Chancellor George Osborne had warned that he would "not hesitate to move swiftly, without notice and retrospectively" to counter aggressive and widely marketed stamp duty land tax (SDLT) schemes. In Budget 2013, when announcing retrospective SDLT legislation to counter sub-sale schemes, he showed that he was willing to follow through on this promise. This update reviews some of the practical implications raised by this development.
Essentially, sub-sale schemes involve an original purchaser that:
- contracts to acquire land (often residential);
- subsequently enters into an onward sale agreement with a second purchaser, subject to completion being delayed for up to 125 years; and
- remains in possession.
SDLT was not thought to be payable, because sub-sale relief applied (resulting in the first contract being ignored for SDLT purposes) and the purchase amount under the onward sale agreement was below the SDLT threshold.
However, the new rules will now retrospectively deny sub-sale relief in relation to transactions that have been substantially performed on or after March 21 2012 (ie, the date of Budget 2012, when the chancellor issued his threat). Where the new rules apply, the original purchaser will need to pay SDLT (and back-dated interest) and submit an SDLT return (or an amended return) before September 30 2013. A more comprehensive rewrite of the sub-sale rules in the Finance Bill 2013 will ultimately supersede these new rules.
In general, even if a tax scheme is countered by a change to the relevant legislation, Her Majesty's Revenue and Customs (HMRC) will also argue that the scheme does not work under existing law (without amendment). HMRC considers these (and most other) sub-sale schemes to be ineffective under the current rules, but in line with its common practice, it has stated that the new rules simply ensure that this is "put beyond doubt".
Most of the arguments that HMRC may consider will undoubtedly be well known to SDLT scheme participants, including:
- the general anti-abuse rule (GAAR) being introduced this year (as regards future schemes);
- Section 75A of the Finance Act 2003 (the SDLT mini-GAAR); and
- the Ramsay argument (in modern parlance, the 'purposive interpretation').
Without awareness of tax schemes, it is difficult for HMRC to police the tax code effectively. The new requirement to submit an SDLT return under the amended sub-sale rules provides a good example of how HMRC will bring schemes onto its radar screen.
The level of disclosure in an SDLT or tax return often requires a balancing act: detailed disclosure of the precise arrangements (and applicable tax rules) helps to achieve certainty and finality once the enquiry window closes, but the disclosure may prompt an early enquiry; vague disclosure may give temporary comfort (no immediate enquiry), but will leave the door open to a 'discovery assessment' several years later. Until relatively recently, many had taken the view (especially in the realms of SDLT) that no disclosure was necessary. However, the mood has now significantly changed, as the courts have largely favoured HMRC when it has sought to re-open returns.
A promoted scheme (including most SDLT schemes) will often be given a reference number under the Disclosure of Tax Avoidance Schemes (DOTAS) Rules, which then needs to be recorded in the SDLT or tax return of a taxpayer that uses the scheme. HMRC will no doubt continue to use the DOTAS Rules to track down widely marketed schemes and legislate accordingly (and, in the most egregious cases, retrospectively). On each occasion, HMRC will remind taxpayers that the rules are working. The DOTAS Rules have grown in scope every year since their introduction in 2004. Last year, changes were made to catch a greater array of SDLT schemes – in particular, sub-sale schemes.
The new legislation serves as a timely prompt for participants in SDLT planning to refresh their view of transactions previously undertaken and the adequacy of earlier reporting of those transactions. In addition to any potential exposure to SDLT, any applicable penalties may be capable of mitigation if matters are now handled appropriately. For some taxpayers, an updated assessment of reputational issues and risk profile may also be agenda items.
When dealing with a HMRC enquiry or investigation into a previous scheme or transaction, a scheme participant must first objectively assess the strength of its position and then determine a strategy accordingly. Allied with this analysis will be a thorough review of the facts, documents and supporting evidence – including an analysis of whether particular items are disclosable or benefit from the shield of legal professional privilege (which the Prudential case has recently confirmed does not extend to accountants).
It is fair to say that SDLT schemes in recent years could now be viewed as ranging from the robust to the weak. There may be several reasons for this, including the perceived strength of the technical analysis (some types of tax planning will "date" faster than others), the quality and commerciality of transaction execution and compliance with any post-completion structural requirements. In some cases, taxpayers have been comforted by the fact that they were simply part of a very large community of participants in SDLT schemes—ironically, the same fact that has prompted the chancellor's attack on those schemes.
The well-known maxim 'buyer beware' applies as much to the 'purchase' of an SDLT scheme (in some cases, for a fee) as it does to the related purchase of real estate.
Until recently, commercial organisations and their advisers generally discussed the risk of a change in tax law in terms of prospective changes only, such as in the following cases:
- Where a transaction had been structured so that it did not involve a particular taxable event (eg, a land transaction attracting SDLT), the transaction could have either been thwarted or needed to be restructured if the rules were changed before completion. In some cases, the perceived threat of an imminent change could lead to an accelerated completion.
- Where the transaction relied on the normal accrual of a particular tax relief (eg, in the areas of capital allowances and loan relationships), a rule change during the accrual period could significantly reduce the tax relief derived from the transaction.
However, recent instances of retrospective tax legislation may now be a game changer. At the very least, this new trend will further test the appetite for risk among users of tax schemes. As regards the real estate sector, the chancellor's retrospective attack on sub-sale schemes must surely now mean that the days of SDLT schemes are numbered.
There are suggestions in the protocol published in Budget 2011 and the DOTAS guidance that retrospective legislation will be used only exceptionally and will generally look back only to an objectively justifiable date. Only time will tell whether this is the case. However, it is clear that retrospective rules have now evolved from a theoretical discussion point to the reality of the statute book, and they are here to stay.
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