HMRC have been successful before the First-tier Tribunal (FTT) in Project Blue Ltd2, an SDLT case in which the anti-avoidance provisions contained in sections 75A to 75C, Finance Act 2003, fell to be considered. Unless otherwise stated, all statutory references below are to Finance Act 2003.
The case related to the sale of the Chelsea Barracks (the Property) by the Secretary of State for Defence (the MoD) to a special purpose vehicle, Project Blue Limited (PBL). PBL was ultimately primarily owned by the Qatari ruling family. The other main party to the relevant transactions was a Qatari incorporated financial institution, specialising in Islamic finance, the Qatari Bank Masraf al Rayan (MAR), itself in part owned by the Qatari ruling family. The sale was structured so that it was Sharia-financing compliant and involved a sale and lease-back arrangement.
The main transactions bringing about the sale and purchase of the Property are set out below.
Following PBL’s success in a sealed bid tender process on 5 April 2007, the following transactions were carried out:
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- Step 1: PBL exchanged contracts with the MoD for the purchase of the Property. This was not subject to SDLT as it was not substantially performed (see section 44(2)). The price, inclusive of VAT, if applicable, was £959 million. A 20% deposit of £191.8 million was paid on exchange. Delayed completion (to 31 January 2008) was specified to allow the MoD to re-quarter troops from the Property.
- Step 2: On 29 January 2008, PBL entered into a contract with MAR for the sale of the Property for a price of US$2.46. The SDLT1 submitted in respect of the transaction records the consideration as being £1.25 billion.
- Step 3: Also on 29 January 2008, PBL and MAR entered into an agreement for lease under which MAR would immediately grant a lease back to PBL.
Steps 4-7 occurred on 31 January 2008:
- Step 4: PBL and MAR entered into call/put options entitling MAR to sell the Property back to PBL at the end of the financing period, and entitling PBL to buy back the Property from MAR. For PBL to acquire the freehold reversion from MAR, it would have to pay a sum equal to the price paid to date by MAR.
- Step 5: The MoD transferred the Property to PBL.
- Step 6: PBL transferred the Property to MAR.
- Step 7: MAR granted a lease to PBR in accordance with the terms agreed in Step 3. The rent was calculated to give MAR an appropriate return on its ownership of the Property.
The agreements referred to at steps 1-3, not being substantially performed, were not subject to SDLT (see section 44(2)).
The transfer, referred to at step 5, was not subject to SDLT due to the operation of section 45(3): although it completed the contract between the parties, it was completed at the same time as and in connection with the transfer referred to at step 6.
The transactions referred to at steps 6 and 7 were exempt from a charge to SDLT pursuant to section 71A (alternative finance).
It was accepted that the above transactions were Sharia-compliant, being a form of Ijara-style financing.
Section 75A(1) applies where:
"(a) one person (V) disposes of a chargeable interest and another person (P) acquires either it or a chargeable interest deriving from it,
(b) a number of transactions (including the disposal and acquisition) are involved in connection with the disposal and acquisition ("the scheme transactions"), and
(c) the sum of the amounts of stamp duty land tax payable in respect of the scheme transactions is less than the amount that would be payable on a notional land transaction effecting the acquisition of V’s chargeable interest by P on its disposal by V."
Once section 75A applies, all scheme transactions which are land transactions are disregarded. Instead, there is a charge pertaining to the notional transaction effecting the acquisition of V’s chargeable interest by P on its disposal by V (see 75A(4)).
Section 75A(5) provides:
"The chargeable consideration on the notional transaction mentioned in subsections (1)(c) and
(4)(b) is the largest amount (or aggregate amount) –
(a) given by or on behalf of any one person by way of consideration for the scheme transactions, or
(b) received by or on behalf of V (or a person connected with V within the meaning of section 1122 of the Corporation Tax Act 2010 [formerly section 839 of the Taxes Act 1988]) by way of consideration for the scheme transactions."
Progress to the FTT
None of the individual transactions gave rise to liability to SDLT. On 1 February 2008, a DOTAS submission was made to HMRC which stated that:
"No SDLT is payable by [PBL] on the sale from [the MoD] by virtue of sub-sale relief under section 45 (3) Finance Act 2003. No SDLT is payable by [MAR] on the sale of the Property from [PBL] to [MAR] by virtue of alternative property finance relief under section 71A (2) Finance Act 2003."
By a closure notice contained in a letter dated 13 July 2011, HMRC amended the SDLT return which related to the completion on 31 January 2008 of the contract between the MoD and PBL (Step 5). The amended return reflected a tax liability of £38,360,000, ie 4% of £959 million.
PBL did not accept HMRC’s analysis of the above transactions and notified its appeal to the tribunal. Less than a month before the hearing of its appeal, HMRC amended their Statement of Case (the application to do so was dealt with as one of a number of preliminary issues by the FTT), increasing the amount of SDLT due to £50 million, being 4% of £1.25 billion (based on section 75(5)(a)).
The FTT’s decision
The FTT dismissed PBL’s appeal and concluded that SDLT was payable under section 75A in respect of a notional land transaction, and that the chargeable consideration in respect of that transaction was the sum of £1.25 billion.
In arriving at this conclusion, the FTT considered a number of issues, some of which are commented on below.
For the purposes of section 75A, P must be a person who has avoided SDLT
In construing section 75A purposively, the FTT held that "P" must be a person who has avoided SDLT which would otherwise have been payable. HMRC cannot "pick parties at random from the chain of transactions, apply a mechanical test of whether that party has disposed of or acquired property, and thereby deem subsection (1)(a) to be satisfied".
Motive and the effect of the DOTAS notification
The FTT found that the omission of a motive defence to section 75A was intentional, and that evidence of the taxpayer’s motives was "not strictly relevant". What will be of particular concern to practitioners are the comments of the FTT on the DOTAS submission. Accepting that legal advisers may well err on the side of caution, the FTT nevertheless commented that the notification showed that PBL’s advisers (and hence PBL) were aware that one of the main benefits of the structure was an SDLT advantage, and so the notification "strongly suggests that the avoidance of SDLT may have been a factor" in the structure choice.
Human rights considerations
The FTT considered whether PBL was subjected to religious discrimination (prohibited by Article 14 ECHR) in that, because it chose to finance the acquisition in a Sharia-compliant manner, it suffered more SDLT than it would have done had it financed its acquisition by conventional loan finance, which would have resulted in a SDLT liability calculated on £959 million, rather than £1.25 billion.
In the FTT’s view the burden of proof on this issue fell on PBL and that there was a paucity of evidence to the effect that PBL was required to structure the finance in a Sharia-compliant fashion. The FTT concluded that PBL had provided no evidence in relation to this issue and it had therefore failed to establish that it entered into the Sharia compliant financing for religious reasons. It therefore failed to establish that it had suffered discrimination.
The FTT did not, therefore, need to consider whether it is possible to construe the legislation in a manner which is compatible with the ECHR.
Although the FTT agreed with HMRC’s analysis that, for the purposes of section 75A, the MoD was V and PBL was P, because the MoD had disposed of the freehold and PBL had acquired a chargeable interest deriving from it, namely, the leasehold interest, it is worth noting that the FTT said that P must be a person who has avoided SDLT which would otherwise have been payable. This limitation means that HMRC cannot simply decide which party, from several parties involved in the transactions under consideration, should be P.
As the FTT did not need to consider whether the legislation under consideration could be construed in a manner compatible with Article 14 of the ECHR, an argument based on Article 14 remains open to other taxpayers in a similar position to PBL in future cases.
Whilst it is not known whether the taxpayer will appeal to the Upper Tribunal, given the complexity of the law in this area (a fact acknowledged by the FTT itself) and the amount of SDLT at stake, an appeal would seem likely.
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