DECISION
Introduction
1.
The Appellant appeals by notice of 8 February 2011 against a discovery
assessment to Stamp Duty Land Tax (“SDLT”) dated 11 December 2009. The
assessment is for £87,310. The SDLT arises in connection with the Appellant’s
acquisition of 41 Kendal Street, London W2 2BU (“the Property”) on 14 November
2007. The discovery assessment arises from the Appellant’s use of a SDLT mitigation
arrangement.
2.
In the land transaction return (“SDLT 1”) received by Her Majesty’s Revenue
and Customs (“HMRC”) on 28 November 2007, the Appellant declared that the
consideration paid for the acquisition of the Property was £356,250 which meant
a SDLT charge of £10,619. However the Land Registry records showed on the
forms used to transfer the Property (TR1) the consideration to be £2,450,000.
It would have resulted in a charge to SDLT of £98,000 rather than £10,619.
3.
In the light of the Land Registry records, it became apparent to HMRC
that the SDLT 1 return delivered by the Appellant understated the amount of chargeable
consideration properly due following the acquisition of the Property.
Accordingly, the discovery assessment was issued to recover the SDLT which
should have been paid on the consideration of £2,450,000.
Background Facts
4.
The facts are largely agreed though the order in which events took place
is seen differently by the two parties. In particular the date and time of the
execution of a Deed of Novation.
5.
On 31 July 2007, Foxtons, the agents for Mr and Mrs A Dean (the
“Vendors”) sent a Memorandum of Sale regarding the purchase of the Property by Edward
Allchin to Messrs Crust Lane Davies, solicitors to the Appellant. The agreed
sale price was stated at that time to be £2,375,000, a draft sale contract (“the
Contract”) was sent by Messrs Seddons, the Vendors’ Solicitors, to Mr Allchin’s
Solicitor. The Contract recorded Mr Allchin as the “Buyer”.
6.
On 3 August 2007, Mr Allchin entered into an agreement with Big Bracket Tax
Planning Limited (“Big Bracket”) whereby for a fee Big Bracket agreed to
provide Mr Allchin with advice and assistance in saving SDLT on the purchase of
the Property.
7.
On 8 August 2007, a mortgage offer was made to Mr Allchin by Standard
Life Bank Limited for an advance of £1,187,500. On the same day, the sum of
£237,500 was transferred by telegraphic transfer from an account in Mr
Allchin’s sole name held at St James Place Bank to Mr Allchin’s Solicitors’
client account.
8.
On 10 August 2007 Mr Allchin’s Solicitors wrote to the Vendors
Solicitors indicating that as part of their client tax planning they had been
advised, “to request that your client executes a Deed of Novation between
exchange of contracts and completion if required”.
9.
This reference was to the tax mitigation scheme provided by Big Bracket
which involves (broadly) Mr Allchin’s proposed acquisition of the Property
utilising the following two steps. The steps were:
Step 1 – the entry
into a sale agreement for the sale of the Property from the Vendors to a
limited company; and
Step 2 –the entry into
a document entitled a “Deed of Novation” pursuant to which Mr Allchin would be
substituted for the limited company as the purchaser in step 1.
10.
On 14 August 2007, the Vendor’s Solicitors wrote to Mr Allchin’s
Solicitors with a revised form of Contract incorporating the various agreed changes.
The purchase price was said to be £2,450,000 and the Buyer was stated to be
Alpine Investment Limited (UK Company No.06239455) (“Alpine”) rather than Mr
Allchin, as was recorded in the original draft Contract.
11.
The shares in Alpine were owned by Corporate Factoring Services (a
company incorporated in the Isle of Man). The purchase price increased by
£75,000 following a last minute negotiation by the Vendors.
12.
On 17 August 2007 contracts were exchanged at 15.25 using Formula B of
the Law Society’s formula for exchanging contracts between the Vendor’s
Solicitors and Mr Allchin’s Solicitors (who held themselves out as acting on
behalf of Alpine).
13.
The contract incorporated Standard Conditions of Contract (Fourth
Edition) subject to a number of agreed variations. A deposit of £237,500 was
paid by Alpine on 21 August 2007 from funds belonging solely to Mr Allchin.
Completion was scheduled for 15 October 2007, although ultimately this took
place on 14 November 2007.
14.
Although paid by Alpine, it appears that the sum of £237,500 came from
the account of Mr Edward Allchin through his solicitors, Crust Lane Davies.
The trail of money shows that the sum was transferred from Mr Allchin’s account
on 8 August 2007 and paid to the Seller’s Solicitors on 25 August 2007.
15.
On 12 November 2007, Mr Allchin’s Solicitors received funds from Mr
Allchin’s current account in the sum of £1,133,719.75 from Mr Allchin’s sole
bank account with St James Place Bank.
16.
On 13 November 2007, Mr Allchin’s Solicitors received mortgage funds
into Mr Allchin’s current account with them in the sum of £1,187,500 from
Standard Life Bank.
17.
On 14 November 2007, the Vendors, Alpine and Mr Allchin each signed
separate documents entitled “Deed of Novation” which recorded inter alia that:
(a)
The Vendor released Alpine from the obligation to purchase the Property
in return for Mr Allchin’s obligation to purchase the Property pursuant to the
details of the Deed of Novation; and
(b)
The Contract was cancelled in return for the Vendor’s entering into a
Deed of Novation with Mr Allchin.
18. On 14 November 2007, Mr
Allchin’s Solicitors transferred funds in two tranches totalling £2,212,500
(comprising funds which Mr Allchin had paid into his Solicitor’s client account
and the mortgage monies from Standard Life Bank) to the Vendor’s Solicitors.
On the same day, the Land Registry Transfer Deed (TR1) was executed to transfer
the Property from the Vendors to Mr Allchin where consideration stated to be £2,450,000.
19.
On 14 November 2007, the Purchaser’s Solicitors, Crust Lane Davies
requested that HSBC make two payments to the Vendor’s Solicitors, from the
Appellant’s current account. The first payment was £1,856,250 and the second was
£356,250. The Tribunal will look to establish if these payments were made by
Alpine before the novation.
20.
The instructions to make these payments appeared to have come from Mr
Matthew Harrison of Big Bracket by emails timed at 12.22 and 12.32
respectively.
21.
On 14 November 2007 the Deed of Novation were executed. It is not clear
exactly when the execution took place. The sequence suggested by the Appellant
is that the £1,856,250 was paid then the Deed of Novation was entered into and
then the £356,250 was paid to the Vendor’s solicitors. This sequence of events
is disputed by the Respondents.
22.
The Vendors then transferred the Property to the Appellant in his sole
name.
23.
The Respondents say that the Appellant had not provided any particulars
in respect of the source of funds paid to the Vendors for the Property or used
to cover incidental costs such as Solicitor’s fees and searches. It appears
that the money was provided by the Appellant personally and £1,187,500 of the
funds came from the mortgage advance from Standard Life Bank on 13 November
2007. These are the only two sources of funds.
24.
The SDLT 1 form returned by Mr Allchin showed the consideration for the
transfer as being £356,250 which the Appellant paid to the Vendors under the
terms of the Deed of Novation and this is the only chargeable consideration for
his acquisition of the Property on which SDLT was charged. The SDLT 1 form was
received by HMRC on 28 November 2007.
25.
The Appellant says that sub-sale relief under Section 45 FA 2003 applies
to the transaction entered into since the original Contract was not completed.
26.
HMRC say that the Appellant is liable to SDLT on the full amount of the
consideration of £2,450,000 since that entire sum was provided by the Appellant
himself. They say that Alpine did not pay the deposit of £237,500 or the
further amount of £1,856,250 since these were sums belonging to the Appellant.
The legal setting
27.
SDLT was designed as a transaction based tax, self-assessed rather than
a tax on the execution of an instrument which evidenced the property
transaction.
28.
It is charged on “land transactions” regardless of whether there is an
instrument or not effecting the transfer and whether executed in the UK or otherwise, it applies to UK land.
29.
A land transaction means “any acquisition of a chargeable interest”
however acquired or however the acquisition is effected, whether by act of the
parties, by order of a Court or other authority or under any statutory
provision or by “operation of law”. A chargeable interest is an estate,
interest, right or power in or over land in the UK, or the benefit of an
obligation, restriction or condition affecting the value of any such interest,
right or power, other than an exempt interest. This is a very wide definition
and catches a broad range of transactions.
30.
The legislation refers to Purchaser and Vendor in relation to a land
transaction and these “are to the person acquiring and the person disposing of
the subject matter of the transaction”. It is required that the Purchaser
gives consideration for the acquisition. For this purpose the “chargeable
consideration” is defined as “any consideration in money or monies worth given
for the subject by the transaction, directly or indirectly, by the Purchaser or
a person connected with him”.
31.
Section 44 makes special provisions for a contract to acquire a
chargeable interest which is to be completed by a conveyance. A person is not
regarded as entering into a land transaction by reason of entering into a
contract for a land transaction unless the contract is “substantially performed”
or completion takes places (The HMRC interpret substantial performed as meaning
that 90% or more of the consideration due is paid).
32.
Contracts and completion are treated as part of a single land
transaction for which the effective date is the date of the conveyance. This
is the case provided that it is completion of the land transaction proposed,
between the same parties, in substantial conformity with the original
contract. This means that, for example, where there is a sub-sale, a person is
not regarded as acquiring a chargeable interest on contract but only on completion.
33.
In our case, Alpine never acquired a chargeable interest in the Property
nor was it involved in a land transaction.
34.
Section 45 contains special rules for dealing with land transactions
where there is an assignment, sub-sale or other transaction. In such a
situation the original purchaser does not complete the transaction. The person
to whom the contract or rights are transferred, the transferee, is not treated
as entering into a land transaction as a result of only the assignment,
sub-sale, etc. The provisions of s44 apply as if there was a secondary contract
for a land transaction under which the transferee was the purchaser. The
substantial performance or completion of the original contract takes place at
the same time or in connection with the substantial performance or completion
of the secondary contract.
Legislation
35.
Section 42(1) FA 2003 establishes the charge to SDLT on “land
transactions”.
Under s.42 (2) FA 2003, SDLT is chargeable:
“(a) whether or not there is
any instrument effecting the transaction,
(b) if there is such an
instrument, whether or not it is executed in the United Kingdom; and
(c) whether or not any party
to the transaction is present, or resident, in the United Kingdom.”
A land transaction means “any
acquisition of a chargeable interest” (s.43 (1) FA 2003), “however the
acquisition is effected, whether by act of the parties, by order of a court or
other authority, by or under any statutory provision or by operation of law”
subject to provisions to the contrary (s.43 (2) FA 2003).
Under s.48(1) FA 2003, a
chargeable interest means “an estate, interest, right of power in or over land
in the United Kingdom, or the benefit of an obligation restriction or condition
affecting the value of any such estate, interest, right or power” other than
exempt interests, such as mortgages (s.48(2) FA 2003).
References to the “purchaser”
and “vendor” in relation to a land transaction “are to the person acquiring and
the person disposing of the subject matter of the transaction” (s.43 (4) FA
2003).
Section 43(5) FA 2003,
provides that “[a] person is not treated as a purchaser unless he has given
consideration for, or is a party to, the transaction”. Pursuant to s.85 (1) FA
2003, liability to pay the SDLT in respect of a chargeable transaction falls on
the purchaser.
Pursuant to s.49 (1) FA 2003,
a land transaction is a “chargeable transaction” if it is not a transaction
that is exempt from charge. A land transaction is exempt from charge if there
is no chargeable consideration for the transaction (para. 1, Sch 3 to FA 2003).
The
“chargeable consideration” for a transaction is, except as otherwise expressly
provided, “any consideration in money or money’s worth given for the subject
matter of the transaction, directly or indirectly, by the purchaser or a person
connected with him” (para. 1(1) of Sch. 4 to FA 2003).
Contract and Conveyance (s.44 FA 2003)
A
person is not regarded as entering into a land transaction by reason of
entering into a contract for a land transaction unless the contract is
substantially performed or completion takes place (ss.44(1), (3) and (4) FA
2003).
Contract and Conveyance: effect of transfer of rights (s.45 FA 2003)
Section
45 FA 2003 is in effect a relieving provision dealing with sub-sales and
assignment of rights under a contract of sale.
So
far as is relevant, section 45 provides as follows:
“(1)
This section applies where-
(a)
a contract for a land transaction (“the original contract) is entered
into under which the transaction is to be completed by a conveyance, …
(b)
there is an assignment, subsale or other transaction (relating to the
whole or part of the subject matter of the original contract) as a result of
which a person other than the original purchaser becomes entitled to call for a
conveyance to him, and
(c)
paragraph 12B of Schedule 17A (assignment of agreement for lease) does
not apply.
References in the following
provisions of this section to a transfer of rights are to any such assignment,
subsale or other transaction, and references to the transferor and the transferee
shall be read accordingly.
(2)
The transferee is not regarded as entering into a land transaction by
reason of the transfer of rights, but s.44 (contract and conveyance) has effect
in accordance with the following provisions of this section.
(3)
That section applies as if there were a contract for a land transaction
(a “secondary contract”) under which –
(a)
the transferee is the purchaser, and
(b)
the consideration for the transaction is –
(i)
so much of the consideration under the original contract as is referable
to the subject-matter of the transfer of rights and is to be given (directly or
indirectly) by the transferee or a person connected with him, and
(ii) the
consideration given for the transfer of rights.
The substantial performance or
completion of the original contract at the same time as, and in connection
with, the secondary contract shall be disregarded …
(4)
…
(5)
…
(6)
Section 839 of the Taxes Act 1988 (connected persons) applies for the
purposes of s.45 (3) (b) (i).
(7)
In this section “contract” includes any agreement and “conveyance”
includes any instrument”.
Anti-avoidance
(ss.75A-C FA 2003)
Section
75A is a general anti-avoidance rule for SDLT, introduced by the SDLT
(Variation of the Finance Act 2003) Regulations 2006 with effect from 6
December 2006. It therefore potentially applies to the transactions in
question.
At the time that the relevant
transactions took place, ss.75A-C provided:
“75A Anti-avoidance
(1)
This section applies where –
(a)
one person (V) disposes of a chargeable interest and another person (P)
acquires either it or a chargeable interest deriving from it,
(b)
a number of transactions (including the disposal and acquisition) are
involved in connection with the disposal and acquisition (“the scheme
transactions”) and
(c)
the sum of the amounts of stamp duty land tax payable in respect of 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.
(2) In subsection (1)
“transaction” includes, in particular –
(a) a non-land
transaction
(b) an agreement,
offer or undertaking not to take specified action,
(c) any kind of
arrangement whether or not it could otherwise be described as a transaction,
and
(d) a transaction
which takes place after the acquisition by P of the chargeable interest.
(3) The scheme transactions may
include, for example –
(a)
the acquisition by P of a lease deriving from a freehold owned or
formerly owned by V;
(b)
a sub-sale to a third person;
(c)
the grant of a lease to a third person subject to a right to terminate;
(d)
the exercise of a right to terminate a lease or to take some other
action;
(e)
an agreement not to exercise a right to terminate a lease or to take
some other action;
(f)
the variation of a right to terminate a lease or to take some other
action.
(4) Where this section applies –
(a)
any of the scheme transactions which is a land transaction shall be
disregarded for the purposes of this Part, but
(b)
there shall be a notional land transaction for the purposes of this Part
effecting the acquisition of V’s chargeable interest by P on its disposal by V.
(5) The chargeable consideration
on the notional transaction mentioned in sub-sections (1)(c) and (4) (b) is the
largest amount (or aggregate amount) –
(a)
given by or on behalf of any one person by way of consideration for the
scheme transactions, or
(b)
received by or on behalf of V (or a person connected with V within the
meaning of s.839 of the Taxes Act 1988) by way of consideration for the scheme
transactions.
(6) The
effective date of the notional transaction is –
(a) the
last date of completion for the scheme transactions,
or
(b) if
earlier, the last date on which a contract in respect of the scheme
transactions is substantially performed.
(7) This
section does not apply where subsection (1)(c) is satisfied only by reason of –
(a) sections
71A to 73, or
(b) a
provision of Schedule 9.
75B
Anti-avoidance: incidental transactions
(1)
In calculating the chargeable consideration on the notional transaction
for the purposes of s.75A (5), consideration for a transaction shall be ignored
if or in so far as the transaction is merely incidental to the transfer or the
chargeable interest from V to P.
(2)
A transaction is not incidental to the transfer of the chargeable
interest from V to P –
(a)
if or in so far as it forms part of a process, or series of transactions,
by which the transfer is effected,
(b)
if the transfer of the chargeable interest is conditional on the
completion of the transaction, or
(c)
if it is of a kind specified in s.75A(3)
(3)
A transaction may, in particular, be incidental if or in so far as it is
undertaken only for a purpose relating to –
(a)
the construction of a building on property to which the chargeable
interest relates.
(b)
the sale or supply of anything other than land, or
(c)
a loan to P secured by a mortgage, or any other provision or finance to
enable P, or another person, to pay for part of a process, or series of
transactions, by which the chargeable interest transfers from V to P
(4)
In subsection (3) –
(a)
paragraph (a) is subject to subsection (2)(a) to (c)
(b)
paragraph (b) is subject to subsection (2)(a) and (c) and
(c)
paragraph (c) is subject to subsection (2) (a) to (c).
(5)
The exclusion required by subsection (1) shall be effected by way of
just and reasonable apportionment if necessary.
(6)
In these sections a reference to the transfer of a chargeable interest
from V to P includes a reference to a disposal by V of an interest acquired by
P.
75C
Anti-avoidance: supplemental
(1)
A transfer of shares or securities shall be ignored for the purposes of
s.75A if but for this subsection it would be the first of a series of schemes
transactions.
(2)
The notional transaction under s.75A attracts any relief under this Part
which it would attract if it were an actual transaction (subject to the terms
and restrictions of the relief).
(3)
The notional transaction under s.75A is a land transaction entered into
for the purposes of or in connection with the transfer of an undertaking or
part for the purposes of paragraph 7 and 8 of Schedule 7, if any of the scheme
transactions is entered into for the purposes of or in connection with the transfer
of the undertaking or part.
(4)
In the application of s.75A(5) no account shall be taken of any amount
paid by way of consideration in respect of a transaction to which any of ss.60,
61, 63, 64, 65, 66, 67, 69, 71, 74 and 75, or a provision of Schedule 6A or 8,
applies.
(5)
In the application of 75A(5) an amount given or received partly in
respect of the chargeable interest acquired by P and partly in respect of
another chargeable interest shall be subjected to just and reasonable
apportionment.
(6)
Section 53 applies to the notional transaction under s.5A.
(7)
Paragraph 5 of Schedule 4 applies to the notional transaction under s.75A.
(8)
For the purposes of section 75A –
(a)
an interest in a property-investment partnership (within the meaning of
paragraph 14 of Schedule 15) is a chargeable interest in so far as it concerns
land owned by the partnership, and
(b)
where V or P is a partnership, Part 3 of Schedule 15 applies to the
notional transaction as to the transfer of a chargeable interest from or to a
partnership.
(9)
For the purposes of s.75A a reference to an amount of consideration
includes a reference to the value of consideration given as money’s worth.
(10) Stamp duty
land tax paid in respect of a land transaction which is to be disregarded by
virtue of s.75A(4)(a) is taken to have been paid in respect of the notional transaction
by virtue of s.75A(4)(b).
(11) The
Treasury may by order provide for s.75A not to apply in specified
circumstances.
(12) An order
under subsection (11) may include incidental, consequential or transitional
provision and may make provision with retrospective effect.”
(2)
The amendment made by subsection (1) has effect in respect of disposals
and acquisitions if the disposal mentioned in new s.75A (1) (a) (inserted by
that subsection) takes place on or after 6 December 2006.
(3)
But –
(a)
the transitional provisions of sub-paragraphs (2) to (5) of paragraph 1
of the Schedule to the Stamp Duty Land Tax (Variation of the Finance Act
2003). Regulation 2006 (SI 2006/3237) continue to have effect in relation to
this section as in relation to that paragraph, and
(b)
a provision of new s75C (inserted by subsection (1) above) shall not
have effect where the disposal mentioned in new s.75A (1) (a) took place before
the day on which this Act is passed, if or in so far as the provision would make
a person liable for a higher amount of tax than would have been charged in
accordance with those regulations.”
Cases Referred to
1.
Escoigne Properties Ltd v ITC [1958] 1 All ER 406
2.
Re United Railways of Havana and Regia Warehouses Ltd [1960] Ch 52
3.
Littlewoods Mail Order Stores Ltd v
IRC [1963] AC 135
4.
Clarke Chapman-John Thompson Ltd v
IRC [1975] STC 567
5.
Abbey National Building Society v
Cann [1990] 1 All ER 1085
6.
Langham v Veltema [2004] STC 544
7.
BMBF v HMRC [2005] 1 AC 684
8.
Corbally-Stourton v R & C Comrs [2008] STC (SCD) 907
9.
HMRC v Barclays Bank plc and another [2008] STC 476
10.
HMRC v Household Estate Agents Ltd [2008] STC 2045
11.
Talisman Energy (UK) Limited v HMRC [2009] UKFTT 356 (TC)
12.
DV3 RS LLP v R & C Comrs [2011] SFTD 531
13.
Vardy Properties v R & C Comrs [2012] SFTD 1398
14.
ALH Group Property Holdings Pty
Limited v CCSR [2012] HCA 6
15.
R & C Comrs v Lansdowne
Partnership [2011] STC 372
16.
R & C Comrs v Lansdowne
Partnership [2012] STC 544
17.
R & C Comrs v Charlton [2012] UKUT 770 (TCC)
18.
Sanderson v HMRC [2012] SFTD 1033
19.
R & C Comrs v DV3 RS LLP [2012] UKUT 399 (TCC)
Textbooks Referred to
20.
Bennion on Statutory Interpretation 5th ed (2008), pp1231-1245
21.
Chitty on Contracts 31st Edn, 19-086-19-088
Witness
Statement of David Nicholas James
22.
Mr James, an Inspector of Taxes at HMRC, provided a witness statement
dated 2 April 2012 and also gave oral evidence. He made the following points:
(1)
In 2008 he investigated a number of SDLT returns where purchasers of
residential properties had used an SDLT avoidance scheme.
(2)
The use of SDLT avoidance schemes was characterised by a low amount of
consideration being declared on the SDLT return than was actually paid for the
acquisition of the property in question as recorded at the Land Registry.
(3)
He conducted a review of the amount of consideration which purchasers
declared on the SDLT return with those declared on the Land Registry forms and
he discovered that the amount of consideration declared in a number of SDLT
returns was lower than that appearing in the Land Registry records and concluded
that an insufficient amount of SDLT had been paid in respect of those
transactions.
23.
The data from the Land Registry was initially obtained from the
commercial website Nethouseprice.com which acquires property price data
from the Land Registry and publishes it on the internet.
24.
He investigated several companies involved in selling SDLT tax
mitigation schemes.
25.
He decided to raise a discovery assessment on a number of purchases
after discovering the difference in purchase consideration stated in the SDLT
form and the Land Registry documentation.
26.
He said at the time in 2008, HMRC was not aware that there were SDLT
mitigation schemes being used in residential properties. He also said it is
very difficult given the substantial number of property transactions to
properly investigate cases where there was a discrepancy between the
information given on the SDLT form and that given to the Land Registry. The
internal checking facilities did not exist for HMRC to find out whether the
price which was being declared was the proper price. He said he found, in a
number of tax mitigation schemes, it was “part of the plan” that SDLT returns
would show a small amount of consideration as a small amount of tax was being
paid on the property purchased.
27.
He explained that the Land Registry was not part of the HMRC and they
operated separately. He had to submit a request and pay a fee to obtain
information on Land Registry transactions just as members of the public were
required to do and this made checking difficult.
28.
He explained at the time there were over a million SDLT returns per year
for the years 2007-2009. This made investigation of individual returns a
substantial task.
Terms
36.
The following terms are used:
(a)
“Original Contract” is the contract between the Vendor and Alpine. This
is not a completed transaction since it is not “substantially performed” (less
than 90% of the purchase price is paid).
(b)
The “Substituted Contract” is the Novation Agreement (14 November 2007)
entered into between the Vendor Alpine and the Appellant. This seeks to
transfer the rights of Alpine to the Appellant.
(c)
The “Secondary Contract” is a notional contract which establishes the
consideration payable for SDLT purchases as the consideration payable to the
Vendor under the Substituted Contract and the amount paid to Alpine for the
transfer of rights. The consideration payable under the Original Contract is
therefore attributable to the Secondary Contract. Performance under the
Original Contract is disregarded and the SDLT charge arises under s44 FA 2003.
Appellant Submissions
37.
The Appellant makes four main submissions
Submission 1
38.
That s.45 FA 2003 is “engaged”. The wording of s.45 (1) (b) FA 2003 –
“an assignment, sub-sale or other transaction” allows a novation to fall within
that definition. It is not a sub-sale or assignment but it is an “other
transaction” whereby a third party becomes entitled to call for a conveyance.
39.
The Appellant says that s.45 (3) does not necessarily assume that the
Original Contract is still in existence and survives the sub-sale.
40.
The Ejusdem Generis rule of interpretation, a reference to a
specific class followed by a general reference, does not apply to s.45 FA 2003
(Bennion on Statutory Interpretations 5th edn (2008), pp. 1231-1245)
and the expression “or other transaction” encompasses a novation.
Submission 2
41.
In this submission the Appellant focuses on the consideration which is
liable to SDLT.
42.
Under the Substituted Contract (Novation) the Vendor releases Alpine in
consideration of Mr Allchin agreeing to perform the Original Contract. The new
purchaser under the Original Contract is now Mr Allchin.
43.
In looking at the consideration payable on a sub-sale, the Appellant says
that a payment of only 9.6% of the purchase price, i.e. £237,000, was paid by Alpine.
Section 45(3) FA 2003 seems to envisage that Mr Allchin would have paid Alpine
an amount equivalent to what Alpine had already paid the Vendor. In fact, no
payment was made between Mr Allchin and Alpine (transfer was by gift) and Mr
Allchin took over the liabilities of Alpine under the Original Contract.
44.
Section 45(3)(b) FA 2003 says that the consideration payable under the Secondary
Contract is “so much of the consideration of the Original Contract, as is
attributable to the subject matter of transfer of rights and is to be given
(directly or indirectly) by the transferee or a person connected with him and
(ii) the consideration given for the transfer of rights,”
45.
The Appellant says that the words “is to be given” means a future
payment rather than payments made and therefore only applies to outstanding
consideration. It does not apply to the total consideration. To that extent,
the legislation ignores any consideration already paid by Alpine prior to the
Substituted Contract.
46.
The Appellant’s submission is that the words “so much of the
consideration under the original contract … to be given directly or indirectly
by the transferee or a person connected with him” can be confined to the
amounts payable under the Substituted Contract by Mr Allchin and do not
encompass amount already paid under the Original Contract. This means that the £1,856,250
payment on 14th November 2007 should be left out of account for SDLT
purposes. Alternatively if the tax mitigation scheme was not undertaken
properly, the SDLT consideration should be £2,212,500 rather than £2,450,000
which takes account of the £237,500 deposit. These are submissions made in the
alternative.
47.
The Appellant says that there was no consideration passing between
Alpine and Mr Allchin and that any consideration paid by Alpine drops out and the
only relevant consideration for SDLT is that paid by Mr Allchin.
48.
Since Mr Allchin had no legal obligation to make any payment to the
Vendor, the sums paid before the Substituted Contract or Novation would
therefore drop out and not be included in the payment by him under the
Secondary Contract.
Submission 3
49.
The Appellant’s third submission concerns s.75A FA 2003, under which the
steps in a composite transaction can be amalgamated for tax purposes into a
notional disposal by the Vendor to Mr Allchin.
50.
The Appellant draws reference to the words “in connection with” in s.75A
(1) (b). These words also appear in s.45 (3) FA 2003. The Appellant says that
the words should be given a narrow meaning so the transaction from the Vendor
to Alpine is not a scheme transaction because that contract is novated to Mr
Allchin and in effect there is only one transaction, which is the sale from the
Vendor to Mr Allchin.
51.
Section 75 therefore does not apply.
Submission 4
52.
The Appellant’s fourth submission concerns the assessment. The relevant
provisions are the administrative provisions regarding returns as set out in FA
2003, ss.76-78A and Schedule 10. The Appellant’s submissions on this point are
best made if one quotes directly from their skeleton argument.
53.
The Appellant states:
“The
legal question is: having regard to the public sources of information about
land prices as well as the price paid given in the TR1, was the information
given in Box 10 of SDLT 1 information made available from which the
hypothetical reasonable inspector could reasonably have been expected to infer
that there was an insufficiency in the tax declared? Put differently, will
non-disclosure of the use of a sub-sale scheme inadequate disclosure?”
54. The Appellant proposed that within
the scope of “process now, check late” procedure for self assessment, should
the hypothetical reasonable inspector have inferred from the information in the
return that something unusual might have occurred, giving rise to a loss of
tax, and requiring some further action on his part within the Inquiry window?
55. The Appellant says that on
the face of the return a reasonable inspector would have made further inquiry
and “inaction beyond the inquiry window was not justified”. He submits that
there was “no ground for the making of a discovery assessment under the
relevant provisions.”
56.
In summary the Appellant says that the tax mitigation was successful and
the Appellant owes only £10,690 of SDLT declared in his SDLT 1 form. The
sub-sale relief provisions are engaged, some or all of the consideration
provided for the purchase price is excluded and the anti-avoidance provision in
s.75A FA 2003 is not engaged.
Respondents’ submissions
57.
Perhaps it is best to summarise the Respondents’ submissions as follows:
(a) Section
45 FA 2003 is not engaged therefore SDLT on the full purchase of £2,450,000
arises to the Appellant as purchaser of the Property pursuant to section 44 FA
2003.
(b) Alternatively,
if the Respondents are wrong and s45 FA 2003 is engaged, then the full amount
of the £2,450,000 consideration paid by the Appellant to the Vendors represents
the consideration for the transaction completed by virtue of the deemed Secondary
Contract under s.45(3)(b)(i) FA 2003.
(c) Alternatively,
the arrangements are caught by section 75A FA 2003 with the result that SDLT is
due on the full £2,450,000 received by the Vendors.
58.
The Respondents say that the issue of the discovery assessment to the
Appellant is to make good to the Crown the amount of SDLT lost on account of his
understatement of the chargeable consideration for the acquisition of the
Property.
59.
The Respondents say that s.45 FA 2003 requires the Original Contract
between the Vendors and Alpine to be in existence at the time of the sub-sale.
This was accepted as common ground between the parties. The Respondents further
say that the Novation brings an end to the Original Contract before the new
Contract comes into existence. Consequently there is no transfer of Alpine’s
right under the Original Contract to Mr Allchin. Consequently there is no
“transfer or rights” from Alpine to Mr Allchin.
60.
The Respondents say that if they are wrong on the engagement of s.45 FA
2003 then only the deposit (£237,500) is to be taken out of the consideration
since the Appellant has not proved the timing of the transactions, which is to
say that the Novation took place between the two transfers of cash. The two
relevant times are 12.23 and 12.32. While there is evidence of instructions
given to the bank there is no evidence of when the bank acted on the
instructions or when the Novation actually took place.
Discussion
61.
The key issue in this case is whether s.45 FA 2003 is engaged. The
Respondents say it is not and the Appellant say it is.
62.
Section 45 FA 2003 is a complex action. It governs the situation where
there is a contract for a land transaction and where that transaction is to be
completed by a conveyance after an assignment, sub-sale or other transaction,
relating to the whole or part of the subject matter of the contract. A person
other than the original purchaser becomes entitled to call for the conveyance
to be made directly to him or her as the case may be. The person to whom the
Contract is transferred, the transferee if you like, is not treated as entering
into a land transaction as a result of the assignment, sub-sale or other
transaction, which means that there is no SDLT or reporting obligations under
the law. Pursuant to s.45 FA 2003, once the assignment, sub-sale or other
transaction has been entered into there is a Secondary Contract for a land
transaction. The transferee is treated as the purchaser and the consideration
on which SDLT becomes payable is the aggregate of the consideration under the
Original Contract given directly or indirectly by the transferee or a connected
party together with the consideration given for the assignment, sub-sale or
other transaction itself.
63.
In order to qualify for sub-sale relief, it is important that the
Original Contract is not “substantially performed” before completion and the
Original Contract and Secondary Contracts are completed at the same time. The
Original Contract is disregarded for SDLT purposes and the transferee only
being liable for SDLT. The original purchaser drops out.
64.
The idea behind sub-sale relief is that if a buyer “transfers his
rights” under the Original Contract before it is substantially performed or
completed and there is no liability to SDLT. The SDLT is paid only by the
person who takes a transfer of those rights. The term “transfer or rights”
includes sub-sale, assignments and other arrangements. The Appellant propose
that it includes a novation.
65.
In a sense sub-sale relief is automatic. If the parties satisfy the
requirements set out in s.45 FA 2003 then one qualifies for the sub-sale relief
and no further claim is required. In essence, s45 requires the following:
(a)
The contract is for a land transaction which is to be completed by a
conveyance;
(b)
There is an assignment or other transaction which results in a person
other than the original buyer becoming entitled to call for a transfer of the
land to him or her; and
(c)
There are two contracts in place and the first contract takes place at
the same time as, and in connection with, the substantial performance or
completion of the second contract.
66.
If these conditions are satisfied, the effect of s.45 is then to
disregard the first contract for the purposes of SDLT. The second purchaser or
transferee is not treated as entering into a land transaction by virtue of the
sub-sale and there is a notional contract between the first purchaser and the
second purchaser which is called the Secondary Contract, under which the
chargeable consideration for SDLT arises.
Is section 45 FA 2003 engaged
67.
The requirements in s.45 FA 2003 for the section to be engaged there
must be both a transfer of rights and the Original Contract must continue to be
in existence. The section states that it applies when:
(i)
a contract for a land transaction (“the Original Contract”) is entered
into under which the transaction is to be completed by a conveyance s.45(1)(a);
and
(ii)
there is an assignment, sub-sale or other transaction (relating to the
whole or part of the subject matter of the Original Contract) (“transfer of
rights”) as a result of which a person other than the original purchase becomes
entitled to call for a conveyance to him: s.45 (1) (b).
68.
The section contemplates that “a person other than the original
purchaser to become entitled to call for a conveyance to him at the time when
the original contract is “to be completed”.
69.
The requirements in s.45 (1) (a) and s.45 (1) (b) are cumulative and the
secondary purchaser must become entitled to call for a conveyance at the time
when the completion of the original contract remains outstanding. The idea of
the transfer of rights is that both the Original Contract and the notional
secondary contract are treated as part and parcel of the same transaction.
70.
This is borne out by s.45 (3) FA 2003 which anticipates that the
original contract would be substantially performed or completed “at the same
time as, and in connection with, the substantial performance or completion of
the secondary contract”. When this occurs, the substantial performance or
completion of the Original Contract is ignored. Section 45(3) postulates the
existence of a secondary contract where the Appellant is charged to tax as the
purchaser. For this reason, the acquisition by the transferee is the only
chargeable transaction and the consideration is calculated, in part, by the
transaction effecting the transfer of rights. A transfer of rights is
essentially one transaction with two parts.
71.
Let us examine the facts. The method used to transfer rights from
Alpine to Mr Allchin is a novation. Under a novation the rights and
obligations of one party are not transferred to a third party. Rather, a novation
extinguishes one contract and replaces it with another, under which a third
party takes up rights and obligations duplicating those of the party to the
original contract. All the parties to the original contract, which is to say
the Vendor and Alpine and incoming party, Mr Allchin, must consent to the novation
for it to be valid. This makes it different from an assignment. Chitty on
Contracts 31st edn at para.19-088 states:
“It
should, however be noted that the effect of a novation is not to assign or
transfer a right or viability, but rather to extinguish the original contract
and replace it with another.”
72.
The use of a novation therefore meant that there is no “transfer of
rights” from Alpine to Mr Allchin. It is the ending of a contract and its
replacement with another. It is therefore not a transfer.
73.
The existing case law supports the view that the original contract must
continue to exist.
74.
The First-tier Tribunal in Vardy Properties v. R&C Commissioners
[2012] SFTD 1398 stated:
“The
parties agreed that, for s.45 FA 2003 to apply, the “original contract”
referred to in s.45(1)(a) must still be extant (i.e. incompleted) at the time
when the “transaction” referred to in s.45(1)(b) occurred. We agreed that this
is inherent in the structure of the two provisions when read together.”
75.
This view agrees with the Upper Tribunal’s analysis in HMRC v. DV3 [2012] UKUT 399 (TCC) which states:
“[26]
It can at once be seen that s45 is dealing with a wide variety of different
factual situations, the common feature of which are that –
(a)
there is an original contract, which is do to be completed by
conveyance, and
(b)
as a result of a further transaction relating to the whole or part of
the subject matter of the original contract, someone other than the original
purchaser becomes entitled to call for a conveyance.”
76.
There is no doubt that for s45 to be engaged there must be a transfer of
rights at a time when the Original Contract is alive since that contract is only
treated as completed when the secondary contract is completed or substantially
performed. The legislation contemplates its continued existence until that
time.
77.
Was there a transfer of rights by virtue of the Deed of Novation? Under
the novation the Original Contract is cancelled by mutual agreement and as such
there is effectively a rescission of that contract. It is clear that the
original debtor, Alpine, is discharged from their liability but that is
distinct and separate from the acceptance by Mr Allchin of the position of
substitute debtor. He enters into a new contract with the Vendor to buy the
Property.
78.
In commenting on a Novation, the Court in Re United Railways of Havana & Regia Warehouses Limited [1961] Ch.52 Jenkins LJ stated:
“The
discharge of the original debtor must proceed, and is distinct from, the
acceptance by or imposition upon the creditor of the substituted debtor. It
follows from this although the elements of statutory novation may, and usually
will, be comprised in one statute or decree and, for practical purposes, operates
simultaneously, each has nevertheless a separate and distinct legal identity.”
79.
Ms McCarthy for the Respondents say that there is no transfer of rights
from the Original Contract to Mr Allchin because the rights obtained by the new
contracting parties flow from a new contract. This seems a sensible view.
80.
This view is supported by the case of ALH Group Property Holdings Pty
Ltd v. The Chief Commissioner of State Revenue, a decision of the High
Court of Australia which states at para.27:
“Handley,
AJA was also correct to identify the rescission of the existing 2003 Contract
as essential to its novation. “Novation” is a term derived from the Civil Law;
Lord Selbourne LC observed in Scarf v. Jardine and therefore from Roman
Law. The term applied in two classes of cases: where the parties to a contract
make a new contract, with new obligations, implying the rescinding and existing
contract; and, more commonly, by agreements, where “the obligation of a third
party is by express agreement accepted by one party to an existing contract
with the consent of the other party, who, by the new contract, is released from
his obligation under the original contract.”
81.
It must therefore be correct to say that there is no transfer of rights
but rather the ending of one contract and the assumption by the new purchaser
of the same obligations under a separate and distinct contract. For that
reason, there is not a time when both contacts co-exist.
82.
The terms of the Deed of Novation itself are interesting. It clear that
the contract was brought to an end and Alpine was discharged from its
obligations under the Agreement. A new agreement was entered into for the sale
of the Property between the Vendors and Mr Allchin.
83.
The Deed of Novation provides in recital (B) as follows:
“The
parties hereto have agreed to transfer the rights and obligations of the Vendor
under the Agreement to the Substitute Purchaser (the Appellant) in accordance
with the terms of this Deed. Accordingly, the agreement between the Vendors
and the Purchaser (Alpine) is cancelled and replaced by an Agreement by the
Vendors and the Substitute Purchaser.
84.
The contract is therefore “cancelled” by mutual agreement between the
parties so releasing each other from all obligations under the Agreement.
85.
Clause 2.1.1 of the Deed of Novation provides:
“The
Vendors release the Purchaser from the obligation to purchase under the
Agreement in return for the Substitute Purchaser’s obligation to purchase the
Property pursuant to the terms of this Deed.”
86.
Clause 2.1.2 provides:
“The Purchaser agrees to the
cancellation of the Agreement.”
87.
It is common ground between the Appellant and Respondent that both
contracts must continue to exist for the purposes of s.45 FA 2003. It is clear
that they did not exist at the same time.
88.
Mr Southern for the Appellant says that there was the first funding
(£1,856,250) followed by the novation agreement which was followed by a second
transfer of funds £356,250 to complete the purchase. The transfer was between
solicitors’ accounts and at the time of the first transfer Mr Allchin had no
legal obligations to make any payments to the Vendor and therefore that sum
cannot be included in the payment by him under the Secondary Contract. This
would mean only the £356,250 is charged to SDLT.
89.
The Tribunal finds that there is no evidence that the Novation actually
took place at that time which is between the two payments.
90.
The Appellant has not been able to prove that a novation took place
between the two transfers, which is to say between 12.23 and 12.32 on 14th
November 2007. We understand that Alpine and Mr Allchin each signed separate
documents called a Deed of Novation. We know that two transfers of £1,856,250
and £356,250 took place and instructions were given to the bank. There is no
evidence of when the bank acted on the instructions to transfer and when the
actual transfer took place in November. There is no evidence from the bank or
the scheme providers as to when the execution of the Novation took place.
91.
It would have been possible for the Appellant to call witnesses or to
provide documentary evidence to support their submission that the novation took
place between the two transfers but the Tribunal finds that this has not been
done. In the circumstances therefore the Tribunal finds that there is no
evidence that the novation took place between the two transfers of money. This
is a question of evidence and the Appellant has been unable to prove its case or
to discharge the onus placed on them.
92.
What then are our conclusions? The parties agree that there is a
requirement for the contract between the Vendors and Alpine to stay in
existence at the same time as the Secondary Contract between the Vendors and Mr
Allchin. It is clear that the use of a novation was not clearly thought out
from a legal point of view in implementing the tax mitigation scheme. A novation
brings the Original Contract to an end. For this reason, there was no transfer
of rights as anticipated by the legislation but rather the ending of the Original
Contract and the entering into by the Appellant of an entirely new contract
with the Vendor. For this reason, the legal effect of the transaction entered
into does not satisfy the statutory requirement at s.45 (1) FA 2003.
93.
Mr Southern makes an argument around the concept of scintilla
temporis. He used the House of Lord’s decision in Abbey National Bank
Society v. Cann & Others [1919] 1 All ER 1985 where the Court looked at
the rights of a person with an equitable interest in a home to remain in
occupation, where a bank sought repossession. The question was whether the
legal estate which vested in the purchaser was, from the outset, subject to the
Banks’ rights. The Court said:
“…
the transaction necessarily involve conveyancing steps which, in contemplation
of law, must be regarded as taking place in a defined order, so that there is a
“scintilla temporis” between the purchaser’s acquisition of the legal
estate and the creation of the Society’s charge during which the estoppel could
be fed.”
94.
In the Tribunal’s view there is no such scintilla temporis in
this case. The circumstances are different. In a novation one contract is
extinguished and replaced with another, as night follows day, there is no
period when they both existed together. The doctrine does not have a place
where there is the formation of altogether new contracts.
Consideration
95.
The purpose of the transfer of rights provisions is to prevent a double
charge to tax. In this case, given that the Original Contract has been novated;
the notional Secondary Contract calculates the chargeable consideration and the
Appellant is substituted for Alpine under the Original Contract by the Deed of
Novation. In the original sale contract it is provided that the “Seller will
sell and the Appellant will buy the Property for the Purchase Price”. The
Purchase Price is contractually defined as £2,450,000. The chargeable
consideration on which the Appellant must pay SDLT is the aggregate of the
consideration given by him and under the Secondary Contract. Under s.45 (3) (b)
(i) the consideration which the Appellant gives, “directly or indirectly” is
considered as part of the chargeable consideration. It was clear that the
£237,500 paid by Alpine was paid for and on behalf of the Appellant. Alpine
did not have use of those funds and it was not its funds at any point. The
whole purpose of providing Alpine with those funds was to allow a deposit
payment on behalf of the Appellant.
96.
The observation of the Court in Vardy is instructive when looking
at the chargeable consideration point. It is stated there:
“A
pre-ordained scheme has been established in which C, at an early stage provides
the cash to B which will ultimately be used by B to pay A for the purchase of
the property. In those circumstances, we are satisfied that when, as a result
of a later step in the scheme, there is a transfer of rights which ultimately
entitles C to call for a conveyance of the property, it can be said that A’s
purchase price, though it will be received from B, is “to be given indirectly by
C within the meaning of s.45 (3) (b) (i).”
97.
In this case, Mr Allchin provided all of the purchase money. There was
no other source of funds. The Tribunal finds that the £237,500 deposit was
paid by Mr Allchin.
98.
Mr Southern said that the words “is to be given” in s.45 (3) (b) carries
with them a reference to the future rather than back to the past and are intended
to apply only to the outstanding consideration, not the total consideration.
99.
In other words, it refers only to monies given by the Appellant after
the transfer of rights. The words require one to identify that part of the
consideration due under the Original Contract which the Appellant is obliged to
give (directly or indirectly) as a result of the transfer or rights. In his
view the Tribunal must look entirely at the Secondary Contract which is a
hypothetical construct for SDLT purposes. He says that the words “so much of
the consideration under the Original Contract … to be given directly or
indirectly by the transferee or a person connected with him” can be confined to
the amounts payable under the Substituted Contract by Mr Allchin plus any
amounts given to Alpine.
100. The Tribunal
does not accept this interpretation of the provision. In this case, the Original
Contract has to be read as if Mr Allchin had agreed to purchase the Property
for the Purchase Price as stated in Clause 2.1.3 – 2.1.5. If Mr Allchin had
not completed the purchase, he would have been sued for the Purchase Price. He
alone is responsible for the completion and the payment under the contract.
101. Furthermore,
even if Mr Southern is right, that the expression “is to be given” refers to
consideration given after the novation, there is no evidence that the sum of
£1,187,500 was paid to the vendors before the Deed of Novation was executed.
The Appellant has failed to discharge the burden of proving the time and date
of this transfer. There is no clear evidence to pinpoint when the Novation
took place.
102. Given that the
Appellant has been unable to provide any evidence of the timing of the
different tranches of payment and given the fact that the entire purchase price
was provided either directly or indirectly by Mr Allchin, the Tribunal finds
that the entire amount of £2,450,000 is the chargeable consideration. The
Tribunal accepts the reasoning in the Vardy case regarding the
consideration which is provided pursuant to Clause 45(3), where there is a
pre-ordained transaction. The facts support an indirect payment from Mr
Allchin.
103. In the
circumstances, the Tribunal finds that Mr Allchin provided the entire consideration
pursuant to the terms of s.45 (3). It should be added in caution that there
may be cases when indirect consideration may not be considered part of the
chargeable consideration. It is not for this Tribunal to explore all those
situations.
Discovery assessment
104. In the case of
every notifiable transaction a land transaction return must be delivered within
30 days of the effective date of the transaction. The effective date is
ordinarily the date of completion. The return must contain a declaration that
it is complete and correct.
105. HMRC may give
notice of an inquiry into a return within 9 months of the filing date. If
after the close of the inquiry window, or after completion of an inquiry, HMRC
discover that the assessment to tax of a chargeable transaction is less than
the correct amount of tax, they may issue a discovery assessment.
106. A discovery
assessment may only be made in a case where either (a) the underpayment of tax
is due to the fraudulent or negligent conduct of the taxpayer or a person acting
on his behalf or (b) at the time when HMRC ceased to be entitled to start an inquiry
they could not have been reasonably expected, on the basis of the information
available to them, to have been aware of the underpayment of tax.
107. The general time
limit for assessments is 6 years after the effective date of the transaction or
in the case of fraudulent or negligent conduct; the time limit is 21 years.
108. In this case,
the SDLT 1 form was lodged on 20th November 2007 by Big Bracket and
the inquiry window closed on 13th September 2008. A discovery
assessment was issued to Mr Allchin on 11th December 2009, which was
past the inquiry period.
109. Fraudulent or
negligent conduct is not alleged in this case.
110. The Appellant
says in their Further and Better Particulars that there was no loss of tax,
they state:
“The
discovery assessment dated 11th December 2009 was invalid because
there was no loss of tax to discover.”
“The
SDLT paid … had been correctly accounted for in the amount due by law.”
111. If the Appellant
challenged the discovery assessment on the ground of no loss of tax, then given
the findings of the Tribunal on s.45 FA 2003, that is the end of the matter.
112. However, the
Appellant raised another point. He says that the HMRC’s approach of “process
now, check later” does not justify “prolonged inaction, where there are grounds
to suspect that something may be amiss”. They say that “HMRC’s hypothetical
officer ……… would have been sufficiently aware having regard to the relevant
context of the property market and there was therefore no ground for making a
discovery assessment under the relevant provisions.” This raises a second
argument.
113. Mr Southern said
that from the SDLT 1 form HMRC should have been aware that a Central London property
should go for considerably more than was declared. They should have gone to the
Land Registry and checked the price and realised that there was a tax scheme
and more tax had to be paid. We heard evidence from Mr James that HMRC did not,
at that time, have adequate facilities for checking house prices. They used
the site available publicly called nethouseprice.com.
114. The Appellant’s
main contentions are as follows:
(a)
That the consideration provided on SDLT 1 form was lower than one would normally
have expected but that this was discoverable should HMRC have referred to the
public websites or gone to the Land Registry to check to TR1; and
(b)
HMRC were aware at the time that avoidance schemes in relation to high
value residential properties were in use and should have been alerted by the circumstances
that there was a scheme in progress.
115. We heard
evidence from Mr James that this was not quite the case. HMRC had very little
knowledge at that time that stamp duty schemes were being undertaken for
residential properties. This has changed over the years. It seems that the
facilities available to HMRC officers for checking stamp duty schemes and
prices relating to residential properties were very limited and there were over
3 million conveyances at the time which would have made the task very onerous.
116. The Appellant
draws reference to the Upper Tribunal’s decision in R&C Commissioners v.
Charlton [2012] UKUT 770 (TCC) (“Charlton”) where the Tribunal
stated at para.58:
“There
is no single eponymous hypothetical officer. Nor is there any single benchmark
of the knowledge and experience the hypothetical officer should be expected to
have. The test of reasonable awareness must be applied to the circumstances of
each case… The test of reasonable awareness must in our view be applied to the
particular context in which the question arises and without regard to any
perceived lack of expertise or specialisation of individual officers ...”
117. On this test,
the Appellant says that the hypothetical officer did not act expeditiously or
reasonably.
118. Let us look at
the law. HMRC can raise a discovery assessment pursuant to paragraph 28(1) of
Sch.10 which states:
“an amount of tax that ought
to have been assessed has not assessed.” if under Sch.10, Para. 30(3):
… at the time they
–
(a) ceased to
be entitled to give a notice of inquiry into the return, …
…
could not have been
reasonably expected, on the basis of the information made available to them
before that time to be aware of the situation mentioned in paragraph 28(1)…”
119. It is necessary
to establish the state of Mr James’ knowledge by reference to what information
had been made available by the Appellant or those acting on his behalf, on 13
September 2009. This is the time the inquiry window closed. As explained by Ms
McCarthy, he had no information from the Appellant or anyone acting on their
behalf other than disclosed on the face of the SDLT 1 form.
120. From the
evidence given by Mr James, he said that he first became aware of Big Bracket’s
involvement with SDLT avoidance schemes and Ashton Court’s involvement, who
were named in the SDLT 1 as the Appellant’s agent, in December 2008. This is
approximately three months after an inquiry window had closed.
121. The second point
consideration is what is regarded as “information made available to” HMRC under
Sch.10, para.30 (4). In this regard, the only information was the SDLT form
which contained no express notice that the Appellant had entered into a tax
avoidance scheme. It would have been advisable for the Appellant to make a
fuller disclosure by writing a separate letter to HMRC explaining the
circumstances surrounding a transaction. This was not done. In other words,
the Appellant did not supplement the information in the SDLT 1 form with a more
complete disclosure of the facts and circumstances of the transaction. This
would have been a reasonable disclosure to make.
122. A few points can
be made regarding the information. First, even if one looks at nethouseprice.com,
it can be seen that other properties at the address of the purchase property
would have gone for prices in or around £400,000 and considering that the SDLT
1 forms stated £356,250 it was entirely plausible that this could have been a
property being sold in that location. Secondly, there is no requirement for
HMRC to investigate and they did not have to investigate in this case. Under
the self-assessment scheme it is the taxpayer who must tell HMRC what the tax
should be and it is up to the taxpayer to get it right by providing requisite
and sufficient information on which HMRC can make a determination of the tax
liability.
123. This view is
supported in the case Langham (Inspector of Taxes) v. Veltema [2004] EWCA Civ 193 where the Court of Appeal pointed out (at 552):
“The
test in s.29 (5) is awareness of actual insufficiency; here, neither the return
nor the associated documents made the Inspector aware of any actual
insufficiency, nor, for that matter, did the P11D, even if relevant for the
purpose. There is no obligation in the statute to oblige the Inspector to make
inquiries unless he is put on notice by the information made available by the
taxpayer as to the insufficiency of the return.”
124. The Court went
on to say that (at page 553) the question which must be asked is:
“…
what is the relevant information before the Inspector on the basis of which he
could be said to have been reasonably expected to be aware of an
insufficiency? Is it simply that emanating from the taxpayer and any inference
that would reasonably be expected to be inferred from it.”
125. The Court went
further in discussing the new self-assessment scheme at that time and stated
that the purpose is to “simply bring about early finality of assessments of
tax, based on an assumption of an honest and accurate return and accompanying
documentation by the taxpayer.”
What emerges
is from the case of Veltema and later on from Charlton is that the onus is on the taxpayer or his agent to
clearly alert HMRC to the insufficiency of the assessment. It is up to the
Inspector to assess the available information. The Inspector is not to have
attributed to him further information that he might have obtained if he had
carried out his own investigation prior to the end of the inquiry window. In Charlton, the court sought to clarify the
test to say that officers should be aware of possible deficiencies based on
information made available and not whether the officer has sufficient
information to enable him to estimate the deficiency. The point is that the
Inspector had very little information disclosed to him.
126. It is clear HMRC
did not have sufficient information and were not under an obligation to make
further checks of the type described by Mr Southern and were therefore entitled
to make a discovery assessment for the loss of tax. They were not aware, based
on the available information, at 13 December 2008 that there was a problem. They
did not know there was a tax mitigation scheme in progress, the parties such as
Big Bracket and Ashton Court were unknown to them and it was only through
enquiries otherwise that they came to realise that a discovery assessment
should be made. The low price of itself would not be enough to alert the
Inspector of a tax mitigation scheme. There are many reasons why a property
price would be low, for example, a house with subsidence or there are issues
relating to planning and the neighbourhood. The arguments of the Appellant,
though interesting, are not persuasive.
127. In the
circumstances the Tribunal therefore finds that the discovery assessment was
validly made.
CONCLUSIONS
1.
The Tribunal has been asked not to proceed to s.75A FA 2003 if the
finding is that s.45 FA 2003 is not engaged. The Tribunal finds that the s. 45
FA 2003 is not engaged for the reasons given above. The land transaction to be taxed
is the sale from the Vendors to the Appellant with a chargeable consideration
of £2,450,000.
2.
In the circumstances the Tribunal, as requested by the parties, did not
explore fully section 75A FA 2003, an anti-avoidance provisions dealing with
scheme transactions.
3.
The Tribunal finds that the discovery assessment is valid.
4.
The appeal is therefore dismissed.
5.
The parties may apply separately on matters of costs.
DR K KHAN
TRIBUNAL JUDGE
RELEASE DATE: 27 March 2013
