Gordon Keenay, head of Stamp Taxes at FTI Consulting has examined the judgment of the UT in Project Blue and has generously supplied his erudite analysis for publication here.
Project Blue: Upper Tribunal [2014] UKUT 0564 (TCC)
This is an important judgement since the case is the first one to come before the courts which hinges on the statutory interpretation of s75A FA 2003 – often referred to as the mini-GAAR within the SDLT rules. The provision came into effect in December 2006 by regulation before being “properly” enacted in FA 2007. The First-tier Tribunal released its judgement on 5 July 2013, the Upper Tribunal heard the appeal on 21-24 July 2014 and, having subsequently requested submissions from both sides, released its judgement on 18 December 2014.
SDLT advisers have struggled to construe s75A since 2006. Now the judiciary are struggling – which might in a sense be reassuring were it not for the resulting uncertainty as to how the SDLT code operates. The judgement notes that even with the relatively uncomplicated facts of this case there are substantial difficulties in applying the provision which is described as a “labyrinth”. There may be further appeals. But in the meantime advisers will be puzzling about which parts of the judgement are, for the time being, binding rather than merely persuasive in relation to the construction of s75A.
The facts
In essence, PBL bought land from the Ministry of Defence (SSD) for £959m and simultaneously sub-sold it to MAR (a financial institution providing Sharia-compliant financing) for a price of £1.25b (to cover building costs as well as the acquisition cost) who granted a lease for rent (to cover the financing costs) and there were also put and call options providing for the eventual transfer of the property back to PBL. On the face of it there was no SDLT to pay because the then sub-sale rules disregarded PBL’s initial purchase (for the purposes of charging SDLT) and the exemption for this style of alternative financing relieved the later steps. So the question is whether s75A imposes a charge – and, if so, how much it is and who is liable for it. The FTT had found that there was a charge to PBL of 4% of £1.25b which HMRC publicised as including an effective penalty for tax avoidance.
The judgement
The punch-line (that PBL is liable to tax of 4% of £959 million) is a little hard to find since it is in paragraph 130 (of 170) on page 45 (of 57). This results from the fact that the two members of the Tribunal did not agree on all points. Mr Justice Morgan as the presiding judge used his casting vote such that his view prevails. Judge Howard M Nowlan then records the areas where he disagrees. Both members found that s75A applies so as to make PBL liable to SDLT (albeit using different arguments). The presiding judge found that the liability is 4% of £959m though the other member would have ruled that it should be 4% of £1.25b. The uncertainties about the construction of s75A may well mean that there will be further appeals – either by the taxpayer who argued that there is no SDLT liability or by HMRC who relished the additional £11m or so arising from the FTT judgement. No doubt there are many more cases where similar issues arise from the period 2007 to 2008 when the transaction took place. (The sub-sale rules were subsequently changed and then completely re-written so similar transactions rather later than Project Blue no longer had or have any prospect of a favourable SDLT result.)
Existing SDLT case law
Pollen Estate Trustee Co v RCC [2013] 3 All ER 742 (“Pollen”) is quoted since paragraph 24 of that judgement summarises the principles to be applied to the construction of tax (and other) statutes – in particular the concept of “purposive construction”. It is less clear whether, and to what extent, the judgement actually employs purposive construction in this sense.
HMRC v DV3 RS Limited Partnership [2013] STC 2150, [2014] 1 WLR 1136 (“DV3”) was cited as relevant to the operation of s45 FA 2003. Where the tailpiece of s45(3) disregards the first leg of a transaction involving a sub-sale (that is to say it disregards the substantial performance or completion of the original contract) DV3 found that the disregard was sufficient to prevent the intermediate purchaser from becoming a relevant owner of the property for the purposes of the SDLT rules for partnership transactions. PBL sought to argue that the disregard should therefore prevent PBL from being the “person” who made arrangements with a financial institution to comply with s71A(1). If the relief in s71A did not therefore apply, then MAR should pay SDLT on its consideration of £1.25 billion and s75A would not apply since there would have been no tax saving compared with the notional transaction. This judgement did not accept that argument. Instead it found comfort that DV3 had referred to “the importance and centrality of section 44” and found that s45(5A) must be allowed to have effect in determining the vendor for the secondary contract deemed to exist by s45. It accordingly found that PBL can be taken to be the vendor for the transfer to MAR. (The application of s45(5A) is of course the reason why DV3 should not have disregarded the ownership by the intermediate purchaser – but that was not how the Court of Appeal saw it.)
S75A
So the Project Blue appeal depends on how s75A (and its supporting sections 75B and 75C) operate.
Mr Justice Morgan finds that the drafting of s75A leaves a lot to be desired. And he does not like the statement in HMRC’s guidance of 1 March 2011 that “HMRC will not seek to apply section 75A where it considers transactions have already been taxed appropriately” since there is nothing which gives them a discretionary power to apply or not apply the provision. He is initially discomfited by HMRC’s contention that s75A can overcome a defect in the legislation (perceived as the lack of a block to the s45 disregard when the secondary transaction qualifies for s71A relief). (The history of s75A is of course that it was designed to do just that. The policy purpose was certainly to block SDLT savings which could arise in multi-step transactions from a combination of reliefs, exemptions, disregards, and steps which changed the value of land but which were not land transactions (such as paying someone not to exercise a break clause in a lease).
In broad terms the rules work as follows:
- V disposes of a land interest and P acquires it or an interest derived from it; and
- A number of “scheme transactions” are “involved in connection with” the disposal and acquisition – and these transactions under a wide definition may be land transactions or not;
- The tax charge is calculated for a “notional land transaction” direct from V to P for consideration equal to the largest aggregate amount received by or on behalf of V or paid by or on behalf of any person under the scheme transactions. If this is more than the total charge actually payable on the scheme transactions then tax is paid (by P) on the notional transaction and there is no charge on the real land transactions.
“Anti-avoidance”
Headings and side notes to ss75A-C use the phrase “anti-avoidance” and PBL sought to claim that the provisions can only be in point when there is a tax avoidance purpose to the transactions or participants. The FTT ruled that there is no such motive test that can be read into the provisions but it then found that P in the notional transaction that s75A creates must be a person who had avoided tax. And it then sought to make something of the fact that a DOTAS disclosure had been made. The Upper Tribunal went into more detail about why it considers that s75A is not limited to cases where there are avoidance purposes. In particular, it noted that different anti-avoidance purpose tests are used in different parts of the tax statutes and even in the SDLT statute (group relief and charities relief have different explicit tests) so it would not be possible to say which such test has to be used. So PBL’s argument was not accepted. And it did not opine on PBL’s appeal against adverse findings by the FTT in relation to the purpose of tax avoidance since that was not relevant to its application of s75A in this case.
It comments that side notes to Acts of Parliament may be an aid to interpretation of those sections but finds that s75A itself effectively sets out what it means by avoidance in the test in s75A(1)(c) – which is often referred to as the “tax savings test” though this is not statutory wording. This is to say that, having chosen a V and a P and identified the scheme transactions then avoidance in this context is simply that the sum of the charges for the actual steps is lower than the tax chargeable on the notional transaction. For the provision to apply this type of avoidance has to occur as a matter of fact. But the motives of those who benefit from the tax saving are not relevant and there is no need to probe distinctions between tax avoidance and tax mitigation. Paragraph 55 of the judgement acknowledges that this means that tax may apply to a notional transaction which the parties would not for commercial reasons have carried out.
Who is V? Who is P?
The identification of V and P is key to the judgement and this is certainly difficult. The Tribunal members do not use the same reasoning and, while it is certainly clear that Morgan J’s decision prevails, the main impact of this element of the judgement adds to the uncertainty found by taxpayers and their advisers. Those who may be wondering whether they should self-assess for a tax charge under s75A have a particular dilemma.
The discussion as reported seems reminiscent of the answer to the question “Who is Spartacus?” in the eponymous Hollywood film where everyone claimed to be that person. In public pronouncements HMRC have said that they can choose any V and P which give a result that tax is chargeable under s75A. In this case they have agreed with PBL that V is the Secretary of State for Defence (SSD). The Upper Tribunal regrets the lack of a clear statutory rule to determine V but is prepared to acquiesce in the choice of SSD accepted by both parties and by the FTT .
P is the taxpayer (if s75A applies) so HMRC see an advantage in saying that everyone is P. PBL argued that P should not be PBL and that it should be MAR since they were the first to acquire a chargeable interest –using the DV3 interpretation of the s45(3) disregard to say that PBL did not acquire the freehold. HMRC regard it as “obvious” that P is PBL – perhaps as the last acquirer in the chain. The FTT found that P was not a matter of choice and inferred that P must be PBL as the party which was otherwise avoiding tax. Morgan J. found no justification for any of these approaches in the statutory wording and proceeded to consider the implications for each of the two possibilities (PBL and MAR).
PBL as P
The argument is dismissed that s75A(7) blocks the application of the provision on the basis that there is a tax saving for PBL “only” by reason of s71A – because the saving arises also by virtue of the operation of the disregard in s45(3).
The actual transactions incur no tax so the question is merely what is the consideration for the notional transaction. The problem that the FTT and both members of the Upper Tribunal face is that the largest amount for a transaction is the £1.25 billion paid by MAR. It seems over the top for PBL to have to pay SDLT on this amount of consideration. The price paid by PBL for the land (and received by SSD) was £959 million and this must surely have been the market value at the time in view of the public tender process leading to the acquisition and the fact that PBL and SSD are clearly unconnected. The excess over this sum was to finance the development rather than the purchase.
When the s75A rules were originally enacted by regulation in 2006 concern was expressed that the wide terms in which consideration for a notional transaction is expressed could result in inappropriate charges. An example would have been where land was purchased within the purchase of a business which had value in relation to non-land assets. The apportionment rules in s75B were introduced to address this. Unfortunately the drafting of these rules are convoluted. Morgan J. only just manages to find that they work so as to produce the result that consideration for a notional transaction to PBL should be charged by reference to £959 million. Judge Nowlan is not able to accept that the consideration can be other than the £1.25 million figure (as the FTT found) – though in his dissenting arguments he describes his result as not coherent (with what one might expect the provision to produce) and he seems relieved that his conclusion on this does not prevail.
MAR as P
If SSD is V and MAR is P then the judgement concludes that the charge under s75A for MAR is 4% of £1.25 billion since the latter is the consideration payable by MAR for the freehold. As before, the tax savings test was found not to be satisfied “only” by reason of s71A since the sub-sale disregard also played a part. And this time there was not a cogent argument to reduce the £1.25 billion under an apportionment rule.
PBL is P for the purposes of this judgement
Morgan J. was unable to find an argument based on the statute to prevent MAR from being P but fell back on the fact that the Upper Tribunal was not required to determine the tax position of MAR who was neither a party to the appeal nor did HMRC seek to levy tax on MAR.
Judge Nowlan has less difficulty in choosing between PBL and MAR as potential Ps. He looks for the source of the tax advantage which s75A might correct. He sees the lack of a block on the s45(3) disregard (when the secondary contract gives rise to an exemption under s71A) as the drafting slip or error which results in s75A-style avoidance and which it is there to counteract. So it is appropriate for s75A to charge PBL (since its purchase was disregarded by s45(3)) and this also fits with the principle that SDLT and its stamp duty predecessor impose charges on purchasers and not on financiers. He also finds that PBL ranks as P by virtue of acquiring its lease rather than the freehold (citing DV3 to disregard the acquisition of the freehold). This in turn makes it impossible to conclude that the £1.25 billion can be apportioned.
Morgan J. as presiding judge accordingly finds that PBL has a tax liability under s75A on the basis of £959 million of consideration. This made it unnecessary to consider the Human Rights Act argument that paying on the basis of £1.25 billion is discriminatory.
Administrative matters
SDLT is a self-assessed tax and this means that charges under s75A are also to be self-assessed. It is perhaps fortunate that the SDLT analysis for Project Blue would not apply to an equivalent deal carried out now – since the sub-sale rules have been changed. For, if no such changes had been made, the judgement would imply that the equivalent of PBL should pay tax of about £38 million and also that the equivalent of MAR should pay £50 million (albeit that the requirement for MAR is obiter and was contradicted by the non-presiding judge).
PBL filed an SDLT return form in relation to its disregarded purchase showing the code for “other” relief and HMRC purported to amend this return. PBL argued that HMRC’s process was inappropriate since this was not a return for the notional transaction and HMRC had failed to issue a determination within the statutory 4 year period – so PBL could not now be made to pay SDLT. Unsurprisingly, the judgement did not allow such arguments to block the tax liability and finds that the return in question can be considered to be a return in relation to the notional transaction.
Implications for the construction of s75A
I shall give my personal view as comments on a number of questions that arise in construing this difficult provision.
Can HMRC choose V and P at will?
They have no explicit discretionary power to do so and the courts are clearly not going to read in an implicit power for them. That said, when they choose V and P for a particular deal it is going to be difficult for the courts to criticise them since the judiciary does not as yet have a cogent method to determine V and P. Also, it seems harsh for a taxpayer who might be a P to be expected to self-assess.
What is a transaction and when are there a number of transactions involved in connection with a disposal and acquisition?
Project Blue throws little light on this. Indeed its confirmation that avoidance motives need not be present, combined with the statutory definition of a transaction being almost anything, encourage the alarm felt by some advisers that no deal can be effected by just one transaction and therefore s75A is always in point. (Setting up a new company or even appointing legal advisers might be scheme transactions.) The safety net here might be that avoidance in some real sense must occur – not just as a result of the s75A arithmetic. In Project Blue no-one would really have expected a third party purchase from SSD to be free of an SDLT charge where the third party has no special status (such as a charity or Government minister). The judgement finds a drafting error in s45(3) as well as a mechanical tax advantage.
When can consideration be apportioned
The Upper Tribunal had difficulty with the prescriptive wording it found in s75B but clearly wished to exclude the part of the £1.25 billion which represented the financing of the building cost. Some of the difficulty arose from seeing a distinction in the rules depending on whether P acquires an interest disposed of by V or an interest derived from V’s land interest. This might be resolvable by looking at the three elements of s75A(1). S75A(1)(a) refers to both possibilities and the natural reading of (b) allows for both. I would argue that s75A(1)(c) cannot reasonably restrict itself to cases where P acquires something disposed of by V. It makes much more sense to regard “V’s chargeable interest” on its acquisition by P as including a derived interest. There is a general SDLT rule in s43(3)(a)(ii) that a created interest is treated as a disposal by the person whose interest is subject to the new interest. It hardly seems to strain the construction of s75A very much to take the deemed notional transaction to be a disposal by V of the interest acquired by P. That would feed through to s75A(4)(b) and s75B.
Where there are different possibilities for V and P can this result in several charges under s75A?
The Upper Tribunal found this troubling but had no obvious cure. I would have thought that multiple charges would generally be prevented by s75A(4)(a) which disregards all of the real land transactions when a notional transaction is charged to tax. So here, for example, if there is a charge to PBL then MAR’s acquisition of the freehold is disregarded and s75A(1)(a) cannot treat MAR as P.
Conclusion
This judgement produces a result which might be considered sensible – in contrast to the more extreme results sought by the parties. But the analysis leading to this result is far from clear and there are disputes between the members of the tribunal. The construction of s75A remains obscure.
