During WWII, MI5 used fake plans attached to a dead body dumped in the sea off Spain to trick the enemy into thinking that the Allies would invade Greece, rather than Sicily. The ploy was turned into a film called “The Man Who Never Was”. The latest Stamp Duty Land Tax case, Project Blue Ltd v HMRC, decided by the Court of Appeal on 26 May 2016, might well be called the case of “The Deal That Never Was”. This is doubly ironic, given that the case also turns on legislation that doesn’t exist, because, since the Project Blue deal was done, it has been repealed and replaced.
Project Blue Ltd (“PBL”) contracted to buy Chelsea Barracks from the Ministry of Defence in April 2007 for £959m. Between then and January 2008, when completion was due, PBL arranged finance with a Qatari bank, Masraf al Rayan (“MAR”) on a Sharia-compliant Ijara (purchase and leaseback) basis. Thus, two days before completion was due, PBL exchanged contracts to sell the Barracks to MAR for £1.25 billion; a sum made up of the purchase price due to the MOD plus development costs and a sum for SDLT, should PBL have to pay it. On 31 January 2008, the MOD transferred the Barracks to PBL for £959m, PBL transferred them on to MAR for £1.25 billion and MAR granted the lease back to PBL.
PBL claimed sub-sale relief on the transfer from the MOD under the old section 45 Finance Act 2003 (now replaced in a very different form by new Schedule 2A). MAR claimed relief under section 71A (alternative property finance) on the PBL/MAR transfer. Neither paid any SDLT. Not surprisingly, since there was either £38.36m (on the £959m) or £50m (on the £1.25 billion) in SDLT at stake, HMRC opened enquiries into the returns for all three transactions.
HMRC must now bitterly regret its decision to close the enquiry into the acquisition by MAR. Doing so left MAR’s nil liability self-assessment in place. Unless HMRC wins its (surely inevitable) appeal to the Supreme Court, that decision will have cost the taxpayer at least £38.36m.
Old s.45 FA2003 dealt with sub-sales, where A contracts to sell to B, who, before completion, contracts to sell on to C. It exempted B, on certain conditions, by providing that the “A – B” deal was disregarded for SDLT purposes, being replaced by a notional deal under which C acquired directly from A. In Project Blue, the “A – B” deal that didn’t exist was the transaction between the MOD and PBL. This was the Achilles Heel in HMRC’s case. MAR’s claim for relief under s.71A depended on PBL being the vendor to MAR. But according to the Court of Appeal, the effect of old s.45 was that the vendor to MAR was the MOD, not PBL. MAR’s claim to relief thus failed. But, happily for MAR, HMRC is now barred from claiming SDLT from it on the notional MOD – MAR deal. Happily for PBL, if the tax liability is on MAR, albeit one that HMRC can’t enforce, PBL is not liable.
HMRC’s main argument, which failed in Project Blue, was based on SDLT’s general anti-avoidance rule, section 75A FA2003. The Court of Appeal confirmed that it is, as HMRC argues, purely mechanistic. It applies even where there’s not a shred of evidence that anyone involved intends to avoid or mitigate an SDLT liability. We’re therefore left in a very unsatisfactory position. S.75A technically catches a great many innocent transactions, but HMRC doesn’t currently take the point; so few people complain. A regime where common sense applies only for so long as HMRC is too busy or too ignorant to apply the law as drafted is reprehensible from a legal and constitutional point of view.
In very brutal summary, s.75A works by taking any two or more transactions (at least one of which must be a land transaction) that are “involved” with each other and comparing them with a single notional transaction in which:
- any of the involved vendors is the notional vendor (“V”);
- any of the involved purchasers is the notional purchaser (“P”); and
- the price is the largest amount paid by any of the involved Ps.
If the notional transaction would have incurred a greater SDLT liability than the total SDLT paid on all the “involved” transactions, s.75A applies. According to HMRC, this allows it to pick any of the involved vendors as V and any of the involved purchasers as P and inflict on P a very real SDLT charge equal to that payable on the notional transaction to which HMRC has notionally made it a party.
Obviously, s.75A is capable, in many circumstances, of producing several possible Ps as victim purchasers. The plurality of possible Vs also causes problems, given that a purchaser’s SDLT liability is often affected by the identity or status of the vendor.
Looking on the bright side, the Court of Appeal in Project Blue has tried, rather helpfully (since it wasn’t strictly necessary for it to do so) to reduce the number of possible victims as P. HMRC argued that, if PBL wasn’t a purchaser under the MOD – PBL transfer (because of old s45), it was nevertheless a possible P under s.75A, as purchaser (tenant) under the lease-back. Patten LJ had little truck with this:
“The condition in s.75A (1) (a) is satisfied if P acquires V’s chargeable interest (“it”) or an interest derived from it. If V’s interest (and not a derivation from it) is acquired by a person in the chain then one need look no further. It would be very strange in my view to ignore the acquisition of V’s [i.e. the MOD’s] freehold by MAR as an acquisition by P and instead to regard PBL as P by virtue of the lease.”
Of course, this helpful steer from the Court of Appeal may not survive a Supreme Court decision. According to the BBC report, HMRC has already announced that it is considering an appeal.