There is a growing body of recent case law in which HMRC have favoured a literal approach to statutory interpretation, as opposed to the usual purposive approach they adopt when challenging what they consider to be 'aggressive' tax avoidance schemes. Last month we commented on the First Tier Tribunal decision in Bennedict Manning v HMRC, in which HMRC were criticised for taking a 'mechanistic' approach to statutory interpretation. The most recent example of such an approach being relied upon unsuccessfully by HMRC can be found in the recent decision of the Court of Appeal in (1) The Pollen Estate Trustee Co Ltd; (2) KCL v HMRC.1
The case involved two separate appeals against decisions made by HMRC denying partial relief from Stamp duty land tax ('SDLT').
The first appellant is the trustee of the Pollen Estate, a trust set up by the will of the Rev George Pollen, who died in 1812. The trust has over 100 beneficiaries, the two major ones being charities; the Church Commissioners and the Secretary of State for Defence, as trustee for the Greenwich Hospital. The assets of the trust consist of commercial property in London. From time to time the trustee sells or buys property. At issue were four such acquisitions that took place in December 2006 and June 2008.
The second appellant, King's College London ('KCL'), is a charity, and part of the University of London. KCL operates a shared equity scheme under which it participates in the acquisition of homes for its employees, in return for an equitable interest in the property acquired proportionate to its contribution. Professor Trembath acquired a lease of a flat in Clink Street, London, with the assistance of KCL who contributed to the purchase price. As part of the arrangements for the purchase, he executed a declaration of trust by which he declared that he held the flat 46.3% for KCL and 53.7% for himself.
The Upper Tribunal's decision
Before the Upper Tribunal, HMRC successfully argued that each property acquisition represented a single land transaction, being the acquisition of the whole of the relevant equitable estate. The tribunal rejected the argument that each beneficiary acquired a separate chargeable interest and that each was a separate purchaser for the purposes of SDLT. Section 103, Finance Act 2003, imposed a joint obligation on joint purchasers to file a single land transaction return; relief could not be made available to one purchaser if it was not available to all.
The Court of Appeal's decision
The Court of Appeal began with a firm restatement of the "modern approach to statutory construction", citing the Ramsay principle 2 as authority that the court should "have regard to the purpose of a particular provision and interpret its language, so far as possible, in a way which best gives effect to that purpose."
The Court of Appeal noted that joint ownership of interests in land has often presented the courts with problems unforeseen by legislative draftsman. Two examples of this were given, first Lloyd v Sadler 3, a case in which the phrase "the person who … was the protected tenant of the dwelling house" in section 3 of the Rent Act 1977, was interpreted in such a way as to include a tenant who had remained in occupation alone at the end of a joint contractual tenancy to a statutory tenancy. This was despite the "unassailable" logic of the argument that the remaining occupier was not "the protected tenant" because "the protected tenant" was both tenants, not one of them.
Similarly, in Potsos v Theodotou 4 joint landlords sought to rely on the statutory authority that they could seek possession of their property for their own occupation "or any son or daughter of his". The Court of Appeal held that the provision should be read as if it said "any son or daughter of theirs, or either of them."
The charities criticised the decision of the Upper Tribunal on two grounds, first that it had identified "the wrong interest in land as the basis for charge", second that it had adopted "an unduly literal interpretation of the relieving provision applicable to acquisitions by charities." The Court of Appeal found that the tribunal had correctly identified the chargeable interest as being the equitable estate which was collectively acquired, and the chargeable consideration as the consideration given for that equitable estate.
Schedule 8(1), Finance Act 2003, provides that: "A land transaction is exempt from charge if the purchaser is a charity and the following conditions are met." The Court of Appeal was of the view that there is sufficient policy imperative in the circumstances under consideration to interpret the statutory language so as to read: "A land transaction is exempt from charge [to the extent that] the purchaser is a charity and the following conditions are met." To not afford the charities relief in the circumstances in which they found themselves would be "capricious".
HMRC can be accused of being opportunistic in their approach to statutory interpretation, adopting a literal approach when it suits their case and advocating a purposive interpretation when challenging tax avoidance arrangements. It would be helpful if HMRC could adopt a consistent approach when construing fiscal legislation. It is regrettable that the charities concerned in this case were forced to go through a lengthy court process in order to benefit from the relief to which they were entitled.