The First-tier Tribunal ('FTT') has dismissed the taxpayer's appeal in Edward Allchin v HMRC. [1]    Mr Allchin utilised a stamp duty land tax ('SDLT') mitigation arrangement which was intended to engage section 45 Finance Act 2003, and thereby provide sub-sale relief. HMRC did not accept that the arrangement came within section 45 and issued a discovery assessment, pursuant to paragraph 28, Schedule 10, Finance Act 2003.

The facts

Mr and Mrs Dean (the 'sellers') wished to sell their property. Originally it was intended that they would sell to  Mr Allchin. Mr Allchin entered into an SDLT mitigation arrangement under which the following steps took place. On 14 November 2007, the sellers, Mr Allchin and a new purchaser, Alpine Investment Limited ('Alpine'), each signed a counterpart deed of novation under which the sellers released Alpine from its obligations under the purchase contract in return for Mr Allchin assuming those obligations.     Mr Allchin's solicitors transferred £2,212,500 to the sellers in two tranches. Payment one was for £1,856,250 and payment two was for £356,250. Thereafter a transfer form (form TR1) was executed transferring the property from the sellers to Mr Allchin.

The issues

There were two issues before the FTT. The first was the legal effect of the deed of novation for SDLT purposes. HMRC argued that the novation was not a transfer of rights for the purposes of section 45 Finance Act 2003 and that the arrangements did not therefore attract sub-sale relief. Secondly, Mr Allchin challenged the validity of the assessment and argued that HMRC had not been entitled to issue a discovery assessment.

Sub-sale relief

As readers are no doubt aware, section 45 provides relief in the situation where 'A' transfers land to 'B' and then 'B' transfers that land to 'C'. The relief prevents two charges to SDLT being triggered under such circumstances. Section 45 applies if there is both a contract for a land transaction (the original contract) under which the transaction is be to be completed by a conveyance and an assignment, sub-sale or other transaction, i.e. a transfer of rights, relating to the whole or part of the subject matter of the original contract as a result of which a person other than the original purchaser becomes entitled to call for a conveyance to him. In such circumstances, the transferee is not regarded as entering into a land transaction and instead there is a deemed secondary contract under which the transferee is the purchaser and the consideration is determined by a statutory formula. Essentially, the consideration given under this formula for the resulting land transaction is the aggregate of the consideration under the original contract that is to be given, directly or indirectly, by the transferee and the consideration given for the transfer of rights.

The FTT's decision

Issue 1

The FTT held that although section 45 contemplated that a transfer of rights could include transactions other than assignments and sub-sales, the section envisages that the original contract would remain in existence at least until the substantial performance or completion of the secondary contract. Unfortunately, for Mr Allchin, the essence of a novation is that the original contract is replaced with a new contract and the rights and obligations of the parties under the original contract are extinguished and replaced with new rights and obligations. The FTT also considered that the consideration for Mr Allchin's acquisition was equal to the price payable under the original contract because the entire purchase price payable under the original contract was provided directly, or indirectly, by Mr Allchin given that the source of the funds used to pay the sellers came exclusively from him.

Issue 2

HMRC had failed to launch an enquiry into the land transaction return within the statutory period of 9 months as provided for by paragraph 12, Schedule 10, Finance Act 2003. However, they had raised a discovery assessment using their powers contained in paragraph 28, Schedule 10, Finance Act 2003. HMRC argued that at the time they ceased to be able to open an enquiry they could not have been reasonably expected, on the basis of the information made available to them before that time, to be aware of the loss of tax (see paragraph 31, Schedule 10, Finance Act 2003). The FTT agreed with HMRC. On the facts of this particular case, the FTT held that HMRC did not have sufficient information to challenge the assessment as the only information they had was contained in the SDLT form which contained no express notice that Mr Allchin had entered into a tax mitigation arrangement. There had been no other form of disclosure that would have enabled HMRC to become aware of the circumstances surrounding the transaction.

Comment

Allchin is a difficult decision because some sections of the FTT's reasoning are difficult to follow. In particular, the facts and circumstances surrounding the novation and its terms are somewhat unclear and it would have been helpful if the FTT had included the deed of novation as an appendix to its judgment. There seems to have been some argument over the timing of the payments but the significance of this in relation to novation is unclear. There are a number of other SDLT mitigation arrangements which are currently being challenged by HMRC which do not rely upon novation in order to obtain sub-sale relief and for those cases the Allchin decision has little relevance.