Despite their reversal in the DV3 case involving a sub-sale of property into a limited partnership (see DV3 RS Limited Partnership v. HMRC (2011) UKFTT 138 (TC)), HMRC has just struck back with victory in relation to a sub-sale of a property into a distribution in specie in the recent case of Vardy Properties and Vardy Properties (Teeside) Limited v. HMRC (2012) UKFTT 564 (TC).
A link to the case can be found here.
Vardy Properties (Teeside) Limited ("VPT") wanted to buy a property from a third party seller, V.V. Stockton LP, for £7.25 million. In connection with this, the following steps were taken, in order:
- VPT set up a wholly-owned subsidiary, Vardy Properties ("VP"), as an unlimited company with an initial share capital of £2 divided into 2 ordinary shares of £1 each.
- Three days later, VPT subscribed £7.4 million for an issue of a further 7.4 million ordinary shares of £1 each.
- A day later, VP contracted with the third party seller to acquire the property for £7.25 million and paid a 10% deposit.
- A day after that, VP resolved to reduce its share capital from £7,400,002 to £1,000 and approved a distribution of the property in specie to VPT, subject to completion of VP's purchase of the property from the third party seller.
- Four days after that, VP completed the purchase of the property from the third party seller and distributed the property in specie to VPT.
Taxpayers' basic arguments
VP and VPT argued that this arrangement was a sub-sale and that the effect of the sub-sale rules, coupled with the basic rule that there is generally no SDLT on an acquisition made for no chargeable consideration, was that:
- VP's acquisition was to be ignored, and
- VPT's acquisition was for no chargeable consideration.
HMRC's basic arguments
HMRC argued that:
- The sub-sale rules did not apply because VPT never became entitled to call for a conveyance of the property to it (as VP had failed to produce initial accounts and so the distribution in specie of the property by VP to VPT was unlawful as a matter of company law) (the unlawful dividend point), alternatively
- If the sub-sale was lawful so that the sub-sale rules did apply, the chargeable consideration for VPT's acquisition was £7.25 million, not nil, because looking at the arrangements realistically the £7.25 million paid by VP to the third party seller was to be given indirectly by VPT by way of the £7.4 million share subscription.
The First-tier Tribunal (Judge Kevin Poole and Gill Hunter) agreed with HMRC on both points. The result of the finding on the first point (the unlawful dividend) was that VP was liable to pay SDLT on its acquisition of the property from the third party seller, with it being observed that the result of the finding on the second point would have been that VPT would have been liable to pay SDLT on its acquisition of the property.
The lesson here for taxpayers from the finding on the first point is that, if structures like this are to be implemented, then they need to be implemented properly having regard to all legal issues that may affect them, not simply the tax rules. Perhaps of greater interest on the tax side, however, is the observation by the First-tier Tribunal (albeit not authoritative) that the "…the direct payment of consideration for an immediate purpose may also amount to the indirect provision of consideration for another"; in other words, on the facts of this case, the subscription by VPT for the shares in VP could be characterised as indirect provision of consideration payable by VP for the property.
That said, it is perhaps implicit in the decision that if company laws had been complied with and VP already had sufficient funds to complete the purchase of the property without recourse to VPT or other group companies, perhaps the taxpayer may have prevailed.
Of course, depending on the outcome of the current consultation on "High-risk areas of the tax code: The Stamp Duty Land Tax 'transfer of rights' or 'subsale' rules", this case may prove to be only of historic interest in the longer term.