Tribunal confirms that HMRC may open an enquiry into a protective SDLT return

In Redmount Trust Company Ltd v HMRC [2023] UKUT 68 (TCC), the Upper Tribunal (UT) upheld the First-tier Tribunal's (FTT) decision confirming (i) that HMRC may open an enquiry into a stamp duty land tax (SDLT) return even when there is no obligation to submit the return; and (ii) there is no time limit for HMRC to issue a closure notice.

Background

Redmount Trust Company Ltd (Redmount), entered into a tax planning arrangement in which it sought to claim 'sub-sale' SDLT relief on the purchase of a property worth £4.2M, pursuant to section 45(3), Finance Act 2003 (FA 2003). The arrangement included an agreement for the future grant of an option with the option being granted at the time of completion of the original contract. 

This arrangement was an iteration of a tax planning arrangement which had previously been implemented by other taxpayers. The previous arrangement involved the grant of an option rather than an agreement to grant an option and was held to be ineffective by the UT in Fanning v HMRC [2022] UKUT 21 (TCC) (this case is currently on appeal to the Court of Appeal). It was accepted that Fanning would not necessarily be determinative of the effectiveness of the arrangement entered into by Redmount.

Following Redmount's property purchase, section 45, FA 2003, was amended with retrospective effect so that 'sub-sale' SDLT relief did not apply to an agreement for the future grant of an option. The amended legislation therefore required property purchasers to amend their SDLT return (if they had filed one) and  enabled HMRC to issue an assessment to collect any additional SDLT it considered due. 

Redmount subsequently filed two tax returns: a nil SDLT return claiming ‘other’ (sub-sale) relief and a return in respect of the grant of the option paying SDLT on the option price. 

Following an enquiry into Redmount's nil SDLT return, HMRC subsequently issued two decisions to Redmount. Firstly, HMRC issued a closure notice, dated 7 September 2016,  which concluded that SDLT was due on the full purchase price of the property which came to £294,000. Secondly and in the alternative, HMRC issued a discovery assessment, dated 25 September 2018, for the same amount, in case it was determined that the closure notice had been issued outside of the four-year time limit.

Redmount appealed both HMRC decisions to the FTT on the basis that: (i) the closure notice was invalid as the SDLT return filed by Redmount was voluntary (the original contract was disregarded under section 45, FA 2003, and therefore no SDLT return was required); and (ii) the discovery assessment was invalid as it was stale and/or raised out of time.

FTT decision

The appeal was dismissed. 

The FTT concluded that, even before section 45 was retrospectively amended to exclude 'sub-sale' relief for future options, the tax planning arrangement entered into by Redmount would have been ineffective. 

Firstly, there was no secondary contract as no person, except Redmount, could call for conveyance; the option conferred no present conveyance right and did not relate to part of the original contract's subject matter as option grants were distinct land transactions from those arising on exercise (section 46, FA 2003). 

Secondly, even if a secondary contract existed, it was not completed or substantially performed simultaneously with the original contract. There was no present right to conveyance under the option until exercise, Redmount already possessed the property and the grant price was not a substantial amount of the property's market value.

Alternatively, section 75A, FA 2003 (the general SDLT anti-avoidance provision), would disregard the SDLT avoidance elements. 

The FTT therefore concluded that the original transfer attracted SDLT, the land transaction return was compulsory, and the closure notice was valid. If this was incorrect, the enquiry would still have been valid as HMRC could enquire into voluntary returns and no time limit applied to issuing closure notices. 

A copy of the FTT's decision can be viewed here.  

Redmount appealed to the UT.

UT decision  

The UT upheld the FTT's decision and dismissed the appeal. 

In the view of the UT, HMRC was entitled to enquire into Redmount's land transaction return. The UT commented that it was implicit in the reasoning of the Supreme Court in Project Blue Ltd v HMRC [2018] UKSC 30 that, if a return was made when it was not strictly necessary, it may still be subject to an enquiry by HMRC. The FTT was also correct to distinguish case law which confirmed that enquiries into voluntary direct tax returns were invalid. It was not, therefore, necessary for the UT to determine if the tax planning arrangement had been effective.

The UT also concluded that the FTT was correct in its view that there was no time limit by which a closure notice must be issued by HMRC to a taxpayer. The structure of Schedule 10, FA 2003, indicated that each part was self-contained. Part 3 concerned enquiries and Part 5 concerned revenue assessments. The time limit in paragraph 31 (in Part 5), therefore, only applied to revenue assessments, which did not include self-assessments contained in land transaction returns that may be amended by HMRC following an enquiry.

Comment 

This decision confirms that HMRC may open an enquiry into a protective SDLT return and that no special limitation period applies to SDLT closure notices.

A copy of the UT's decision can be viewed here.