Authors: Neil Warriner, Partner and Head of UK Real Estate Tax; Will Arrenberg, Partner, Real Estate Tax; Heather Gething, Partner and Head of Tax Planning and Tax Disputes, London
In a 4-1 ruling, the Supreme Court has found in favour of HMRC in the long-running saga of Project Blue Limited v. HMRC (2018) UKSC 30, to the effect that the taxpayer was liable to pay stamp duty land tax (SDLT) on the amount of financing (£1.25bn) it received under the sharia’h law compliant structure, and not merely on the actual price it paid for the land (£959m).
To recap briefly, the taxpayer had contracted to buy a freehold property at Chelsea Barracks in London from the Secretary of State for Defence for a basic price of £959m and had arranged to finance this, along with anticipated development costs, by using a sharia’h law structure under which it sub-sold the freehold on to a banking group for £1.25bn and immediately leased back the asset on terms that effectively replicated a normal financing arrangement, at the same time taking a right to buy back the freehold in the future once the financing arrangement had run its course.
The taxpayer originally argued that no SDLT was payable at all in respect of this due to a combination of sub-sale relief and relief for sharia’h financing structures of this type and that the SDLT targeted anti-avoidance rule in Section 75A Finance Act 2003 was not in point, not least because there was no avoidance motive. By contrast, HMRC argued that the anti-avoidance rule in Section 75A Finance Act 2003 applied even if there was no avoidance motive such that SDLT was payable by the taxpayer not merely on the £959m price payable to the Secretary of State but in fact on the whole £1.25bn payable by the banking group. By the time the case reached the Court of Appeal, it found that in fact the banking group should have been liable to pay SDLT on the £1.25bn it paid for the freehold on the sub-sale and so the anti-avoidance provision was not engaged, but because HMRC had already enquired into and closed its enquiry on the banking group’s SDLT return, it was now out of time to assess the banking group for this SDLT.
The Supreme Court has effectively reversed this, holding that the banking group wasn’t liable to pay any SDLT (because the reliefs applied) and so the anti-avoidance rule was engaged (even if there was no avoidance motive), and when this was applied to the facts of the case viewed realistically, it gave rise to a notional land transaction for SDLT purposes under which the interest sold and purchased was the freehold, the seller was the Secretary of State for Defence, the buyer was the taxpayer and the amount of consideration charged to SDLT was the £1.25bn given by the bank under the financing arrangement (being the highest amount given by way of consideration in the scheme steps), even though the price actually paid to the Secretary of State was only £959m. It was, however, acknowledged that the taxpayer may have a right to reclaim (under Section 80) some of the tax otherwise due to the extent that any part of the £1.25bn was never in fact paid.
Although there were helpful observations to the effect that HMRC cannot seek to apply the anti-avoidance rule in more than one way in respect of any given set of scheme transactions that are, on the facts viewed realistically, “involved in connection with” each other (even where there are in reality several land transactions), the ruling is a salutary reminder to those effecting complex structures involving multiple steps that this targeted anti-abuse rule does indeed potentially have teeth even where there is no avoidance motive.
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