The First-tier Tribunal (FTT) has released its much anticipated decision in Vardy Properties and Vardy Properties (Teeside) Limited v HMRC5, an SDLT mitigation case involving a sub-sale of property into a distribution in specie.
Vardy Property Group Limited (VPG) was run by Mr Vardy, who was managing director of the company. As part of an SDLT mitigation arrangement, Vardy Properties (Teesside) Limited (VPT) was incorporated as a wholly owned limited company on 10 August 2006. VPT’s authorised share capital was £10m divided into 10 million £1 ordinary shares.
VPT set up Vardy Properties (VP), a wholly owned unlimited company, on 22 August 2006. On 22 August 2006 VP’s authorised share capital was £7.5m divided into 7.5 million £1 ordinary shares. In the last days of August 2006:
- VPT subscribed £7.4m for the allotment of 7.4m additional £1 ordinary shares in VP.
- VP entered into a contract with a third party unconnected vendor in respect of the sale andpurchase of land and buildings for £7.25m.
- The VP directors resolved to reduce the issued share capital of VP from £7.4m to £1. On thesame day, the shareholders of VP approved a distribution in specie of the property as a final dividend, subject to completion of the purchase of the property by VP.
- The transaction duly completed.
Section 45 FA 2003
The applicable legislation is section 45 FA 2003. Essentially, section 45 applies where there is a contract for a land transaction (referred to in the legislation as “the original contract”) and the contract is to be completed by a conveyance. If, instead, there is an assignment, sub-sale or other transaction as a result of which the property is conveyed to a person other than the purchaser, then the purchaser will not be liable for SDLT – section 45(1)(b). Instead, section 45(3) applies. Section 45(3) amends the basic rule contained in section 44, which is that generally SDLT is paid on conveyance rather than on exchange of contracts. Section 45(3) provides:
“(3) That section [section 44] applies as if there were a contract for a land transaction (a ‘secondary contract’) under which–
(a) the transferee is the purchaser, and
(b) the consideration for the transaction is-
(i) so much of the consideration under the original contract as is referable to the subject matter of the transfer of rights and is to be given (directly or indirectly) by the transferee or a person connected with him, and
(ii) the consideration given for the transfer of rights.”
The taxpayer companies argued that section 45 applied, so that SDLT was not charged on the original contract. They further argued that, by virtue of the dividend in specie, the consideration under the secondary contract was nil and hence no SDLT was chargeable under the secondary contract.
HMRC argued that the conditions contained in section 45(1)(b) were not satisfied. HMRC put forward two main arguments:
1. it was contended that there had been a clear breach of the Companies Act 1985 because there was a failure to produce initial accounts within the meaning of section 270(4) of that Act with the result that the lawfulness of the dividend could not be tested as required by section 270(2); hence the dividend was prohibited under section 263 of the Companies Act 1985; and
2. in any event, the chargeable consideration for VPT’s acquisition was £7.25m not nil, because looking at the arrangements realistically the £7.25m paid by VP to the third party vendor was to be given indirectly by VPT by way of the £7.4m share subscription.
The FTT’s decision
The FTT held that HMRC succeeded on argument 1 so that section 45 was not engaged at all. In case they were wrong on this point, however, the FTT went on to consider section 45.
The FTT firstly rejected the taxpayer’s submission that section 45(3)(b)(i) cannot, as a matter of law, apply so as to attribute consideration to any secondary contract arising as a result of the declaration of the dividend.
The FTT then considered what consideration should be attributed to the secondary contract.
The tribunal concluded:
“99. We recognise that the £7.4 million in this case was subscribed by VPT for shares in VP, but we consider that does not prevent it (or the relevant part of it) from being regarded as also indirectly given as consideration for the purchase of the property. This is not, as Mr Quinlan asserted, a ‘reattribution’ of consideration from one thing to another; it is a recognition that the direct payment of consideration for an immediate purpose may also amount to the indirect provision of consideration for another.
100. It follows therefore that we consider the entire £7.25 million purchase price paid by VP and funded by VPT is to be regarded as consideration for the secondary contract arising under section 45(3)(b)….
109. If section 45 has been engaged, consideration of £7.2 million would have been attributed to the notional secondary contract arising under section 45(3). That consideration would have been attributed solely under section 45(3)(b)(i) and not under section 45(3)(b)(ii). In that situation, the appeal of VP would accordingly have been allowed and the appeal of VPT dismissed.”
Although this is a significant victory for HMRC, it is important to appreciate that the comments of the FTT in relation to section 45 are obiter, that is the FTT’s comments do not form part of its reasoning in reaching its conclusion. The FTT decided that section 45 was not engaged by virtue of the breach of the Companies Act 1985. As a consequence, the decision is perhaps of less assistance than taxpayers and HMRC would have hoped for in resolving the many outstanding disputes involving sub-sale structures.
The Vardy decision is also a timely reminder of the importance of ensuring that a tax mitigation arrangement is correctly implemented with due regard to all relevant legal issues, including those that have no direct relation to the underlying tax in issue.
It is not known whether the taxpayers intend to appeal to the Upper Tribunal but one suspects that the taxpayers will seek to take their appeals further and the controversy in this area is therefore likely to rumble on for some time to come.
See http://www.bailii.org/uk/cases/UKFTT/TC/2012/TC02242.html for full details of the case.