A recent decision of the First-Tier Tribunal (Tax) Chamber on Stamp Duty Land Tax (SDLT) “sub-sale relief” has raised the prospect of professional indemnity claims against financial professionals.
On 6 September 2012, the First-Tier Tribunal (Tax) Chamber handed down judgment on an appeal relating to the applicability of SDLT “sub-sale relief” under section 45(3) of the Finance Act 2003.
Section 45(3) relieves the middle party in an immediate sub-sale or transfer of rights from paying SDLT.
The appellants (the group of companies) had arranged matters such that the middle party (B) was a subsidiary of the ultimate purchaser (C). B had been incorporated shortly before the purchase of the property; C was the sole shareholder, having injected into B a sum slightly in excess of the purchase price of the property in return for shares. There was a transfer from the vendor (A) to B which the appellants said benefitted from sub-sale relief under section 45(3) because there was an immediate transfer of rights to C. The appellants also argued, however, that while C was prima facie obliged to pay SDLT, the nature of the transaction between B and C (namely ‘payment’ by way of a dividend) meant that the transfer was for nil consideration, and that no SDLT therefore fell due.
The tribunal found:
- B was liable to pay SDLT because it had failed to comply with section 270 of the Companies Act 1985 as initial accounts had not been prepared when the board of B took the decision to transfer its rights to the property by way of a dividend. Consequently, the transfer of rights to C was invalid and an immediate “sub-sale” had not taken place.
- Even if the rights had transferred under a valid dividend, consideration had, in fact, been paid by C. A pre-ordained scheme had been established in which C provided the cash to B which was ultimately used by B to pay A. It was irrelevant that the purchase monies had been paid by C to B in exchange for shares in B and the transfer was by way of a dividend.
This decision both shows that HMRC and the Tax Tribunal will look at the underlying purpose of a transaction and not just its form, and emphasises the importance of carefully following company law procedure. This case is another example of the Revenue’s drive to close perceived tax loopholes, and is reminiscent of its recent attack on film finance partnerships.
This decision raises the prospect of multiple professional negligence claims against financial professionals as a consequence of failed tax avoidance schemes both through negligent advice on the implementation of those schemes and/or through designing a scheme that ultimately does not do the job that it was designed to do. CMS is highly experienced in defending such professional negligence claims on behalf of financial professionals and their professional indemnity insurers.