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Candy Crush, is of course, a famously addictive mobile game. Its qualities as a weapon of mass distraction are perhaps only surpassed by its ability to generate revenue for its owners. Of course, this has led to its tax affairs being questioned in the past.
However, this is about other Candys who are rather adept at making money – the high-profile property developing brothers Christian (CC) and Nick (NC) Candy.
However, as reported in the Times over the weekend, they find themselves in a sticky situation. The Upper Tier Tribunal (“UTT”) case (Christian Peter Candy v HMRC) has reversed an earlier decision of the First Tier Tribunal (“FTT”) which had previously found in the taxpayer’s favour.
The facts of the case were not in dispute but, nevertheless, complex. However, the complexity was perhaps a result of this being a substantial property transaction rather than down to any tax jiggery pokery. Indeed CC paid Stamp Duty Land Tax (“SDLT”) on the full purchase price at the time of the transaction.
CC originally purchased the property in August 2012 from the Commissioners of the Royal Hospital Chelsea and two individuals. Two contracts were involved, an initial lease for a term of 25 years for which CC paid the princely sum of £20m. Further, CC entered into an agreement (“Contracted Out Lease”) that would assign a much longer lease to CC, if a court order was granted regarding so-called enfranchisement rights, for £48m. The details are not important, but perhaps illustrates that the complexity was driven by commercial reasons as opposed to tax reasons.
Importantly, a matter of days later, CC’s building contractors started work at the property. This meant that the Contracted-Out Lease, albeit not completed, had been ‘substantially performed’ for the purposes of SDLT.
This meant that the effective date for SDLT, which would usually be completion, was the date of this ‘substantial performance’ rather than subsequent completion (if and when that happened).
CC submitted two SDLT returns at this time. The first for the completed initial lease and the second, following substantial performance, of the Contracted-Out Lease.
In April 2014, CC gifted his interests in the property – the initial lease and the Contracted-Out Lease – to his brother, NC. A deed of novation effectively extinguished the original Contracted Out Lease with NC stepping in to CC’s shoes.
NC then substantially performed the Contracted-Out Lease by sending his builders in to carry on the work.
NC submitted a SDLT return in respect of the Contracted-Out Lease only. This is because, unlike the gift of the initial lease, the chargeable consideration was taken to be the full purchase price of the property (despite the fact he only assumed the responsibility to pay the remaining instalments due under the agreement).
This is due to the effect of the Minimum Consideration Rule(in the complex Pre-Completion Transaction Rules in Schedule 2A of Finance Act 2003. Rules that were introduced to prevent sub-sale tax avoidance skullduggery.
The key issue was CC’s attempt to recover the tax he paid in respect of the Contracted Out Lease at the time of substantial performance. This was on the basis that he never actually completed on this contract.
The legislation appears to provide for such situations stating that where tax has been charged on substantial performance but the contract “is to any extent afterwards rescinded or annulled, or is for any reason not carried into effect, the tax […] shall (to that extent) be repaid by the Inland Revenue.”
He did this by amending his tax return as required by the legislation. Importantly, the legislation goes on to say that “Except as otherwise provided, an amendment may not be made more than twelve months after the filing date”.
It should be noted that filing date means 30 days (now 14 days) from the effective date. As described above, this is usually completion but, as in the case of the Contracted-Out Lease, might be on an earlier Substantial Performance.
CC amended his tax return 10 April 2014. The effective date of the Contracted-Out Lease was 10 August 2012. As such, he was clearly outside of the 12-month set out in the general regime.
The tribunals were therefore, in brief, asked to determine whether:
The FTT agreed with the taxpayer and held that the “except as otherwise provided” was a reference to some other provision in the legislation and a prime candidate would be in this type of situation, where tax had become payable as a result of “substantial performance” but the contract was later rescinded.
The FTT also felt this provided a fair outcome on the basis that it avoided ‘double taxation’. On first blush, this perhaps seems like a fair comment. However, I will discuss whether there was really ‘double taxation’ below in the UTT’s decision.
They noted that the reason behind the introduction of the substantial performance rules was to prevent ‘resting on contract’ type SDLT schemes. However, they were comfortable with the fact that the Tribunal would drive a stake through any such schemes (a view, incidentally, I agree with)
It should also be pointed out that there is a specific Target Anti-Avoidance Rule (Section 75A) which would also likely catch such an arrangement fairly and squarely. Further, if required, the GAAR Advisory Panel has also shown it has little time for tax avoidance.
As such, the FTT found that CC’s amendment was valid and he could recover the tax paid under the Contracted Out lease.
As is often the case, another tribunal another result!
Broadly, HMRC’s grounds of appeal was that the FTT had erred in law.
The UTT rejected the FTT’s approach and placed very little emphasis on the words “Except as otherwise provided”. Rather than acting as a give way sign to the general time limit for amendments, it stated that this was merely “a helpful aid to the reader to point out that a general proposition might be countermanded elsewhere.”
The UTT opined that the legislation regarding repayment is clear in that:
It was the UTT’s view that the rules around the subsequent rescission of a substantially performed contract does not provide for such an extension to the time limit.
In terms of fairness, the UTT again disagreed with the FTT. It pointed out that:
“In the world of SDLT, charging tax on two different persons by reference to different periods is a natural incident of the system”.
As such, there is, strictly speaking, no double taxation here at all.
The UTT attempts to illustrate this point by setting out the following example:
“a property is sold to person A and then to person B and then to person C in quick succession for the same price of £x. Assuming the contract is completed before the subsequent sale, SDLT would be payable by each A, B and C on the same consideration”
Of course, the UTT’s transaction is almost impossible to comprehend without the parties entering in to a ‘sub-sale’ type arrangement which would result in a very different outcome. The presence of such a relief would therefore seem to suggest that the legislator did not think this was a fair outcome!
The UTT’s view was therefore that the amendment to the tax return needed to be made within 12 months of the effective date.
This UTT decision provides for an extremely short window of opportunity for someone to recover tax paid where paid on substantial performance. Essentially, the contract must now be rescinded within 12.5 months.
The UTT is basically saying that if it was intended for the rescission of the contract to start a new amendment window then the legislation would simply have said so. However, on the other hand, had it only been possible to recover tax if the contract was rescinded within an aribitrary 12.5 month window then one could argue that this would have been made clear in the legislation as well?
The temptation here will be for a developer in similar circumstances might be inclined to delay submitting their tax return if there is a short-term contingency. This cannot be seen as a good thing.
My own view would be an amendment to the legislation such that the 12-month window should commence on the rescission of such a contract. It seems unlikely to me that we will see a return of the Stamp Duty salesman. Section 75A and GAAR mean that any schemes which might seek to use such a mechanism would not survive.
I would be surprised if this decision was not appealed.
Readers might be aware that one can recover SDLT in certain circumstances under ‘overpayment relief’. However, this requires a mistake to have been made in the return. I understand that this is subject to a separate appeal.
Finally, the case once again illustrates how complex the SDLT regime actually is. I suspect that CC obtained professional advice but, in this case, it would appear that there is little he could have done save for perhaps making the gift to NC earlier and making the repayment claim within the tight 12.5 month window (but that might not have been possible / desirable).
However, undoubtedly, getting timeous and ongoing tax advice in relation to such property ventures is a must…
…. in order to make sure you ‘crush it’ rather than get Candy Crushed!
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