Following hearings in the First Tier Tribunal and Upper Tribunal, the Court of Appeal has considered in some detail the construction of an "ijara" and SDLT consequences. It has found that HMRC should have sought SDLT from the bank rather than the purchaser, but was apparently out of time to raise such an assessment.
Project Blue Limited ("Project Blue"/"Purchaser") entered in to an arrangement to acquire the former Chelsea Barracks in West London ("the Site") from the Ministry of Defence ("MoD") for £959 million. The deal completed in January 2008. Project Blue is controlled by the sovereign wealth fund of the State of Qatar. Monies were advanced by Masraf al Rayan ("the Bank") which provided the financial backing for the transaction using an ijara arrangement.
What is an ijara?
An ijara is an Islamic Finance product which is akin to a hybrid lease/hire purchase transaction which enables a buyer to finance a transaction without paying monthly interest to the bank. This enabled the regular fixed payments throughout the term of the financing which enables the bank to derive a profit margin from the financing. The buyer benefits from a leaseback arrangement on the enjoyment of the property during the term and/or can accommodate future rental payments on a property development arrangement.
Unlike a conventional security backed mortgage, here the Bank does not have a charge over the property, as the property is acquired by the Bank with Project Blue in this instance having an option to have title transferred upon the end of the lease.
Background to the Appeal
HMRC successfully argued in the Upper Tribunal that Project Blue as Purchaser was liable to pay SDLT on the transaction. Project Blue then appealed to the Court of Appeal and for the first time argued that the Bank was in fact the correct party that should pay but that HMRC was out of time to raise an assessment against the Bank.
In this case the Court of Appeal had to consider the liability for SDLT under the Finance Act 2003 (as amended).
Court of Appeal's decision
To the surprise of many, the Court of Appeal upheld Project Blue's Appeal and held that HMRC had been chasing the wrong party finding that the Bank was the party which was obliged to pay SDLT as it had acquired the Site.
The Court of Appeal noted that "the Ijara transaction itself is comprised in the lease and option agreement. The arrangement does not involve a loan by the financial institution to the lessee or the acquisition by the financial institution of only a limited interest in the relevant property. The acquisition of the property which is to be financed therefore takes the form of an outright purchase of the relevant interest from its then owner". Applying its findings to the current facts it found that the transaction to acquire the site by the Bank from Project Blue qualified as a land transaction under s43 and would not be exempt under s48(1) of the Finance Act.
The reason why many were surprised was because it was thought that these type of transactions had been made exempt under the Finance Act 2003. However the Court of Appeal found that the exemption did not extend to the transaction with the Bank and that whilst Project Blue was protected under the Act, Project Blue had not been capable of transferring the interest in the Site to the Bank as this had been directly a transfer from the MoD to the Bank.
It appears from this decision that HMRC were ill-advised to pursue Project Blue rather than the Bank and that the machinery in the Finance Act 2003 was not up to the task of ensuring an ijara was treated for tax purposes in the same way as any other transaction. That said given the sums in issue, there may be an appeal by HMRC to the Supreme Court which may or may not follow the line taken by the Court of Appeal.
There is a wider point here however that as the adoption of Islamic Finance instruments increases, our tribunals, courts and regulators will need to understand the structures more clearly going forward.