Taxpayer victory in Project Blue SDLT sub-sale case

In Project Blue Ltd v HMRC [2016] EWCA Civ 485, the Court of Appeal has allowed the taxpayer's appeal and dismissed HMRC's cross-appeal.

The court found that section 75A, Finance Act 2003 (FA 2003) did not apply because the sub-sale to the financier was not exempt from charge to stamp duty land tax (SDLT) under section 71A, FA 2003.

Unless otherwise stated, all statutory references below are to FA 2003.

Background

SDLT is chargeable under section 42(1) on "land transactions" meaning "any acquisition of a chargeable interest in land" (section 43(1)), however "the acquisition is effected" (section 43(2)).

A "chargeable interest", is defined in section 48(1) as:

"(a)    an estate, interest, right or power in or over land in the United Kingdom or

(b)     the benefit of an obligation, restriction or condition affecting the value of any such estate, interest, right or power,

          Other than an exempt interest."

Exempt interests include "any security interest", which in most cases will mean a mortgage. Put another way, there is no SDLT to pay if the property is held only for the purposes of securing the payment of money. The charge instead will fall to the mortgagor.

Ordinarily the person acquiring a property with a mortgage will acquire the property free from a charge once a loan, interest and costs have been paid back to the mortgagee. This conventional arrangement, familiar to many individuals purchasing property with the use of a mortgage, is not permitted under Sharia law which places prohibitions on usury. Such transactions require a different form of arrangement.

The case concerned the purchase of Chelsea Barracks from the Ministry of Defence (MOD) and Project Blue Limited (PBL), an entity controlled by the Sovereign Wealth Fund of Qatar. The sale cost was £959m. It would not have been possible for PBL to utilise a conventional loan and interest arrangement for the purchase, instead, PBL contracted to sell the property to Masraf al Rayan (MAR) a Qatari bank for £1.25bn. The difference between the purchase and sale costs being the costs of redeveloping the site and SDLT.

On the day of completion, MAR granted to PBL a 999 year lease and agreed various other options which would enable PBL to re-acquire the freehold. Accordingly, this transaction did not involve a loan. Instead, PBL and MAR were parties to a lease and put option agreement.

Court of Appeal judgment

Superficially there appeared to be two transactions which may be land transactions for the purposes of section 43: the sale between the MOD and PBL and the sale by PBL to MAR, the latter not being exempt under section 48 because of the absence of a security interest. Under section 48, however, the completion of the contracts between the parties had the effect of engaging sections 44-45, which relate to "sub-sale" agreements. The consequence being that the two transactions were treated as a single land transaction for SDLT purposes.

Following the Court of Appeal decision in DV3 RS LP v HMRC [2013] EWCA Civ 907, the Court was obliged to disregard PBL's acquisition from the MOD for SDLT purposes. Accordingly, for the purposes of SDLT, MAR was to be treated as acquiring an interest in land directly from the MOD and it was on MAR that the liability for SDLT fell.

The Court considered the effect of section 71A, which applies to alternative forms of financing arrangements. Specifically, it covers circumstances where a financial institution acquires a "major interest in land" and then provides a leasing arrangement to a person with an option for acquisition. In such cases, the institution will be exempt from SDLT. The parties accepted that section 71A covered arrangements which complied with Sharia law.

HMRC argued that section 71A had the effect of shifting any liability for SDLT from MAR to PBL. The Court found, however, that the exemption from the charge only applied in circumstances where the "vendor" was the person making the financial arrangements with the financial institution. In this case, because of the effect of the decision in DV3 RS LP, the "vendor" could not be regarded as PBL, as the transaction between MAR and PBL had to be disregarded under sections 44-45. Rather, the vendor was MOD. Accordingly, in the view of the Court, the exemption to SDLT contained in section 71A did not apply to MAR and SDLT remained payable by MAR.

The Court dismissed HMRC's arguments on the application of the anti-avoidance provisions contained in section 75A, on the basis that, if the rules applied at all, a necessary precondition of their application was not met in that the notional SDLT payable was not less than the amount that would otherwise be payable on HMRC's notional reconstruction of the transaction.

Comment

This is an important case in the context of SDLT. Although SDLT was payable, HMRC's decision to close its enquiries into MAR's land transaction return was a significant mistake costing the Exchequer some £50m in lost SDLT.

Many tax advisers will be disappointed by the Court's obiter comment that the Upper Tribunal was correct in its view that a tax avoidance motive is not necessary in order for section 75A to apply.