Background
On 15 January 2020 HMRC updated the pages dealing with section 75A FA 2003 in its SDLT Manual. This refresh had been much anticipated coming in the wake of the judgment of the Supreme Court in Project Blue v HMRC [2018] UKSC 30 which addressed an aggressive combining of SDLT reliefs in an effort to avoid SDLT and the decision of the First-tier Tax Tribunal in Hannover Leasing v HMRC [2019] UKFTT 0262 (TC) in which the tribunal held that section 75A can apply to indirect acquisitions of properties including transactions in units in a fund or shares in a company when there is a commercial purpose and no SDLT avoidance motive.
HMRC had informed various stakeholders and interest groups towards the end of last year that they would be consulted before the guidance was published but in the event the author understands that this did not occur and the guidance simply appeared on-line on 15 January 2020. This echoed the situation with the formal consultation on the draft SDLT legislation that the author recalls was abruptly suspended by HMRC in January 2003 and enacted in FA 2003 which was ill-thought through and contained many gaps that had to be filled later on, not least by the enactment of section 75A itself in 2006/07.
The text of this news item first appeared in Taxation Magazine on 30 January 2020 entitled “More questions than answers“.
A Word about HMRC Published SDLT Guidance
Before considering the detail of the refreshed guidance it is worth mentioning a few points about HMRC’s current approach to its own published guidance especially in SDLT.
The author was appearing in the First-tier tax Tribunal in an SDLT appeal earlier this month where the SDLT Manual guidance was relevant and the judge asked the HMRC advocate what the purpose of the SDLT Manual was. The advocate replied that the purpose of the guidance was to help members of the public to know what HMRC’s views were. Strictly speaking this was of course incorrect because the manuals are internal HMRC publications prepared for the assistance of HMRC staff in applying the tax rules as the following extract from HMRC’s manual homepage shows:
These manuals contain guidance prepared for HMRC staff and are published in accordance with the Freedom of Information Act 2000 and HMRC Publication Scheme.
The guidance is not comprehensive and does not provide a definitive answer in every case. It is based on the law as it stood when they were published. HMRC publishes amended or supplementary guidance if there’s a change in the law or in the department’s interpretation of it.
However one can understand the HMRC advocate’s confusion because at some points even the authors of the manuals themselves become confused and assume that the manuals are there to speak to members of the public direct as the following extract at the start of the SDLT Manual shows:
From 1 April 2018 you’ll pay Land Transaction Tax (LTT) on any land transactions in Wales. LTT is operated by the Welsh Revenue Authority. You won’t have to pay Stamp Duty Land Tax (SDLT) or need to send HM Revenue and Customs (HMRC) a return for these transactions. For more detail about SDLT to LTT, read cross-border and transitional guidance
This confusion is compounded by the author’s experience of HMRC advocates in tribunal tax appeals now having no hesitation in either not mentioning published guidance that directly contradicts their statement of case or flatly contradicting it when it suits them to do so. HMRC have also now begun to amend their published guidance so that it is written with the tax result they have in mind rather than as in the past reflecting an objective view of what Parliament can be taken to have intended and the recent revisions to the SDLT Manual on the meaning of “garden and grounds” and “dwellings” is a case in point.
Overall the effect of these developments is likely to dilute the respect that tax tribunals and taxpayer’s representatives have for HMRC guidance.
Section 75A “Anti-avoidance”
Much has already been written in this journal about the effect of the Project Blue and Hannover Leasing decisions. Suffice to say that although section 75A is headed “Anti-avoidance” these cases establish clearly that section is really an “anti-tax saving rule” and can apply regardless of whether there or not is a tax scheme or a commercial or tax avoidance motive. This creates considerable uncertainty for commercial property transactions where due to the way in which a transaction is structured the maximum possible SDLT appears to have been avoided.
Because section 75A is and was intended to be a statutory formulation of the Ramsay principle as applied to a series of linear transaction but does not contain any exceptions for transactions with a commercial purpose or those without a tax avoidance motive, it has become the antithesis of the traditional case-law approach to anti-avoidance provisions exemplified in IRC v Brebner 43 TC 705. In that case Lord Upjohn famously said:
“No commercial man in his senses is going to carry out a commercial transaction except upon the footing of paying the smallest amount of tax he can.” [42 TC 705 at 718I]
He meant by this that the fact that the taxpayer had chosen a way to carry out a genuine commercial transaction in a way that involved paying a reduced or no amount of tax did not necessarily mean that one of the main objects was the avoidance of tax. What the noble and learned Lord would make of section 75A and the two decisions mentioned above can only be guessed at particularly given that despite the heading of section 75A the Supreme Court has ruled that the absence of a tax avoidance motive does not prevent the section from applying.
The HMRC Updated Guidance
A sample of the issues that arise from the updated guidance is as follows with the proviso that some of these issues existed already but have been highlighted by the refresh.
Advance clearances: the facility to obtain an advance clearance from HMRC is more important than ever with a statutory provision that imposes an “anti-tax saving test” in the context of multi-step commercial property transactions that are commercially driven and do not have as a main object a tax avoidance motive. HMRC say at SDLTM09080 that advance clearances are available for section 75A but then go on to dash one’s hopes by stating:
“In particular we will not provide clearances where, in our view, the transactions are undertaken for the purpose of avoiding tax or where the clearance application only requests confirmation of whether Section 75A applies or not.”
Given that most clearance requests will be made in order to establish whether or not HMRC will regard the transaction as a tax avoidance transaction in the sense that the maximum theoretical possible SDLT may not be paid and/or requesting confirmation whether section 75A applies, read literally the proviso quoted above seems to significantly undermine the offer to supply advance clearances.
Intention and purpose: That section 75A is now to be applied as an “anti-tax saving test” instead of only where there is a tax scheme or tax avoidance motive is made clear by SDLTM09090 which states that:
“Section 75A is an objective test which sets out conditions for the legislation to apply. None of these conditions require there to be a tax avoidance motive by or on behalf of any of the persons who are party to the property transaction or arrangements.”
The unanswered question, the answer to which will gradually become clearer with subsequent judicial decisions, is how generous the margins of appreciation will be when comparing the actual transaction with a theoretical transaction that would have triggered a greater amount of SDLT.
The ‘anti-tax saving test” is reinforced at SDLTM09170 which states:
“There is no tax avoidance motive required for a transaction to meet the definition of a scheme transaction. Similarly, scheme transactions need not be linked together by, or be part of, a larger scheme for Section 75A to be applied i.e. Section 75A can apply where the reduction in SDLT is an unintended consequence of the transactions”. [Author’s emphasis]
Connected companies: Where P is a company connected with V then section 53 FA 2003 is applied by section 75C(6) to ensure that the chargeable consideration for the notional transaction will be not less than market value. Although it seems self-evident that the exceptions to the operation of section 53 contained in section 54 should also apply, section 75A does not expressly provide for section 54 to apply and in one case of which the author is aware HMRC are arguing that section 54 does not apply. The refreshed guidance now states however that:
“When considering whether Section 53 applies, you should consider the exception cases listed in Section 54.”
This is helpful although the recent experience of the author in tax tribunal hearings is that HMRC advocates will sometimes ignore or flatly decline to follow HMRC published guidance leading to questions from the judge about whether the taxpayer is seeking to make out a claim for legitimate expectation with the added complications that this involves.
A Procedural Question
One practical concern that arises with complex property transactions is how to protect the client from a subsequent revenue determination in the four years after the transaction even when the actual land transactions have been reported on the SDLT returns, the SDLT paid and a full disclosure made to HMRC so that a discovery assessment cannot be made following the end of the nine month enquiry period. HMRC can and often will take the view that because there has been no return for the notional transaction arising under section 75A then a revenue determination can still be issued up to four years later despite the return and disclosure having been made for the actual transaction.
One possible way of dealing with this dilemma is to also file a return for the notional transaction and make a separate suitably worded disclosure in respect of the second return. In that way a revenue determination cannot be issued because a land transaction return will have been filed for the notional land transaction.
Conclusion
In Project Blue Lord Hodge remarked at [69] that: “In my view both section 75A and section 75B are difficult provisions to apply to particular transactions.”
That difficulty was emphasised in Hannover Leasing where the tax tribunal decided that section 75A applied to transactions when there is a commercial purpose and no SDLT avoidance motive.
What advisers are presented with when advising clients on complex commercial property transactions is an anti-avoidance provision of considerable uncertainty and ambiguity which requires them to make a worst-case assessment of any given scenario by ascertaining the maximum theoretical SDLT that might be paid. Having done this a view needs to be taken on the justification for filing the SDLT return that reports a lesser amount of tax based on the actual as distinct from the notional land transactions under section 75A. The issue of whether to make a disclosure will also need to be addressed along with whether to file an alternative return and disclosure for the possible notional transaction.
Patrick Cannon is a barrister at Tax Chambers, 15 Old Square and can be contacted at www.patrickcannon.net
