The First-tier Tax Tribunal's decision in the case of Vardy Properties (Teesside) Limited and Others v HMRC (2012 UKFTT 564 TC) delivered what HMRC hopes will be a knockout blow in its fight against SDLT avoidance.
The case concerned a widely marketed SDLT scheme involving the use of sub-sale relief. Perhaps one of the most significant aspects of this case is that the court was considering the position before the introduction of the wide anti-avoidance legislation.
Vardy Properties (Teesside) Limited ('P') wished to acquire a property for £7.25m from V.V. Stockton LP ('V') without paying SDLT.
To do so, it entered into the following transactions:
- P incorporated a wholly-owned unlimited company subsidiary, Vardy Properties Limited ('SP') with an initial share capital of £2
- P then subscribed for £7.4m worth of new ordinary shares in SP
- SP contracted with V to buy the property for £7.25m and paid a 10% deposit
- SP then resolved at an extra-ordinary general meeting to reduce its share capital from £7,400,002 to £1,000
- Shortly afterwards the shareholders of SP approved a distribution in specie of the property as a final dividend to P, subject to completion of its purchase from V
- Several days later, SP completed the purchase of the property from V and distributed it by way of final dividend to P
The argument advanced by the taxpayer was that the combined steps fell within the sub-sale provisions set out in section 45 Finance Act 2003. Accordingly, the intermediate step of the sale between V and SP was ignored for SDLT purposes, and the dividend of the property from SP to P fell outside the scope of SDLT, because there was no consideration.
HMRC challenged the Vardy relief claim on two main grounds.
The first, interestingly enough, was based on a company law argument. This was that SP had not satisfied the company law requirements for paying a dividend because of its failure to produce interim accounts. The tribunal accepted that SP had failed to meet the company law requirements, and that accordingly, P never became entitled to call for the property, which is a pre-requisite for s. 45(3) to be engaged. The tribunal noted that if the company law requirements had been met it would have found that the requirements for sub-sale relief had been met.
The second argument - to be used if the first argument failed - was that P had indirectly paid for the property by means of its share subscription to its subsidiary. Thus, it had acquired the property for a consideration and was liable for SDLT on that consideration.
The tribunal accepted the second argument, noting that s45(3)(b)(i) of the Finance Act 2003 refers to a 'consideration under the original contract.to be given (directly or indirectly) by the transferee'. It regarded the amount subscribed by P for its shares as being consideration given indirectly for the property.
As well as shedding some useful light on HMRC's interpretation of certain aspects of the SDLT legislation, the main significance of the case is in the broad interpretation of the way the tribunal is prepared to analyse the consideration given under the secondary contract.
Thus, whilst other types of sub-sale planning may not fail on the company law errors identified in the decision, the fact that many other forms of SDLT planning rely on a perhaps narrower interpretation of section 45(3) means that these must also be at risk.