SDLT tax avoidance: Taxpayer left feeling the blues
Project Blue Ltd v HMRC – a representative case for sub-sale avoidance schemes – has been decided in favour of HMRC. The case involved Project Blue Ltd which acquired land from the Ministry of Defence for consideration of £959m and utilising an Ijara financing arrangement.
Lord Hodge concluded that the tax provisions were flawed, and indeed these flaws were exploited, but nonetheless the avoidance scheme worked.
However, the caveat to accepting that the scheme worked meant that the courts needed to identify whether the anti-avoidance rule that is FA 2003 s75A applied and if so, precisely how this applied.
S75A is an anti-avoidance provision intended to insert a notional transaction in the place of a series of transaction. A charge is placed on the notional transaction where the series of transactions taken together result in less SDLT payable.
Those familiar with the SDLT provisions will no doubt be aware of the practically non-existent boundaries of s75A. Indeed, this was the intention of parliament and the Treasury have power to retrospectively restrict the application of s75A to ensure fairness.
Project Blue Ltd has clearly determined that although s75A is an anti-avoidance provision there is no requirement for a tax motive to be present. Rather, that as a matter of fact a reduction of the SDLT liability is achieved.
This conflicts with most other anti-avoidance provisions in which there is generally a motive test as a safeguard for the taxpayer.
Other sub-sale scheme users
The specific scheme in question has long since been rendered ineffective. However, application of s75A to other schemes makes this a seminal decision.
A number of different SDLT sub-sale schemes have placed reliance on the interaction of sub-sale relief with other provisions resulting in a lower or nil liability to SDLT.
It seems to us that this ruling is one which could be used by HMRC as a ‘relevant judicial ruling’ on which they could issue Follower Notices to those who have used any sub-sale tax scheme in combination with another relief or exemption. As such, we would expect HMRC’s counter-avoidance team to issue a string of Follower Notice’s over the next 12 months.
Project Blue Ltd (“PBL”) entered into an agreement with the Ministry of Defence (“MOD”) to purchase land which was at the time being used as Barracks. The agreement was to purchase the freehold land for £959m
Meanwhile, PBL entered into an alternative financing mechanism with a Qatari bank which was consistent with Sharia law – known as an Ijara arrangement – as opposed to a mortgage type arrangement whereby interest is payable and is not consistent with Sharia.
This involved a contract between the Qatari Bank and PBL in which the bank would acquire the freehold to the barracks and grant a long lease back to PBL – a sale and leaseback type arrangement with the Qatari Bank. An option was also granted for PBL to purchase the freehold back from the Bank.
This arrangement constituted a ‘sub-sale’. Effectively, the freehold was conveyed to the Bank from the Ministry of Defence (albeit via PBL) under the arrangement. Therefore, sub-sale relief applied to disregard PBL as the purchaser and treat the bank as purchaser.
Indeed, sub-sale relief was claimed by Project Blue Ltd to this effect.
One might think ‘well, if the bank is the ‘purchaser’, surely they would have paid the SDLT’. Think again.
The scheme utilised relief at FA 2003 s71A which applies specifically to the type of Ijara arrangement mentioned above. Remember, the Ijara arrangement is simply a financing mechanism and ‘in the real world’ the purchaser was Project Blue Ltd.
Indeed, relief was claimed to this effect both in respect of the freehold acquisition by the bank and the acquisition of the long lease by Project Blue Ltd. So, a deal for £959m was reached, on which circa £36m would otherwise be payable…it’s no wonder HMRC wouldn’t let this one slide!
The Supreme Court – Round One
The proceedings at the Supreme Court were concerned with two main issues.
Quite rightly, the first was whether both sub-sale relief and relief under s71A should be available. The key arguments which I’ll not go into resting on the technicalities as to the vendor & purchaser.
It was clear that the draftsman had not considered the interaction of these provisions. Indeed, the judges referred to the relatively new nature of the FA 2003 SDLT provisions at the time and the inevitable existence of ‘lacunas’… However, with that said, Lord Hodge with the agreement of three of the other judges did not see fit to interpret the provisions so to deny relief. Each relief operated so to achieve its independent goal – the interaction of the reliefs was the issue, not the reliefs in and of themselves.
Ultimately, the interaction of the reliefs were allowed and the pursued benefit was accepted. Of course, the legislation had been subsequently amended to deny such arrangements twice relieved.
However, Project Blue Ltd were not off the hook…
Where a series of transactions takes place with the sum of SDLT payable in respect of those transactions are less than the ‘notional transaction’, one will be within the ambit of s75A.
Indeed, having determined that the sub-sale and Ijara arrangement resulted in no SDLT payable, Lord Hodge turned to s75A.
The Supreme Court – Round Two
S75A is recognised as a broad provision encumbering both commercial and tax-motivated transactions. However, the provision was introduced as an anti-avoidance measure, of which the clue is in the name with s75A headed menacingly as – ‘Anti-avoidance’.
Project Blue Ltd’s first argument was that the financing arrangements were not tax-motivated and therefore s75A could not apply. This was promptly cut short by Lord Hodge, who agreeing with the FTT, UT and CoA, stated that the heading is relevant to assist in understanding the mischief which the provisions address, but has no regard as to the motives of the party or how the body of the provisions apply.
Indeed, there was nothing in the body of the provision which expressly or inferentially refers to motivation. The provision was enacted to counter tax avoidance resulting from the use of a number of transactions. In this case, tax avoidance is met by a reduced or no liability to SDLT, regardless of motive for transacting in any particular manner.
Interestingly, s75A does not identify the purchaser and vendor of the notional transaction. Indeed, Lord Hodge stated that more than one person may be the vendor and more than one person the purchaser.
It was decided that, because of the application of sub-sale relief, the initial freehold acquisition of the barracks by PBL was disregarded. However, the Bank could not be held to be the purchaser in this case as, in taking a purposive approach, the SDLT provisions intend to place a charge on purchasers, not financiers.
It was therefore determined PBL was the purchaser and the chargeable interest Is the long-lease it acquired from the bank.
Although not wholly relevant to the application of the above provision, PBL also put forward a challenge on the application of s75B in regard to the amount of chargeable consideration. The argument followed that the additional chargeable consideration resulting from the Ijara financing should be taken out of account as had a mortgage type arrangement have utilised, the chargeable consideration would have been £959m.
The case provided much needed commentary as to the application of s75A.
It is clear that the anti-avoidance provision applies broadly, without any requirement for a tax avoidance motive.
The breadth of the provision does not identify a purchaser for the purposes of determining the charge and ultimately, it is for the courts to identify the relevant vendor and/or purchaser of the transaction.
Many SDLT schemes have placed reliance on sub-sale relief with or without the interaction of other relieving provisions. It is without doubt that this decision will prove a valuable prerequisite to the issue of follower notices.
Indeed, users of similar schemes should consider their proximity of the Project Blue Case. I’d imagine most users of sub-sale schemes will – rightly or wrongly – receive a follower notice through the post demanding the users take ‘corrective action’ within 90 days.
This article was in published in our June 2018 enewsletter. To be added to our mailing list, click here and submit your contact details on our sign up form.