWCA Civ.485)