UK: First-Tier Tribunal Considers The Application Of Section 75A

Last Updated: 26 July 2013
Article by Michael Cant

Summary and implications

In Project Blue Limited v HMRC [2013] UKFTT 378 (TC) the First-Tier Tribunal (Tribunal) considered for the first time the application of section 75A to a complex and high-profile property transaction. The significance of the case is that:

  • it is the third consecutive victory for HMRC in their battle against SDLT planning and resulted in the appellant paying more SDLT than had they not adopted any planning;
  • HMRC did not have matters all their own way and the scope of section 75A, a wide anti-avoidance provision, has been narrowed in a couple of important respects; and
  • it is unclear whether the taxpayer will appeal but, with fine points of law involved and £50m at stake, it would seem likely.

The Tribunal decision runs to some 72 pages in total. It considers various arguments, including human rights, in addition to section 75A. Of necessity this briefing is restricted to a consideration of the section 75A analysis.

Background

The Ministry of Defence (MoD) decided to sell the freehold of Chelsea Barracks (the Property) for development under a high-profile competitive tender process. Project Blue Limited (PBL), a recently incorporated Jersey tax resident company, agreed to buy the freehold and Qatari Bank Masraf al Rayan (MAR), which specialises in Islamic finance, provided the finance.

The transaction took place in seven steps:

1. The MoD and PBL entered into the sale contract.

2. PBL and MAR entered into a sub-sale contract.

3. MAR and PBL entered into an agreement for leaseback.

4. MAR and PBL entered into put and call options respectively over the freehold exercisable at the end of the finance period.

5. The MoD conveyed the freehold of the Property to PBL to complete the sale contract

6. PBL conveyed the freehold of the Property to MAR to complete the sub-sale contract.

7. MAR leased the Property back to PBL.

The MoD received £970m for the sale and PBL £1.25bn for the sub-sale.

PBL believed that no charge to SDLT arose because it was entitled to sub-sale relief on steps 1, 2, 5 and 6 and alternative finance relief on steps 2, 3, 6 and 7. PBL further believed that section 75A of the Finance Act 2003 (FA 2003) did not apply.

In contrast, HMRC contended that section 75A of the FA 2003 did apply and that SDLT at four per cent of the chargeable consideration should have been paid by PBL. HMRC eventually amended PBL's SDLT return to show £50m was payable and PBL appealed.

Sub-sale relief and Alternative Finance Relief

Sub-sale relief, which has been rewritten in the Finance Bill 2013, provides relief from SDLT for the original purchaser in a sub-sale. Section 71A provides relief from a double charge to SDLT where a purchaser adopts alternative, principally Islamic, finance.

Section 75A of the FA 2003

Section 75A is a widely drafted anti-avoidance provision. It applies automatically where:

  • one person (V) disposes of a chargeable interest and another person (P) acquires either it or a chargeable interest deriving from it;
  • a number of transactions, including the disposal and acquisition, are involved in connection with the disposal and acquisition (scheme transactions); and
  • the sum of the amounts of SDLT payable in respect the scheme transactions is less than the amount that would be payable on a notional land transaction effecting the acquisition of V's chargeable interest by P on its disposal by V.

Section 75A is part of the self-assessment regime so the taxpayer has to decide for himself when submitting a return whether or not it applies.

Interpretation and application of section 75A

The Tribunal acknowledged that section 75A has attracted a great deal of controversy and is difficult to interpret. Like all other legislation the provision must be construed purposively. The Tribunal could take account of statutory headings and explanatory notes when seeking to identify the purpose of the legislation. From this it was clear that section 75A was designed to be an anti-avoidance provision.

Furthermore section 75A applies regardless of a taxpayer's motives and the Tribunal noted that the fact a transaction may be carried out for commercial reasons does not mean it does not have a tax avoidance motive.

Identifying V and P

The Tribunal agreed with HMRC's analysis that for the purposes of section 75A the MoD was V and PBL was P because the MoD had disposed of the freehold and PBL had acquired a chargeable interest deriving from it, i.e. the leasehold. However, interestingly the Tribunal added a limitation. P must be a person who has avoided SDLT which would otherwise have been payable. HMRC cannot decide which party, from a number of parties involved in a transaction, should be P. This is a major limitation on the application of section 75A.

Importantly, the Tribunal did not consider that section 75A imposes a requirement that P's acquisition must be directly from V. The use of the term "derived" indicates the possibility of a more indirect chain of transactions and contemplates the creation of a leasehold interest.

Meaning of "involved in connection with"

In order to determine whether the sale of the freehold by the MoD was part of the scheme transaction the Tribunal had to decide whether it was "involved in connection with" the sub-sale and leaseback.

The expression is not commonly used in legislation but in the Tribunal's view "involved" must have been intended to qualify "in connection with" and denoted some form of participation. Therefore, the relationship between the steps must be more than merely being party to a chain of transactions and the test was more than a "but for" test. This is another significant limitation on the application of section 75A.

On this basis, the Tribunal considered that steps 1 to 7 were involved in connection with the disposal by MoD of the freehold to PBL.

Chargeable consideration on the notional transaction

The chargeable consideration for the notional transaction, being the sale of the freehold from the MoD to PBL, is the higher of the amounts either given or received for the scheme transactions. Therefore, the chargeable consideration was the £1.25bn given for the transfer of the freehold of the Property from PBL to MAR, not the £970m received by the MoD. SDLT at four per cent, £50m, is payable by PBL.

Asserting legal professional privilege for tax papers and DOTAS

The Tribunal noted that PBL's board of directors had considered a tax structure paper and a steps paper after step 1 but before step 2. PBL asserted its right to legal professional privilege and did not disclose the board minutes, the tax structure paper or the steps paper to HMRC. Although noting the existence of the documents, the Tribunal stated that it did not draw an adverse inference from PBL's assertion of privilege.

However, in determining whether or not PBL had an avoidance motive the Tribunal did attach significance to the fact that PBL's legal advisers had submitted a notification under the SDLT Tax Avoidance (Prescribed Description of Arrangements) Regulations the day after step 7 was completed. Although the Tribunal recognised that legal advisers may err on the side of caution, it was clear that they - and therefore PBL also - were aware that the way in which the purchase from the MoD and the Sharia-compliant financing with MAR were being structured involved an SDLT advantage and was a main benefit of the transaction structure. This strongly suggests that avoidance of SDLT may have been a factor.

Practical implications

Assuming Alternative Finance Relief would have been available, PBL faces an additional £11.2m SDLT cost as a consequence of seeking to claim sub-sale and Alternative Finance Relief.

According to HMRC's press release, this decision, the first to test a targeted anti-avoidance rule, affects 24 similar commercial cases and 900 mass market residential cases, which collectively are "protecting" £85m.

This is the third successive SDLT victory for HMRC but they have achieved it at a cost. Section 75A is clearly not as wide in its application as they had previously contended and the limitation on the identification of P in particular will give them cause to reconsider future cases.

It is unclear yet whether PBL will appeal. Although £50m is absolutely a large sum it is relatively small beer in relation to the eventual costs of developing Chelsea Barracks. That said the points at issue are fine points of law which another Tribunal might not have followed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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