Trinity
Term
[2018] UKSC 30
On appeal from: [2016] EWCA Civ 485
JUDGMENT
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Project
Blue Limited (Respondent) v Commissioners for Her Majesty’s Revenue
and Customs (Appellant)
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before
Lady Hale, President
Lord Hughes
Lord Hodge
Lord Lloyd-Jones
Lord Briggs
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JUDGMENT GIVEN ON
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13 June 2018
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Heard on 28 February and 1 March 2018
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Appellant
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Respondent
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Malcolm Gammie QC
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Roger Thomas QC
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Hui Ling McCarthy
QC
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(Instructed by HMRC
Solicitors Office)
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(Instructed by Clifford
Chance LLP)
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LORD HODGE: (with whom
Lady Hale, Lord Hughes and Lord Lloyd-Jones agree)
1.
This appeal is concerned with Stamp Duty Land Tax (“SDLT”), which was
introduced by the Finance Act 2003 (“the FA 2003”) to replace Stamp Duty, a tax
on written instruments which had been the subject of many successful tax
avoidance schemes. The principal question in the appeal is whether Project Blue
Ltd (“PBL”) is due to pay SDLT of £50m arising out of its purchase from the
Ministry of Defence (“the MoD”) of the former Chelsea Barracks in Chelsea
Bridge Road, London. Since its enactment, the FA 2003 has been amended on
several occasions. This appeal is concerned with that Act as it existed on 31
January 2008.
2.
Two issues lie at the heart of the appeal. The first concerns the
relationship between section 45 of the FA 2003, which provides what is often
called “sub-sale relief” where there is a transfer of rights to a contract for
a land transaction which is to be completed by a conveyance, and section 71A of
that Act, which creates exemptions for alternative property finance which
complies with the prohibition of usury in Shari’a law. The first issue does not
arise in relation to transactions after 24 March 2011 because of an amendment
to section 45(3) of the FA 2003 which was made by the Finance Act 2011, to
which I refer in para 33 below. The second issue concerns the correct
interpretation of the anti-avoidance provisions in section 75A of the FA 2003,
which was introduced by the Finance Act 2007. If the anti-avoidance provisions
do not apply to the transactions, PBL is not liable to pay the SDLT which HMRC
claims; if they do apply, there is a dispute over the amount of SDLT which is
due and who was or is liable to pay it.
3.
PBL purchased the Chelsea Barracks through a sealed bid deadline tender
process for the price of £959m and exchanged contracts with the Secretary of
State for Defence on 5 April 2007. A 20% deposit was paid on exchange of
contracts and the balance of the price was to be paid in four equal
instalments. Completion of the purchase was postponed by the contract until 31
January 2008 to allow the MoD to re-house the troops from the barracks. The
principal shareholder in PBL was Qatari Diar Real Estate Investment Company
(“QD”), which was owned by the Qatari Investment Authority, a sovereign wealth
fund owned by the Qatari government. QD provided the funding for the initial
deposit but PBL required to obtain finance for the purchase of the barracks
from Qatari Bank Masraf al Rayan (“MAR”), a Qatari financial institution which provided
a portfolio of Shari’a-compliant products, and which syndicated the finance for
the purchase.
4.
Financial institutions, which seek to comply with the Islamic
prohibition on usury, have adopted structures for financing deals which do not
involve lending in return for interest and the taking of security for the
repayment of the borrowed sums and interest by means of a mortgage. One such
form of Shari’a -compliant financing, known as Ijara finance, was used to fund
the purchase of the barracks. PBL’s written case (paras 14 and 15) contains a
convenient summary of the paradigm forms of Ijara arrangements, which I quote
in full:
“14. Such transactions are
likely to occur in one of two categories of case. In the first, the
counterparty wishes to acquire a property from a third party and requires
funding to enable it to do so. The financial institution buys the property from
the third party, leases it to the counterparty and, at the same time, grants
the counterparty an option to acquire the financial institution’s interest at a
later stage. In the event that the counterparty has some, but insufficient,
capital to acquire the property, each party can take an undivided share in the
land; and the rent charged by the financial institution takes account of its
reduced interest.
15. In the second case, the
counterparty already owns the property but wishes to obtain funds to use for
another purpose. In this case the Ijara involves the counterparty selling his
own interest in the property to the financial institution and taking a lease
back, together with an option to repurchase.”
HMRC in para 44 of their written case described the two
situations in which Ijara finance was used in essentially similar terms and
stated (as is clearly the case) that section 71A was drafted with those
situations in mind.
5.
The funding of the purchase of the barracks was an adaptation of the
first of the two categories. I set out the transactions in the following steps
so as to assist understanding of the arguments which follow in relation to the
tax consequences of the transaction:
(1)
5 April 2007: PBL and the MoD entered into a contract to purchase the
barracks.
(2)
29 January 2008: PBL contracted to sub-sell the freehold to MAR.
(3)
29 January 2008: MAR agreed to lease the barracks back to PBL.
(4)
31 January 2008: On completion, (a) MAR and PBL entered into call and
put options respectively entitling or requiring PBL to repurchase the freehold
in the barracks; (b) the MoD conveyed the freehold in the barracks to PBL; (c)
PBL conveyed the freehold in the barracks to MAR, and (d) immediately after
that, MAR leased the barracks back to PBL.
On 1 February 2008 PBL granted a 999-year lease to its
subsidiary, Project Blue Developments Ltd (“PBDL”) with call and put options
for the purchase of the freehold, but that transaction is not relevant to this
appeal. As will be seen, it is not disputed that stages 4(b) and (c) brought
into play the sub-sale relief provided by section 45 of the FA 2003, while it
is contested whether stage 4(c) engaged the exemption for alternative property
finance which section 71A(2) of the Act provides. This is the first of the two
principal issues mentioned in para 2 above.
6.
On 1 February 2008, Clifford Chance LLP submitted a notification
“Disclosure of Tax Avoidance Scheme” in accordance with the Stamp Duty Land Tax
Avoidance (Prescribed Descriptions of Arrangements) Regulations (SI 2005/1868).
The notification stated:
“No SDLT is payable by [PBL] on
the sale from [the MoD] to [PBL] by virtue of sub-sale relief under section
45(3) Finance Act 2003. No SDLT is payable by [MAR] on the sale of the property
from [PBL] to [MAR] by virtue of alternative property finance relief under
section 71A(2) Finance Act 2003.”
Such a notification is not an acknowledgement that the
arrangements were entered into for the purpose of tax avoidance. Arrangements
are notifiable under section 306(1) of the Finance Act 2004 if they enable, or
might be expected to enable, any person to obtain a tax advantage and are such
that one of the main benefits that might be expected to arise from the
arrangements is the obtaining of that advantage. The focus of the statutory
provision is on the consequences of the arrangements and not on the intention
of the parties who enter into them.
7.
On 22 February 2008 several land transaction returns were filed in
relation to these transactions. Three are relevant to this appeal. First, a
return lodged on behalf of PBL, which related to the completion on 31 January
2008 of the contract of 5 April 2007 between the MoD and PBL, claimed that
there was no liability to SDLT because of the sub-sale relief in section 45(3)
of the FA 2003. Secondly, a return lodged on behalf of MAR related to the
completion on 31 January 2008 of the sale agreement between PBL and MAR dated
29 January 2008. The consideration was stated to be £1.25 billion, which was
the Sterling equivalent of US$2,467,875,000 which was specified in the sale
agreement. In the return MAR claimed “alternative property finance relief”
under section 71A of the FA 2003. Thirdly, a return was filed relating to the
grant by MAR of a lease to PBL on 31 January 2008. Again, “alternative property
finance relief” was claimed under section 71A. The consequence was that the
taxpayers claimed that nobody incurred a liability to SDLT as a result of the
completion of those transactions.
8.
HMRC opened an inquiry into the SDLT returns which had been submitted in
relation to these transactions. In relation to the first return, which was
lodged on behalf of PBL, HMRC concluded the inquiry by a closure notice
contained in a letter dated 13 July 2011, which amended that return by
adjusting the amount of SDLT due from £0 to £38.36m. This sum is the SDLT which
would be due on the completion of the sale by the MoD to PBL for the
consideration of £959m if that were a chargeable transaction. PBL now argues
that HMRC were not empowered to amend that return as they did. I discuss this
challenge under the heading “The ‘wrong return’ challenge” in paras 81-84
below. HMRC did not require any amendment to the other land transaction returns
as a result of their inquiry. But when PBL appealed the amendment of the
return, HMRC successfully applied to amend its case to increase the amount of
SDLT due from £38.36m to £50m. This was because the total consideration which
MAR agreed to provide to PBL was £1.25 billion, and, at first sight at least,
£50m would be the tax due on that transaction. I discuss those figures in
greater detail below.
9.
The sale contract which PBL and MAR entered into on 29 January 2008 involved
payments by instalments which were subject to contingencies (clause 4.1 and
4.2). The fourth tranche of consideration, which was US$378,670,740 payable on
31 January 2011, was never paid because the arrangement was terminated on 1
March 2010. This is relevant to the dispute about the actual consideration and
PBL’s human rights challenge which I consider in paras 57-80 below.
The Finance Act 2003
10.
Part 4 of the FA 2003 introduced SDLT into British tax law. It is a tax
on land transactions (section 42(1)). A “land transaction” is “any acquisition
of a chargeable interest” (section 43(1)); and a “chargeable interest” is
defined (in section 48(1)) as including “an estate, interest, right or power in
or over land in the United Kingdom” other than an exempt interest. A “security
interest”, which is “an interest or right (other than a rentcharge) held for
the purpose of securing the payment of money or the performance of any other
obligation” (section 48(3)), is an exempt interest (section 48(2)). Thus, in
relation to land purchases and conventional property funding arrangements in
the United Kingdom, the tax is levied on the acquisition of chargeable
interests, such as freehold or leasehold interests in land, while security
interests, including those which secure the financing of such acquisitions, are
exempted.
11.
When persons enter into a contract for a land transaction under which
the transaction is to be completed by a conveyance, section 44(2) provides that
they are not regarded as entering into a land transaction by reason of entering
into the contract. Thus steps (1) and (2) in para 5 above would not of
themselves give rise to any liability to SDLT. Instead, if the transaction is
completed without previously having been substantially performed, the contract
and the transaction effected on completion are treated as parts of a single
land transaction, whose effective date is the date of completion (section
44(3)). If the contract is not completed but is substantially performed (for
example, if the purchaser takes possession of the subject matter of the
contract or a substantial amount of the consideration is paid) the contract is
treated as if it were the transaction provided for in the contract and its
effective date is when the contract is substantially performed (section 44(4)
and (5)).
12.
It is common ground in this appeal that section 45, which creates
sub-sale relief by modifying the operation of section 44, applies in relation
to the completion of the two contracts for the sale of the barracks (steps (1)
and (2) in para 5 above) to prevent a charge to tax on the completion of the
contract between the MoD and PBL at step 4(b) in para 5 above. Section 45 (as
amended by section 49 of and paragraph 2 of Schedule 10 to the Finance (No 2)
Act 2005) provides:
“(2) The transferee is not
regarded as entering into a land transaction by reason of the transfer of
rights, but section 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 substantial performance or completion of the secondary contract shall
be disregarded except in a case where the secondary contract gives rise to a
transaction that is exempt from charge by virtue of subsection (3) of section
73 (alternative property finance: land sold to financial institution and
re-sold to individual).”
The consequence of the tailpiece of section 45(3) was
that the completion of the contract between the MoD and PBL for the purchase of
the barracks was disregarded.
Section 71A
13.
The FA 2003 as originally enacted contained an exemption for Ijara
financing in section 72. Section 71A was added in April 2005 by section 94 of
and paragraph 2 of Schedule 8 to the Finance Act 2005 and applies in place of
section 72, except in relation to land in Scotland, to which sections 72 and
72A apply. Section 71A(1) sets out the scope of the section; it
provides:
“(1) This section applies
where arrangements are entered into between a person and a financial
institution under which -
(a) the institution
purchases a major interest in land or an undivided share of a major interest in
land (‘the first transaction’),
(b) where the interest
purchased is an undivided share, the major interest is held on trust for the
institution and the person as beneficial tenants in common,
(c) the institution (or the
person holding the land on trust as mentioned in paragraph (b)) grants to the
person out of the major interest a lease (if the major interest is freehold) or
a sub-lease (if the major interest is leasehold) (‘the second transaction’),
and
(d) the institution and the
person enter into an agreement under which the person has a right to require
the institution or its successor in title to transfer to the person (in one
transaction or a series of transactions) the whole interest purchased by the
institution under the first transaction.”
14.
The section therefore has the scope to cover the contracts between PBL
and MAR at steps (2), (3) and (4)(a) in para 5 above. The section then spells
out the exemptions which it confers on Ijara arrangements as follows. First,
subsection (2) exempts the first transaction (the institution’s purchase of a
major interest in land) if the vendor is the counterparty to the arrangement
with the financial institution (or is another financial institution which has
provided Ijara finance to that person). It provides:
“(2) The first transaction is
exempt from charge if the vendor is -
(a) the person, or
(b) another financial
institution by whom the interest was acquired under arrangements of the kind
mentioned in subsection (1) entered into between it and the person.”
15.
Secondly, subsection (3) exempts from charge the grant of the lease of
the subjects to the counterparty by providing:
“The second transaction is exempt
from charge if the provisions of this Part relating to the first transaction
are complied with (including the payment of any tax chargeable).”
16.
Thirdly, subsections (4), (5) and (7) exempt from charge the
re-conveyance by the financial institution of the major interest in land to the
counterparty. They provide:
“(4) Any transfer to the
person that results from the exercise of the right mentioned in subsection
(1)(d) (‘a further transaction’) is exempt from charge if -
(a) the provisions of this
Part relating to the first and second transactions are complied with, and
(b) at all times between
the second transaction and the further transaction -
(i) the interest purchased
under the first transaction is held by a financial institution so far as not
transferred by a previous further transaction, and
(ii) the lease or sub-lease
granted under the second transaction is held by the person.
(5) The agreement mentioned
in subsection (1)(d) is not to be treated -
(a) as substantially
performed unless and until the whole interest purchased by the institution
under the first transaction has been transferred (and accordingly section 44(5)
does not apply), or
(b) as a distinct land
transaction by virtue of section 46 (options and rights of pre-emption).
…
(7) A further transaction
that is exempt from charge by virtue of subsection (4) is not a notifiable
transaction unless the transaction involves the transfer to the person of the
whole interest purchased by the institution under the first transaction, so far
as not transferred by a previous further transaction.”
17.
Section 71A therefore reflects the two paradigm forms of Ijara finance
set out in para 4 above. First, if the financial institution purchases the
property from a third party, that transaction is not exempted under subsection
(2) and the financial institution pays SDLT on completion or the substantial
performance of that contract; but the lease to the party who is being financed
and the eventual transfer of the interest by the financial institution to that
party on repayment of the financing are exempt under subsections (3) and (4)
respectively. Secondly, if the financial institution purchases the property
from the counterparty whom it is financing, subsection (2) applies to exempt
the transfer of the major interest in land to the financial institution and
subsections (3) and (4) exempt the second transaction (the lease) and the
further transaction (the re-transfer of the major interest in land to the
counterparty).
18.
Because the arrangements for financing the purchase of the barracks
involved PBL completing its purchase and its sale of the barracks to MAR on the
same day in a connected transaction, PBL, as I have said, claimed sub-sale
relief under section 45(3). Because MAR had purchased the barracks from PBL in
the context of an Ijara arrangement, it claimed exemption under section 71A(2)
for that purchase and a claim was also submitted on behalf of PBL for exemption
under section 71A(3) for the lease to PBL.
19.
When HMRC amended PBL’s return to assert a liability to pay SDLT of
£38.36m, PBL appealed to the First-tier Tribunal (“the FTT”). Before the FTT
the parties agreed that the combined effect of sections 45(3) and 71A was to
exclude any liability to SDLT on the part of PBL or MAR in relation to the
transactions unless the anti-avoidance provisions of section 75A applied to the
transactions. The arguments before the FTT therefore concentrated on the
meaning and application of section 75A, to which I turn later in this judgment.
But when the appeal came before the Upper Tribunal (the “UT”), PBL changed its
position. It continued to argue that it was not liable for SDLT on its purchase
of the barracks from the MoD because of its entitlement to sub-sale relief
under section 45(3). But it now argued that MAR was not entitled to exemption
on its purchase of the barracks under section 71A(2) (para 14 above) because,
on a proper understanding of the related provisions of the FA 2003, PBL was not
the “vendor” of the barracks to MAR under that subsection. The tailpiece of
section 45(3) (para 12 above) required that the completion of the sale by the
MoD to PBL be disregarded and that tax was due on the notional contract created
by section 45(3). Giving effect to that disregard and the notional contract
meant that the vendor of the barracks was the MoD, and not PBL. The exemption
in section 71A(2) therefore did not apply and MAR would have been liable to pay
SDLT on the purchase price of £1.25 billion, if HMRC had not failed to so
determine or to assess MAR within the six-year time limit since the
transaction.
20.
This argument did not succeed before the UT (Morgan J and Judge Nowlan).
Morgan J, with whom Judge Nowlan agreed in relation to section 71A held, at
para 43, that the purpose of the section was “to equate the position of a
provider of an alternative form of finance (such as MAR), who acquires a
chargeable interest, with the position of a funder who acquires a security
interest (which is an exempt interest)”. He relied on section 45(5A) which I
discuss in para 32 below, in interpreting “the vendor” in para 71A(2) as
referring to PBL but also pointed out that his interpretation promoted the
purpose of section 71A. If PBL were correct in its submission, SDLT would be
paid on the level of funding provided by the financial institution and not on
the price paid by the “borrower” for the land. He acknowledged that his
interpretation meant that neither PBL or MAR was liable to pay SDLT in respect
of the transactions unless section 75A applied, but considered the legislation
to be flawed at the relevant time because the tailpiece of section 45(3) did
not contain an exception to the disregard where the sub-sale was exempt from a
charge under section 71A.
21.
The Court of Appeal (Patten, Lewison and Underhill LJJ) [2018] 1 WLR 368
disagreed with the Upper Tribunal’s interpretation of the relationship between
section 45(3) and section 71A. Patten LJ began by observing, at para 28, that
HMRC’s approach by its reliance on section 75A produced “a particularly inapt
and harsh result” because PBL would have to pay SDLT on the larger sum which
MAR provided to it rather than on the purchase price which it paid to the MoD.
Secondly, he held that PBL could not be “the vendor” in section 71A(2) because,
as a result of the disregard of the transaction between the MoD and PBL in the
tailpiece of section 45(3), the only contract by which MAR acquired the
barracks for SDLT purposes was the secondary contract under that subsection. He
referred to the Court of Appeal’s earlier judgment in DV3 RS LP v Revenue
and Customs Comrs [2014] 1 WLR 1136 (“DV3”) in support of his
analysis: “vendor” in section 71A(2) must be a reference to the person from
whom MAR purchased the barracks; that person could not be PBL as, by virtue of
the disregard, it had no chargeable interest so as to be regarded as entering
into the secondary contract, which under section 45(3) was a contract for a
land transaction. He rejected Mr Gammie’s submission on behalf of HMRC that section
71A was not addressing land transactions “in the SDLT world” but was framed to
address transactions “in the real world”, and also his submission relying on
section 45(5A). Thirdly, he considered that the scheme of section 71A was to
limit SDLT in all cases to a single charge on the acquisition of the property
from the third party vendor, whether the acquirer was the financial institution
or its customer. Fourthly, he thought that it was unlikely that Parliament had
intended to leave transactions, which fell within both of sections 45(3) and
71A, exempt from any SDLT charge and to have dealt with the problem by the
anti-avoidance provisions of section 75A, which was introduced over a year
later. The “vendor” under section 71A(2) was therefore the MoD, and not PBL,
with the result that that subsection did not exempt MAR from the charge.
22.
Lewison LJ added two further points. First, he disagreed with the
approach of the Upper Tribunal which equated the position of MAR with a
traditional lender and saw the aim of section 71A as being that SDLT was to be
paid by purchasers and not financiers. As under an Ijara arrangement the
financial institution owned the asset for the duration of the lease, it was not
surprising that it should be liable to pay SDLT on the purchase. Secondly,
because section 75A did not apply until 20 months after section 71A had taken
effect, the result of HMRC’s approach was that no SDLT would have been payable
on transactions which combined sub-sale relief and the section 71A exemption in
that period. This provided “a very strong context” which made it inappropriate
to apply an extended meaning of “vendor” in section 45(5A): para 49.
23.
I recognise the difficulty in interpreting the legislation which has
been subjected to repeated incremental amendments and additions since 2003, as
Parliament has struggled to optimise this new tax. But I have come to the
conclusion that the Upper Tribunal was correct in concluding that PBL was “the
vendor” under section 71A(2) and therefore that MAR’s purchase of the barracks
from PBL was exempt from SDLT for the following four reasons.
24.
First, it is in my view significant that Parliament has chosen, when
describing the alternative property finance transactions to be exempted from
charge in section 71A, and also in sections 72, 72A and 73, not to use the
language of “land transaction” and “chargeable interest” but to use what Mr
Gammie described as the language of “real world” transactions. Parliament also
adopted this practice in paragraphs 2-4 of Schedule 3, which exempt specified
transactions from charge. Thus in section 71A(1)(a) the first transaction is
described as the purchase of “a major interest in land” and in subsection
(1)(c) the second transaction is described as the granting of “a lease” out of
the major interest. This contrasts with the language of sections 42-45 which
are concerned with the statutory constructs of land transactions, contracts for
land transactions, and the acquisition and disposal of chargeable interests.
25.
As descriptions of “real world” transactions the provisions of section
71A match the paradigm descriptions of Ijara arrangements in para 4 above so
that in the first example, when the financial institution purchases the
property from a third party and then finances its customer’s acquisition by
means of a lease and a contract to purchase, the institution pays SDLT on its
purchase but not on the financing arrangements which follow, whereas in the
second example, where the financial institution purchases the property from its
customer, that purchase and the subsequent transactions are exempt. The
distinctive treatment of the two examples is achieved by section 71A(2) which
exempts “the first transaction” from charge if the vendor is the customer of
the financial institution (or a financial institution which has previously
provided Ijara finance to that customer). It appears to me that in enacting the
section using “real world” terms, Parliament has sought to describe the two
paradigms of Ijara finance. In the second example, in which subsection (2)
exempts “the first transaction”, the customer may have purchased the major
interest in land and paid SDLT on that purchase, or he may have received the
major interest in land as a gift or through inheritance and therefore have
incurred no charge to SDLT. It is not relevant to the application of section
71A(2) to ask whether or not the customer has incurred a liability to pay SDLT
before entering into the Ijara arrangement. Subsection (2) requires one only to
ask the “real world” question: “who sold the major interest in land to the
financial institution?” If the answer to that question is “the customer”, no
charge to SDLT would arise. In the present case, if one asks, “who sold the
barracks to MAR?”, the answer is PBL.
26.
Secondly, this approach is consistent with the aim of section 71A, which
the UT identified, of seeking to equate Ijara financing with conventional
lending in the United Kingdom by taxing the purchaser of the property and
exempting the financier. In conventional lending, security interests are exempt
in all circumstances (section 48(2)). Section 71A operates as a self-contained
statutory regime to achieve this result. As was stated in the Explanatory Notes
to the original clauses 72 and 73 of the Finance Bill 2003 the aim was to place
the amount of tax due on purchases by means of Islamic financing “on a level
footing with the amount due for purchases with ‘conventional’ mortgage
products”. Thus in the case where the financial institution purchases from its
customer, the whole transaction may be seen as the equivalent of a security
transaction. In the case where the financial institution purchases from a third
party, that purchase may be seen as a precursor of the equivalent of a security
transaction effected by the lease and the conferring on the customer of the
right to buy the property from the financial institution.
27.
Thirdly, there is nothing within section 71A which suggests that the
exemption in subsection (2) will not apply when the sale by the customer to the
financial institution is a sub-sale which takes place contemporaneously and in
connection with the customer’s purchase of the major interest in land. What
Parliament appears to have overlooked at the outset is the possibility of the
combination of sub-sale relief with the exemption of Ijara arrangements.
28.
Fourthly, this interpretation has the benefit (subject to the operation
in particular cases of section 75A which I discuss below) that, where the
financial institution purchases the property from its customer, SDLT will not
be charged on the amount which the financial institution provides its customer,
which may in many circumstances be significantly less than the purchase price
of the property, for example where the customer has provided a proportion of
the purchase price of the land from its own resources. In some cases, as here,
the amount which the financial institution contracts to provide may be
significantly more than the purchase price of the property which the customer
has paid. It is of note that the interpretation of section 71A(2) which the
Court of Appeal has favoured in the context of a sub-sale has the effect of
imposing a tax charge by reference to the amount which the financial
institution provides the customer. This would not achieve the level footing
which the section was designed to achieve.
29.
In DV3 the Court of Appeal was addressing relief under paragraph
10 of Schedule 15 to the FA 2003 which was available when a person transfers a
chargeable interest to a partnership of which he is a partner. In that case the
partner (A) purchased a lease from an insurance company (C) and transferred the
lease to a newly created partnership (B) of which A and four others were the
partners. Both contracts were completed on the same day. A claimed sub-sale
relief under section 45(3) and also relief for B (the partnership) under
paragraph 10 of Schedule 15. The claim for the Schedule 15 relief failed
because the section 45(3) disregard prevented A from acquiring a chargeable
interest from C, and paragraph 10 of Schedule 15 applies only if a partner
transfers a chargeable interest to a partnership. Lewison LJ, when discussing
the definition of “land transaction” in section 43(1), stated, at para 23:
“the fact that B acquires a
chargeable interest as the result of an instrument giving effect to a
transaction between him and A does not necessarily entail the proposition that
the interest in A’s hands was itself a chargeable interest. If there is no land
transaction, there cannot have been the acquisition of a chargeable interest.”
He continued at para 30:
“Paragraph 10 of Schedule 15 to
the 2003 Act is not so much concerned with the acquisition of a chargeable
interest by a partnership as the transfer by a partner of a chargeable
interest. It looks at a transaction from the perspective of the transferor. …
It seems to me to be clear that a partner cannot transfer a chargeable interest
to a partnership unless he has a chargeable interest to transfer.”
30.
HMRC accept as correct the Court of Appeal’s analysis in DV3 but
argue that the case casts no light on the correct interpretation of section
71A(2) because it is irrelevant to the operation of that subsection whether the
completion of the sale from the MoD to PBL was a “land transaction” for the
purpose of SDLT with the result that PBL acquired a chargeable interest.
Equally, it is irrelevant to the interpretation of section 71A(2) whether or
not the transaction between the customer and the financial institution is a
land transaction. When the FA 2003 spoke of “the vendor” in section 71A and in
the equivalent subsections in the other sections exempting alternative property
finance, it was referring to the vendor in the “real world” transaction of the
sale of the major interest in land. It was not concerned with whether or not
the “real world” transaction was a “land transaction” for the purposes of SDLT.
Accordingly, HMRC submit that section 43(4), which defines “vendor” in
relation to a land transaction in Part 4 of the FA 2003 as “the person
disposing of the subject-matter of the transaction” is not in point. For the
reason set out in paras 24 and 25 above, I agree. It follows that the disregard
in the tailpiece of section 45(3) has no bearing on the operation of section
71A(2).
31.
A consideration which influenced the Court of Appeal in reaching its
view on section 71A(2) was that Parliament could not have intended to leave
transactions which involved a sub-sale financed by an Ijara arrangement (and
thus fell within both section 45(3) and section 71A) free of charge for over
one year before it introduced the anti-avoidance provision of section 75A. I
see the force of this point; it is without question a legitimate method of
purposive statutory construction that one should seek to avoid absurd or
unlikely results. But SDLT was a new tax created by the FA 2003 and, as I have
said, required repeated amendments to make it effective. It is not surprising
that lacunas may have existed in the early years of a new tax.
32.
In the early years of the tax, Parliament enacted amendments to close
identified lacunas caused by the combination of sub-sale relief and exemptions.
Thus section 45(5A) was inserted into the FA 2003 by section 296 of and
paragraph 5 of Schedule 39 to the Finance Act 2004. It provided:
“In relation to a land transaction
treated as taking place by virtue of subsection (3) -
(a) references in Schedule
7 (group relief) to the vendor shall be read as references to the vendor under
the original contract;
(b) other references in
this Part to the vendor shall be read, where the context permits, as referring
to either the vendor under the original contract or the transferor.”
This provision would not have needed to define “the
vendor” for the purpose of group relief in para (a) as it did if, consistently
with the Court of Appeal’s reasoning, the disregard in the tailpiece to section
45(3) operated already to make “the vendor” a reference to the vendor under the
original contract. Similarly, the insertion by the Finance (No 2) Act 2005 into
the tailpiece of section 45(3) of the words of exception (ie “except in a case
where the secondary contract gives rise to a transaction that is exempt from
charge by virtue of subsection (3) of section 73 (alternative property finance:
land sold to financial institution and re-sold to individual)”) would not have
been required to impose a charge to SDLT. If the Court of Appeal were correct
in holding that the “vendor” in section 71A(2) had to have a chargeable
interest and that the tailpiece of section 45(3) prevented it from having such an
interest, sections 72(2), 72A(2) and 73(2), which are similarly worded, would
operate in the same way in the context of a sub-sale so that the “vendor” in
each case could not be the customer.
33.
The parties have not explained to the court what prompted each of the
various amendments, but Parliament may have been responding to particular
schemes which had the effect of avoiding SDLT. HMRC explained in their written
case that section 75A, which the Stamp Duty Land Tax (Variation of the Finance
Act 2003) Regulations 2006 (SI 2006/3237) and section 71 of the Finance Act
2007 inserted into the FA 2003, was a response to the formulation of tax
avoidance schemes which combined reliefs (including sub-sale relief) and
exemptions in ways which Parliament had not intended. As will be clear when I
turn to section 75A, it has a very broad ambit. The problem of tax avoidance by
combining sub-sale relief and the exemptions for the various forms alternative
property finance was capable of a more focussed resolution. While subsequent
amendments are not a legitimate tool in ascertaining prior parliamentary
intention, it is relevant to note that the problem of the combination of the
sub-sale relief and those exemptions was eventually resolved by a simple
expedient. In section 82 of and paragraph 2 of Schedule 21 to the Finance Act
2011 Parliament amended the exception in the tailpiece of section 45(3) to
read: “except in a case where the secondary contract gives rise to a
transaction that is exempt from charge by virtue of any of sections 71A to
73 (which relate to alternative property finance)” (new wording emphasised).
This amendment, like those referred to in para 32, would not have been needed
to create a charge to SDLT if the interpretation which the Court of Appeal
favoured were correct.
34.
The courts adopt a purposive approach to the interpretation of taxing
statutes following the guidance of the House of Lords in Barclays Mercantile
Business Finance Ltd v Mawson (Inspector of Taxes) [2005] 1 AC 684. In
accordance with that guidance, summarised by Lord Nicholls of Birkenhead at
para 32, the court asks itself two questions. First, it must determine the
nature of the transaction to which a statutory provision is intended to apply;
and secondly it must decide whether the actual transaction answers to the
statutory description. If I am correct about the self-contained nature of the
provisions of section 71A, the answer to the first question is that the
exemption in section 71A(2) applies to the “first transaction” of the Ijara
arrangement in section 71A(1) where the customer sells a major interest in land
to the financial institution. The question whether PBL’s sale of the barracks
to MAR answers that description is answered in the affirmative. A purposive
construction will not always operate in favour of HMRC and against the taxpayer
as MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311 shows.
Similarly, if there are lacunas in a statutory regime which enable tax
avoidance, a purposive interpretation may not always remove them as the Court
of Appeal’s judgment in Mayes v Revenue and Customs Comrs [2011] STC 1269 shows.
35.
I therefore conclude that, but for section 75A, the combination of the
operation of sub-sale relief under section 45(2) and (3) and the exemption
under section 71A(2) relieved the sale by the MoD to PBL and exempted the sale
by PBL to MAR from a charge to SDLT.
36.
An argument against this approach, which has attracted Lord Briggs, is
that section 71A(2) must be construed as exempting a transaction which would
otherwise be a chargeable transaction under Part 4. The only transaction which
is so chargeable, so the argument goes, is the completion of the notional
secondary contract which section 45(3) creates, and section 45(5A)(b) gives
instructions on the identification of the vendor in the notional land
transaction. Because the identification of “the vendor” in section 45(5A)(b)
depends on the context in which the word is used and that context would give
rise to the avoidance of tax if “vendor” referred to the transferee because the
combination of sub-sale relief and section 71A(2) would exempt both
transactions, it is argued that “the vendor” in section 71A(2) must refer to
the original vendor, ie the MoD. I do not agree. In relation to the first
point, the statement that a transaction is exempt from charge, such as that in
section 71A(2) referring to “the first transaction”, is an unqualified
statement that a transaction of that description is free from a liability to
pay the tax. That exclusion of liability is not removed if, for some extraneous
reason such as the operation of sub-sale relief under section 45, the
transaction in question would not have imposed a liability to SDLT: viz the
first of my four reasons (paras 24 and 25 above). If that is correct, the
second argument does not arise because operation of the exemption does not
depend on section 45(5A)(b).
37.
In any event, if section 45(5A)(b) were relevant, (a) the context of the
use of the word “vendor” was in relation to “real world” transactions and (b)
the history of the amendment of the FA 2003 in the years before the
transactions were carried out on 31 January 2008 suggests that HMRC were
struggling to respond to schemes which exploited lacunas in the legislation. In
that context the existence of a loophole in the tax legislation would not
militate against the interpretation which I favour. This is not to say that a
contextual construction of a statutory provision may not have regard to the
consequences of a particular interpretation and lead one to prefer another
interpretation, especially when the former interpretation would have absurd or
unreasonable results. It is simply to say that in the early years of SDLT
Parliament created a patchwork of provisions, which, for a while, allowed a
transaction, which combined sub-sale relief and Ijara arrangements, what Lord
Briggs correctly calls “an unintended tax holiday”.
38.
I recognise that the exclusion by the Finance (No 2) Act 2005 of the
completion or substantial performance of the first contract from the section
45(3) disregard when the secondary contract would give rise to an exempt
transaction under section 73(3) suggests that the draftsman in 2005 sought to
impose a charge on the first transaction under section 73 while not addressing
a similar problem in section 71A. But that indication of intention at that time
is not sufficient in my view to outweigh the factors which have persuaded me to
regard section 71A, which had been introduced earlier in 2005, as a
self-contained statutory regime which confers exemption on “real world”
transactions. Further, the different treatment in section 45(3) of the
similarly-worded exemptions in sections 71A and 73 at the time of the relevant
transactions has the result, on Lord Briggs’ approach which is focussed on
avoiding tax loss, that “vendor” is interpreted differently under sections
71A(2) and 73(2). While section 45(5A)(b) may allow such an interpretation, I
find HMRC’s explanation of a patchwork of provisions and a lacuna a more
persuasive explanation of the relevant provisions as they were then.
39.
Because, as a result of the combination of sections 45 and 71A(2), there
is no SDLT charge on the sales between the MoD and PBL and between PBL and MAR,
it is necessary to consider the correct interpretation and application of
section 75A, to which I now turn.
Section 75A
(i) Whether and if so
how it applies
40.
Section 75A is headed “Anti-avoidance” and provides:
“(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;
…
(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 subsections (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 section 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.”
41.
The breadth of section 75A was implicitly acknowledged by Parliament
which in section 75C(11) and (12) empowered the Treasury to make an order,
including an order with retrospective effect, which provides that section 75A
is not to apply in specified circumstances.
42.
PBL’s first argument, that section 75A could not apply because it had
not been established that the parties entered into the transactions for the
purpose of tax avoidance, failed before the FTT, the UT and the Court of
Appeal. In my view the tribunals and the Court of Appeal reached the correct
conclusion. The heading of the section, “Anti-avoidance”, is the only
indication in the section which could support PBL’s contention. The heading is
relevant to assist an understanding as to the mischief which the provision
addresses, but it says nothing as to the motives of the parties to the scheme
transactions. There is nothing in the body of the section which expressly or
inferentially refers to motivation. The provision was enacted to counter tax
avoidance which resulted from the use of a number of transactions to effect the
disposal and acquisition of a chargeable interest. It is sufficient for the
operation of the section that tax avoidance, in the sense of a reduced
liability or no liability to SDLT, resulted from the series of transactions
which the parties put in place, whatever their motive for transacting in that
manner. This is clear from subsection (1)(c) which compares the amount of SDLT
payable in respect of the actual transactions against what would be payable
under the notional land transaction in section 75A(4), by which P acquired V’s
chargeable interest on its disposal by V.
43.
Section 75A does not identify who is V and who is P in relation to the
transactions to which the section applies. As there is a number of
transactions, it is possible that more than one person may be V and more than
one person may be P. But Parliament has not conferred a discretion on HMRC to
select whom they wish to treat as V or P. HMRC do not contend otherwise. In Vestey
v Inland Revenue Comrs (Nos 1 and 2) [1980] AC 1170, in which the Revenue
contended that they had a discretion to select whom among a class of
beneficiaries it should assess as liable to tax, Lord Wilberforce identified
the following principles as fundamental objections to that contention, at p
1172:
“Taxes are imposed upon subjects
by Parliament. A citizen cannot be taxed unless he is designated in clear terms
by a taxing Act as a taxpayer and the amount of his liability is clearly
defined.
A proposition that whether a
subject is to be taxed or not, or, if he is, the amount of his liability, is to
be decided (even though within a limit) by an administrative body represents a
radical departure from constitutional principle.”
It is necessary therefore for the courts to analyse the
words of a broadly-worded anti-avoidance provision to identify the persons on
whom Parliament has imposed this charge to tax.
44.
The words of section 75A by themselves do not disclose who is V and who
is P in a particular case. But the mischief which the provision addresses and
the context of the provision within Part 4 of the FA 2003 provide the answer.
The court adopts the purposive approach which the House of Lords sanctioned in Barclays
Mercantile Business Finance Ltd, to which I have referred in para 34 above.
The explanatory notes on clause 70 of the Finance Bill 2007 explained that the
provision was introduced to counter avoidance schemes which have been developed
to avoid payment of SDLT. It appears to be drafted in deliberately broad terms
to catch a wide range of arrangements which result in tax loss. The examples of
scheme transactions which are set out in subsection (3), although merely
examples, give an indication of some at least of the targets of the provision.
The task is to identify where the tax loss has occurred as a result of the
adoption of the scheme transactions in relation to the disposal and acquisition
of the relevant interest or interests in land. This in turn involves
identifying the person on whom the tax charge would have fallen if there had
not been the scheme transactions to which subsection (1)(b) refers and which
exploited a loophole in the statutory provisions.
45.
It is clear from (i) subsection (1)(a), which refers to P acquiring
either V’s chargeable interest “or a chargeable interest deriving from it”, and
(ii) subsection (3)(a), which refers to “the acquisition by P of a lease
deriving from a freehold owned or formerly owned by V” (emphasis added),
that the section may operate not only when P acquires the chargeable interest
directly from V but also when P acquires a chargeable interest, such as a
lease, which is derived from a chargeable interest which V formerly owned. Thus
the section can cover a series of transactions by which V disposes of its
chargeable interest which comes to be acquired by another person and P
ultimately acquires a chargeable interest derived from it from that other
person.
46.
Turning to the application of the section to the transactions in this
case, it is agreed by the parties that V in subsection (1)(a) is the MoD; its
chargeable interest was the freehold in the Chelsea Barracks. I agree. In the
course of the scheme transactions, PBL did not acquire a chargeable interest,
the freehold, when the contract between the MoD and it was completed on 31
January 2008 because the transaction fell to be disregarded under section
45(3); on the same day MAR acquired a chargeable interest, again the freehold,
when its contract with PBL was implemented as a result of the completion of the
notional transaction in section 45(3); and, on the same day, PBL acquired a
chargeable interest, the lease, from MAR. The put and call options were
designed to enable PBL to re-acquire the freehold in the barracks, a result
which was the ultimate aim of the series of transactions summarised in para 5
above. But those options did not result in the acquisition of a chargeable
interest on 31 January 2008. They were nevertheless a “scheme transaction”
within subsection (1)(b) because they were involved in connection with the disposal
and acquisition of a chargeable interest and subsection (2)(d) includes within
the definition of “transaction” under subsection (1) a transaction which takes
place after P acquires the chargeable interest. They are part of the context in
which the scheme transactions, which led to P’s acquisition of a chargeable
interest on 31 January 2008, fall to be analysed as they were the final stage
of the transactions by which MAR was to finance PBL’s acquisition of the
freehold in the barracks.
47.
If the court were to confine its attention to subsection (1)(a) alone,
either MAR or PBL could be P, the former because it acquired a chargeable
interest on its acquisition of the freehold in the barracks and the latter
because it acquired the lease of the barracks from MAR. But the court cannot so
confine its attention. It must go on to analyse how the scheme transactions
gave rise to the loss of tax.
48.
In the real world the nature of the transaction is clear: PBL acquired
the barracks with the benefit of finance from MAR. The sub-sale to MAR and the
lease back to PBL were transactions “involved in connection with” the disposal
by MoD of its chargeable interest, the freehold in the barracks, and the
acquisition by PBL of its chargeable interest, the leasehold interest. The
loophole which has enabled the avoidance of tax is the combination of sub-sale
relief under section 45(3) with the exemption conferred on Ijara financing when
the customer of the financial institution sells its freehold interest in land
to the institution and then leases back the land. The simple means of removing
the loophole, which Parliament eventually identified in 2011, was to exclude
from the disregard in the tailpiece of section 45(3) a case where the secondary
contract was exempt because of sections 71A to 73. Thus it was PBL which
obtained the benefit of the avoidance of tax in relation to the completion of
its contract with MoD.
49.
I recognise that the method which Parliament subsequently chose to
remove the tax loss cannot be decisive. There might have been other ways of
removing the tax loss. For example, it might have been possible to amend
section 71A(2) to remove the exemption of the sale transaction between the
customer and the financial institution if the vendor had benefited from the
section 45(3) disregard and thereby impose the burden on the financial
institution. But, as Judge Nowlan stated in his impressive judgment (para 137),
it is appropriate to have regard to the overall structure of SDLT which seeks
to impose the tax on purchasers and not financiers. The amendment of section
45(3) rather than section 71A(2) had the advantage of preserving this structure
by keeping intact the exemption of the two paradigms of Ijara financing to
which I referred in para 4 above. If the opportunity for tax avoidance were
removed by amending section 71A(2), the consequence would be that SDLT would be
paid on the price which the financial institution paid its customer in the
context of the Ijara financing which, as I have said, might differ
significantly from the purchase price of the major interest in land. Thus I
conclude, like Judge Nowlan, that the error obviously lay in the failure to
disapply the section 45(3) disregard, an error which benefited PBL.
50.
Taking a purposive approach to the interpretation of section 75A,
therefore, I conclude that PBL is P; and, because the completion of the
contract between the MoD and PBL is disregarded under section 45(3), the
chargeable interest which PBL acquires in section 75A(1) is the lease which it
received from MAR.
51.
The parties advanced two alternative approaches to the identification of
P, which I comment on briefly to explain why I cannot accept either approach.
52.
First, PBL submits that the court should adopt a sequential approach and
identify as P the first person who acquires a chargeable interest. As the
completion of the MoD-PBL contract is disregarded under section 45(3), MAR is
that person. But there is no justification in the wording of section 75A for
the adoption of a sequential approach, when applying the section to the
transactions which in fact took place, which stops the search at the first
person to acquire a chargeable interest. One would thereby remove from
consideration the leaseback and the grant of the options which were part of the
contractual scheme which the section is designed to address. That approach
appears to me to be inconsistent with the purpose of section 75A, which is to
prevent a tax loss which otherwise would occur because of the totality of the
connected transactions which have taken place in the real world.
53.
Secondly, HMRC submit that MAR could not be P because section 75A(7)
disapplies section 75A if subsection (1)(c) is satisfied only by reason of
sections 71A to 73. HMRC argues that, from MAR’s perspective, the only
reason why MAR did not incur liability to SDLT on its acquisition of the
freehold interest in the barracks from PBL was because of the exemption in
section 71A. That may be so; but it is irrelevant. Subsection (1)(c) does not
look at the question from the perspective of a party to one of the transactions.
It sets up a comparison between the sum of SDLT payable on all of the connected
transactions and that payable on the notional transaction. Subsection (7) would
disapply section 75A in relation to the transactions in para 5 above only if
the section 71A exemption were the sole reason why the amounts of SDLT payable
on those transactions is less than the amount payable on the notional
transaction. The first of those transactions was the completion of the MoD-PBL
contract and the reason why the sum payable on that transaction was £nil was
because of the section 45(3) disregard. Thus subsection (7) would not disapply
section 75A.
54.
PBL advanced a refinement of this approach in its written case, namely
that if one adds up all of the SDLT which would have been charged if there had
been no sub-sale relief and no exemption for the Ijara finance, it is only the
section 71A exemption which takes the tax due on the scheme transactions below
that due on the notional transaction in the subsection (1)(c) balance. Subject
to its challenge on the quantum of the charge on the notional transaction,
which I discuss below, PBL presents the sums payable on the four transactions
in para 5 above, if there were no sub-sale relief and no section 71A exemption,
as follows:
(i)
£38.36m in respect of the MoD-PBL transfer;
(ii)
£50m in respect of the PBL-MAR transfer;
(iii)
£16.41m in respect of the lease granted by MAR to PBL; and
(iv)
£0 for the option to purchase,
A total of £104.77m
If £50m is payable for the notional transaction, PBL
argues that it is only the section 71A exemption (£50m plus £16.41m) which
takes the sums payable in respect of those transactions below the sum payable
on the notional transaction (ie £104.77m - £66.41m = £38.36m). I do not accept
this approach. I consider that the purpose of subsection (7)(a) is to exclude
the application of section 75A where the only cause of the tax loss
which the section counters is the exemptions available under sections 71A to
73. Those alternative property finance provisions involve a series of
transactions which otherwise might themselves be “scheme transactions” under
section 75A(1)(b) and it is clearly not the purpose of the section to strike at
transactions which go no further than to achieve the intended exemption of alternative
property finance. Where, as here, the combined effect of section 45(3) and
section 71A is to diminish the SDLT payable below that payable on the notional
transaction, section 75A must take effect.
55.
I conclude (i) that PBL is P under section 75A(1)(a), (ii) that the
requirements of subsection (1)(b) also are met because the scheme transactions
are those listed in para 5(4) above, and (iii) addressing the first side of the
balance which subsection (1)(c) mandates, that the sum of SDLT payable in respect
of the scheme transactions is £nil.
56.
It is then necessary to consider the other side of the subsection (1)(c)
balance. It will be recalled that subsection (4) requires that the scheme
transactions which are land transactions be disregarded and establishes in
their place a notional transaction by which P acquires V’s chargeable interest
on its disposal by V. That notional transaction involves PBL acquiring MoD’s
freehold interest in the barracks. Under subsection (6) the effective date of
that notional transaction is 31 January 2008. I turn then to the chargeable
consideration on this notional transaction.
ii) The actual
consideration
57.
Subsection (5) provides, so far as relevant, that the chargeable
consideration on the notional transaction is the largest amount (or aggregate
amount) given by any one person for the scheme transactions. HMRC assert that
that sum is the £1.25 billion which was the purchase price which MAR contracted
to pay to PBL for the purchase of the freehold in the barracks. SDLT, which is
chargeable at 4% on that figure, results in a liability of £50m.
58.
PBL contests this. It points out that the Ijara arrangement was brought
to an end on 1 March 2010, at a time when the fourth tranche of the
consideration under the PBL-MAR sale agreement (US$378,670,740) had not been
paid. Before the FTT, PBL argued that MAR had therefore given consideration of
only £970m and not the higher figure of £1.25 billion. PBL now asserts that the
sterling equivalent of the amount which it had drawn down was approximately
£847m, because paragraph 9 of Schedule 4 to the FA 2003 requires the sterling
equivalent to be calculated at the effective date of the transaction (ie 31
January 2008). The higher figure of £970m was, PBL asserts, based on an
erroneous calculation of the sterling equivalent of each of the US$ draw downs
on its own draw down date. If the consideration which MAR actually paid to PBL
for the conveyance to it of the freehold in the barracks was only £847m, the
largest amount given by one person for the scheme transactions was the £959m
paid by PBL to the MoD.
59.
In my view it is not necessary for this court to determine what is the
correct sterling equivalent of the sums which MAR actually paid to PBL as I am
persuaded, for the reasons set out below, that HMRC are correct that the
consideration for MAR’s purchase of the barracks from PBL was £1.25 billion,
but that PBL may claim a refund for the part of that consideration which was
never paid. Mr Gammie does not dispute that it was open to PBL to make that claim.
PBL asserts that it made that claim after the FTT handed down its decision.
60.
The starting point is paragraph 1(1) of Schedule 4 to the FA 2003 which
defines the “chargeable consideration” in these terms:
“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.”
This provision might appear, by itself, to support PBL’s
case. But section 51 addresses contingent consideration. It provides so far as
relevant:
“(1) Where the whole or part
of the chargeable consideration for a transaction is contingent, the amount or
value of the consideration shall be determined for the purposes of this Part on
the assumption that the outcome of the contingency will be such that the
consideration is payable or, as the case may be, does not cease to be payable.
…
(4) This section has effect
subject to -
section 80 (adjustment where
contingency ceases or consideration is ascertained) …”
61.
Section 80, which provides for the adjustment of a return where a
contingency ceases or the consideration is ascertained, provides so far as
relevant (as amended by sections 299 and 326 of and Schedule 42 to the Finance
Act 2004):
“(1) Where section 51
(contingent, uncertain or unascertained consideration) applies in relation to a
transaction and -
(a) in the case of
contingent consideration, the contingency occurs or it becomes clear that it
will not occur, or
(b) in the case of
uncertain or unascertained consideration, an amount relevant to the calculation
of the consideration, or any instalment of consideration, becomes ascertained,
the following provisions have
effect to require or permit reconsideration of how this Part applies to the
transaction (and to any transaction in relation to which it is a linked
transaction).
(2) If the effect of the new
information is that a transaction becomes notifiable, or that additional tax is
payable in respect of a transaction or that tax is payable where none was
payable before -
(a) the purchaser must
make a return to [HMRC] within 30 days. …
(4) If the effect of the new
information is that less tax is payable in respect of a transaction than has
already been paid -
(a) the purchaser may,
within the period allowed for amendment of the land transaction return, amend
the return accordingly;
(b) after the end of that
period he may (if the land transaction return is not so amended) make a
claim to [HMRC] for repayment of the amount overpaid.”
(Emphasis added in sections (2)(a)
and 4(a) & (b))
62.
PBL submits that because section 51 is subject to section 80 and section
80 requires reconsideration of the manner in which the SDLT code applies, it
was incumbent upon HMRC or the courts to amend the land transaction return to
reflect the actual chargeable consideration and thus the SDLT payable. On that
basis PBL asserts that the FTT erred in allowing HMRC to amend their statement
of case to claim that the amount of SDLT which was payable was £50m. But this
is to mis-read section 80. Subsection (1) speaks of the following provisions
having effect to “require or permit” reconsideration. The use of the
disjunctive conjunction is significant. Subsection (2) requires the
purchaser to make a return where tax has been underpaid; but subsection (4),
which applies where tax is overpaid, permits the taxpayer to amend the
return or to claim the repayment. This statutory asymmetry has the effect that
section 51 operates to tax the contingent consideration and, under section 80,
the taxpayer has to take the initiative to obtain repayment if new information
shows that less tax is payable than has been paid.
63.
There is no scope for the application of the Bwllfla principle,
that where facts are available they are to be preferred to prophecies (Bwllfa
& Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426), where Parliament has laid down the process by which the correct amount
of SDLT which is payable is ascertained.
64.
I conclude therefore that, subject to the human rights challenge, HMRC
are correct in their assertion that the chargeable consideration for the
notional transaction (section 75A(4) and (5)) is £1.25 billion and the SDLT due
thereon is £50m. HMRC’s calculation of that sum as the SDLT due is however
subject to the right to claim under section 80. PBL recorded in its written
case (footnote 134) that it made such a claim shortly after the decision of the
FTT and that HMRC opened an inquiry into that claim, which has been left in
abeyance pending the outcome of this appeal. As HMRC has not addressed this
matter, I need say no more.
(iii) Section 75B and the
human rights challenge
65.
In the UT Morgan J interpreted section 75B, to which I will turn, as
enabling the tribunal to determine that the chargeable consideration on the
notional transaction under section 75A was the £959m which PBL had paid the MoD
for the freehold of the barracks and not the £1.25 billion which MAR had
contracted to pay to PBL. PBL accepts that “on a black-letter reading” of
section 75B, where the financial institution provides more finance than the
price which the customer pays for the land, the section 75A charge on the
notional transaction will take account of the whole of the amount payable for
the chargeable interest which the financial institution acquires. But it
asserts that the manner in which section 75B is drafted indirectly
discriminates against those of Islamic faith who may be expected to adopt
Shari’a financing techniques. Under conventional mortgage financing, SDLT would
have been payable on the consideration for PBL’s acquisition of the freehold in
the barracks from the MoD (£959m) and the security transaction would have been
exempt, notwithstanding that the financial institution had provided additional
finance. By contrast, if Shari’a compliant finance is obtained, the additional
sums provided by the financial institution would be subjected to the SDLT
charge.
66.
PBL argues that the transactions fall within the ambit of article 9 of
the European Convention on Human Rights (“ECHR”) (in particular the freedom to
manifest one’s religion) and of Article 1 of Protocol 1 (“A1P1”) (the
entitlement to the peaceful enjoyment of one’s property and the right not to be
deprived of one’s possessions except in the public interest). Article 14 of the
ECHR requires public authorities to secure the enjoyment of such rights and
freedoms without discrimination on a ground such as religion. PBL submits that
section 3(1) of the Human Rights Act 1998 requires the court to interpret
section 75B in a manner which is compatible with article 14 read with article 9
and A1P1, and so to eliminate discrimination against those of the Islamic
faith.
67.
Section 75B provides (so far as relevant):
“(1) In calculating the
chargeable consideration on the notional transaction for the purposes of
section 75A(5), consideration for a transaction shall be ignored if or in so
far as the transaction is merely incidental to the transfer of 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, … or
(c) if it is of a kind
specified in section 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 of 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 this section 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.”
68.
Absent the question of ECHR compatibility, I am satisfied that section
75B does not assist PBL. Morgan J in the UT sought to use section 75B to avoid
what he saw as an unreasonable result by two means. First, he accepted PBL’s
submission that subsections (1) and (6) refer to the acquisition by P of the
chargeable interest disposed of by V and that interest in this case could only
be the freehold as V (the MoD) did not dispose of the leasehold. Thus the only
transfer which was relevant in section 75B was the transfer of the freehold
from the MoD to PBL, to which the sub-sale by PBL to MAR was incidental.
Secondly, he interpreted the words “in so far as” in subsection (1) as
authorising the apportionment of the consideration which MAR provided to PBL
for the freehold between (a) the sum which reimbursed PBL for the price which
it paid the MoD for the freehold and (b) the sum which MAR agreed to provide to
enable PBL to pay any SDLT which was due and to fund other expenditure. He
referred to PBL’s submission that one could achieve this by reading into
subsection (1) after the words “in so far as” the additional words “the payment
of the consideration or” but said that it was not necessary to do so. I
disagree on both points, for reasons which are essentially the same as those
which Judge Nowlan advanced.
69.
In my view both section 75A and section 75B are difficult provisions to
interpret and to apply to particular transactions. In summary, section 75A has
been drafted in broad terms to catch a range of tax avoidance schemes and
prevent unintended tax losses by the use within a series of transactions of a
combination of reliefs and exemptions; and section 75B reduces the chargeable
consideration of the notional transaction in section 75A(4) by excluding
incidental transactions in that series of transactions from the section 75A(5)
calculation. Looking at the matter in more detail, one starts with the
chargeable consideration on the notional transaction in section 75A(5), which
is calculated by reference to “the scheme transactions” which are the actual
transfer or transfers by which a chargeable interest moves from V to P or P
acquires a chargeable interest deriving from it (section 75A(1)(a)). That
chargeable consideration, as I have said, is the largest amount (or aggregate
amount) given by any one person by way of consideration for the scheme
transactions. Section 75B is framed to remove from those actual transactions
(ie “the scheme transactions” of section 75A(1)(b)) any transactions which in accordance
with its provisions are to be treated as incidental. To achieve this, the
reference in section 75B(1) to “the transfer of the chargeable interest from V
to P” is a reference to the actual transfer or transfers which are the subject
of section 75A(1)(a) and (b).
70.
Support for this view comes from (a) subsection (6) and (b) subsection
(2). Subsection (6) (“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”)
makes clear that subsection (1) covers a case where P acquires from another
party the interest which V has disposed of. Thus section 75B could be applied
to the circumstance where, within the scheme transactions, V sold the freehold
in land to B who sold on that freehold to P. Subsection (2) is framed to place
limits on the scope of subsection (1). Subsection (2)(a), which provides that a
transaction is not incidental “if or in so far as it forms part of a process or
series of transactions, by which the transfer is effected”, is a reference to
the scheme transactions in section 75A(1)(b) in so far as they form part of the
process by which the relevant disposal and acquisition or acquisitions are
made. Subsection (2)(c) provides that a transaction is not incidental if it is
of a kind specified in section 75A(3). That includes (in section 75A(3)(a))
“the acquisition by P of a lease deriving from a freehold owned or formerly
owned by V” and (in section 75A(3)(b)) “a sub-sale to a third person”. To give
effect to subsection (2) and achieve coherence both within section 75B and
between that section and section 75A, the transfer of the chargeable interest
from V to P in section 75B(1) and (6) must extend to the transactions to which
section 75A(1)(a) and (b) and (3) refer, including the sub-sale to the third
person under section 75A(3)(b) (ie PBL’s sale to MAR) and the acquisition by P
of an interest derived from the chargeable interest which V has disposed of
under section 75A(3)(a) (ie the leasehold interest which MAR gave to PBL). This
interpretation is wholly consistent with the purpose of section 75B which is to
reduce the consideration given for the transactions in section 75A(1)(b) which
are to be taken into account in the section 75A(5) calculation of the
consideration on the notional transaction.
71.
I therefore conclude that the transactions which transfer the chargeable
interest from V to P in section 75B(1) include both the sub-sale to MAR and the
grant by MAR of the lease to PBL.
72.
I am also not persuaded by the second argument which Morgan J favoured,
namely that the words “in so far as” in section 75B(1) required the tribunal to
apportion the £1.25 billion consideration which MAR paid between the purchase
price of the barracks and other finance. Those words in subsection (1) appear
to be addressing a composite transaction which in part is necessary for the
disposal and acquisition, to which section 75A(1)(a) refers, and in part serves
some other, incidental, purpose, such as any of those identified in subsection
(3). That cannot assist PBL in this case because of the overriding effect of
subsection (2). It is arguable that subsection (2)(a) may not provide an
answer, for as PBL points out, it uses the same “if and in so far as”
formulation as subsection (1). But subsection (2)(c) is unqualified and
prevents the sub-sale to MAR from being incidental because that transaction was
“of a kind specified in section 75A(3)”, ie a sub-sale to a third person. Any
appeal to the terms of section 75B(3)(c) is excluded by subsection (4)(c) which
overrides it by the operation of the exclusion in subsection (2)(a) and (c).
73.
I therefore conclude that the £1.25 billion consideration which MAR
contracted to pay to PBL is the relevant consideration under section 75A(5)(a)
unless section 3 of the Human Rights Act 1998 requires the court to adopt a
more expansive interpretation of incidental transactions in section75B(1).
74.
PBL’s argument in support of its challenge under article 14 of the ECHR
(para 66 above) is that if a conventional lender were to advance sums to its
customer in excess of the purchase price of the land, the purchaser would pay
SDLT on the purchase price and the financier’s security interest would be
disregarded under section 48. In a section 75A exercise, section 75B(3)(c)
would treat the security transaction (a transaction “undertaken only for a
purpose relating to - … a loan to P secured by a mortgage”) as incidental to
the transfer of the land from the seller to the customer and therefore outside the
calculation of the chargeable consideration for the notional transaction under
section 75A(5). But if, as in this case, the financial institution using an
Ijara arrangement were to provide funds in excess of the purchase price,
section 75A(5) would operate to penalise it by using the larger funding as the
measure of the chargeable consideration on the notional transaction. This, says
PBL, amounts to unjustified discrimination on the ground of religion contrary
to article 14 read with article 9 of the ECHR and A1P1. As I have said, PBL
invites the court to read into section 75B(1) the words “the payment of the
consideration or” after “in so far as” so as to enable the consideration given
by the financial institution for the purchase of land from its customer at the
first step of an Ijara arrangement to be allocated proportionately between the
funding of the land purchase on the one hand and the funding of other
expenditure by the customer on the other so that only the former would count
towards the chargeable consideration on the notional transaction under section
75A(5).
75.
The FTT did not have to consider the merits of this challenge because it
concluded that PBL had not established that it had entered into the Shari’a
compliant financing for religious reasons and that it had therefore not proved
that it suffered discrimination on the ground of religion. Neither the UT nor
the Court of Appeal had to address the argument because the UT by the presiding
member’s casting vote held that the chargeable consideration was £959m and the
Court of Appeal held that section 75A did not apply. I note in passing however
that, but for the expiry of a time limit for HMRC, the Court of Appeal’s
decision would have imposed a liability on MAR of £50m on the chargeable
consideration of £1.25 billion, and in accordance with standard practice in
Ijara arrangements the charge would have fallen on PBL by means of a tax
indemnity.
76.
I have come to the view that this court does not need to consider the
ECHR challenge in detail because the matter can be determined on the simple
bases (a) that any discriminatory effect is objectively justified and (b) that,
in any event, PBL is not a victim. There is in this case no need to delve into
the question whether the FTT was correct in holding that it had not been
established that there was any discriminatory treatment. If one were, for the
sake of argument, to accept that section 75A had had the potential to give rise
to indirect discrimination on the prohibited ground of religion, in cases where
the financial institution using Shari’a compliant financing had provided funds
to its customer beyond what was needed to fund the purchase of land, one would
still need to consider whether the provision giving rise to the discriminatory
treatment was objectively justified.
77.
HMRC advances as justification (a) the need to frame section 75A in
broad terms to deal with the lacunas which were giving rise to tax loss and (b)
the safety valve created by section 75C(11) and (12) which empowers the
Treasury to disapply section 75A in specified circumstances, including making
provision with retrospective effect. Thus HMRC argue that if the provision were
shown to give rise to a systemic or frequent infringement of ECHR rights,
Parliament had provided the mechanism by which such infringements could be
avoided.
78.
In addition, section 75A(7) disapplies section 75A where the
requirements of subsection (1)(c) are satisfied only because of the use of
alternative property finance. Paradigm forms of Ijara arrangements are
therefore protected. It is the tax loss occasioned by the combination of
sub-sale relief and the alternative property finance which has given rise to
the section 75A(5) charge in this case. That circumstance cannot recur after
section 45(3) was amended in 2011. There is no evidence of any widespread use
before 2011 of Ijara arrangements by means of a sub-sale to the financial
institution and involving the provision of funds in excess of the
purchase price of the land, as occurred in this case. And it is that combination
which is the basis of the allegation of discrimination. The fact that a broadly
worded provision may on occasion have a harsh effect on an alternative property
finance transaction which is structured in a particular way is not sufficient
to establish unjustified discrimination under article 14 of the ECHR.
79.
In any event, it is not disputed that PBL has a claim under section 80
for the repayment of any amount which is overpaid. If, as appears to be the
case, the sterling equivalent of the consideration, which MAR actually paid to
PBL for the barracks before the Ijara arrangement was brought to an end, was
less than the £959m which PBL paid to the MoD, it is the latter figure which is
the chargeable consideration under section 75A(5)(a). In that event, PBL is
paying no more than it would have paid if it had used a conventional form of
loan financing. It is therefore not a victim of discriminatory treatment.
80.
I therefore do not accept that article 14 of the ECHR can support the
interpretation of section 75B for which PBL argues.
Procedural challenges
(a) The “wrong return”
challenge
81.
PBL submits that HMRC are in any event not entitled to pursue their
claim for the SDLT because they had no power to amend the SDLT return, lodged
on its behalf, relating to the completion of the contract of 5 April 2007
between the MoD and PBL (para 7 above), because it was not a return relating to
the notional transaction under section 75A.
82.
PBL argues that the return, which referred to the section 45(3)
disregard, was not strictly necessary but was submitted on its behalf in order
to have the purchase of the barracks entered onto the Land Register. It submits
that HMRC, while entitled to inquire into that return under section 76 of and
paragraph 12 of Schedule 10 to the FA 2003 in relation to the sale by the MoD
to PBL, had no power to amend the return in order to impose a liability to SDLT
on the separate, notional transaction. The only avenues which had been open to
HMRC to impose a liability to SDLT on the notional transaction, it submits,
were to make a determination under paragraph 25 of Schedule 10, because no
return had been lodged in respect of the notional transaction, or to make a
discovery assessment under paragraph 28 of that Schedule. As the six-year time
limit for either the determination or the assessment had now expired, HMRC
could no longer seek payment of any SDLT due on a notional transaction.
83.
I do not accept that submission. The answer lies in the terms of
paragraph 13 of Schedule 10, which sets out the scope of the inquiry which HMRC
can make under paragraph 12 of that Schedule, and HMRC’s powers on completion
of the inquiry under paragraph 23. Paragraph 13 provides so far as relevant:
“(1) An inquiry extends to
anything contained in the return, or required to be contained in the return,
that relates -
(a) to the question whether
tax is chargeable in respect of the transaction, or
(b) to the amount of tax so
chargeable. …”
The relevant information contained in the return included
information about the sale of the barracks by the MoD to PBL. To my mind, the
fact that the information in the return was provided to HMRC in relation to a
transaction (the MoD-PBL sale), which was to be disregarded under both section
45(3) and section 75A(4), does not limit the scope of the inquiry. HMRC were
entitled to inquire into the tax consequences of that sale. The powers of HMRC
on completion of the inquiry are set out in paragraph 23 of Schedule 10 which
provides:
“(1) An inquiry under
paragraph 12 is completed when [HMRC] by notice (‘a closure notice’) inform the
purchaser that they have completed their inquiries and state their conclusions.
(2) A closure notice must
either -
(a) state that in the
opinion of [HMRC] no amendment of the return is required, or
(b) make the amendments of
the return required to give effect to their conclusions. …”
HMRC were entitled to inquire into that sale and, on
ascertaining that it was a part of a series of transactions which gave rise to
a section 75A charge, to amend the return to reflect the tax due on the
notional freehold acquisition under section 75A(5). Any obligation on PBL to
submit a return in relation to the notional transaction does not limit the
scope of HMRC’s power to inquire into the MoD-PBL sale or their power to amend
the return under paragraph 23.
84.
I therefore reject this procedural challenge.
(b) Case management
challenges
85.
It is not the normal practice of this court to review case management
decisions of the FTT which have been upheld by the Upper Tribunal as involving
no error of law. Having rejected the argument that HMRC were not entitled to
amend PBL’s SDLT return in relation to the purchase of the freehold from the
MoD, it is not necessary to decide whether the FTT should have granted PBL
permission to amend its notice of appeal to put forward that argument.
86.
The other procedural challenge is PBL’s challenge to the FTT’s decision
to allow HMRC to amend its case to argue that the chargeable consideration was
£1.25 billion and not £959m. It is hard to see how the FTT could have decided
otherwise. Under paragraph 22(3) of the Stamp Duty Land Tax (Appeals)
Regulations 2004 (SI 2004/1363) the FTT is bound to increase the amounts of tax
due if the taxpayer has been undercharged: see (by way of analogy in relation
to section 50(7) of the Taxes Management Act 1970) Glaxo Group Ltd v Inland
Revenue Comrs [1996] STC 191. But, again, having reached the view that PBL
has a claim for repayment of overpaid SDLT under section 80, there is no need
to address this case management decision.
A different approach?
87.
Before the hearing, the court drew the attention of counsel to the
Observations in Bulletin No 78 to Emmet and Farrand on Title (September
2016). The authors there suggested that the courts might have found a simpler
solution to the issues raised in this case if they had had regard to the equitable
maxim that “The test of a mortgage is in substance, not form. If a transaction
is in substance a mortgage, equity will treat it as such, even if it is dressed
up in some other guise, as by the documents being cast in the form of an
absolute conveyance” (Megarry and Wade, The Law of Real Property, 8th ed
(2012), para 25.085). The authors suggested that the transfer of the Chelsea
barracks to MAR in the Ijara transaction should be viewed in English law as a
mortgage, with the result that PBL should have been registered as proprietor of
the freehold and have paid SDLT on its purchase and MAR should have been
registered as the proprietor of a charge, a security interest exempt from SDLT
under section 48.
88.
Both HMRC and PBL submitted written observations in response to this
request. Neither party disputed that Ijara was a method of financing PBL’s
purchase and development of the Chelsea barracks. Indeed, the Ministry of
Defence had accepted that “the Ijara was in the nature of a mortgage” and this
was reflected in the Deed of Clarification entered into between the Secretary
of State for Defence, PBL and Qatari Diar Real Estate Investment Co. But the
purpose of this clarification was to ensure that the provisions in the contract
of sale between the MoD and PBL providing for overage in the event of a sale on
by PBL would not apply to the sale to MAR.
89.
Neither party accepts that, for this or any other reason, the
transactions between PBL and MAR were in substance a mortgage and should be
treated as such. They were real transactions, albeit inextricably linked, and
intended to take effect in accordance with their terms, and there is no reason
for this court to treat them any differently. In particular, there is no need
to protect the interests of PBL, as there used to be to protect the interests
of mortgagors who might otherwise be prevented from recovering their property.
Furthermore, if the effect of treating these linked transactions as a mortgage
were that the rental payments made by PBL were to be regarded as interest on
money advanced to finance the purchase and development, this would run counter
to their whole purpose, which was to comply with the Islamic prohibition of
lending money at interest.
90.
As PBL argues, the issue of the substance of a transaction is a fact
sensitive matter and the burden of proving that the substance is other than the
form falls upon the party suggesting it. In the Upper Tribunal, Morgan J was
alive to the possibility that “in some circumstances, a transaction which takes
the form of an absolute transfer coupled with an option for the transferor to
re-acquire the property from the transferee can be analysed as being in substance
a funding transaction under which the transferee has advanced funds to the
transferor and so that the transfer is by way of security only” (para 26). But
no-one had suggested that before the tribunal and further evidence would have
been necessary had they done so. In those circumstances, and where neither
party supports the alternative approach, it would be quite unfair of this court
to pursue it.
91.
In any event, whatever might be the case in other contexts, it is clear
from the terms of FA 2003 that Parliament did not intend to confer exemption
from SDLT on an Ijara transaction by treating it as the creation of a security
interest under section 48, but instead conferred exemptions under section 71A
by recognising the substance of each of the three transactions within an Ijara.
Thus, it would be contrary to the legislative scheme in FA 2003 to treat MAR as
exempt under section 48 on the basis that it had acquired a security interest.
That is a sufficient answer to the point.
Conclusion
92.
I would allow the appeal.
LORD BRIGGS: (dissenting)
93.
Stamp Duty Land Tax (“SDLT”) is a relatively new tax, designed to
generate broadly the same revenue stream as its venerable predecessor, Stamp
Duty, which had become so easily avoided that it had acquired the unhappy
reputation, among those who could afford skilled advice, of being a voluntary
tax. Introduced in Part 4 of the Finance Act 2003, SDLT was designed around a
wholly new conceptual approach to the identification of the chargeable event in
a sale of land. Generally speaking it was no longer the stamping of a
conveyance, but rather the completion or substantial performance of a contract
for the sale of an interest in land in the UK, which Part 4 calls a land
transaction. It was hoped that this new start would close off many of the
loopholes through which advisers had previously been able to guide their
clients. It is no surprise that, in its infancy, SDLT proved to have its own
unintended loopholes. During its first decade it has therefore been the subject
of frequent tweaking and revision.
94.
Land may be sold and purchased by a chain of contracts, all made before the
completion of any of them. This may occur for example in a rising market, where
the first buyer B “turns” the property to a subsequent buyer C, for an
immediate profit derived from the higher price payable under the second
contract. The second contract is usually called a sub-sale. The first and
second contracts may be completed by a transfer by the original seller A to C,
or by simultaneous transfers from A to B and from B to C. The second contract
may be a separate contract of sale, or an assignment to C of B’s rights under
the first contract.
95.
The SDLT scheme is designed to avoid double taxation of sub-sales, that
is charging the completion of both the AB purchase and the BC purchase or
assignment to a full charge to tax. It does so by taxing neither the AB nor the
BC purchase separately, but rather by taxing an artificial deemed land
transaction, constituted by the notional completion of what is called a secondary
contract, which contains elements of both. This treatment of sub-sales appears
in section 45. Using the ABC example, section 45(3) tells you that the
purchaser under the secondary contract is C, and that the consideration is a
combination of the consideration payable under the AB and BC purchases. Subsection
(5A) rather enigmatically explains that the identity of the vendor under the
deemed land transaction to which the secondary contract gives rise is either A
or B, depending on the statutory context in which it matters.
96.
It was never the objective of Stamp Duty, and is not the objective of
SDLT, that it should tax the financing of the purchase of land. In the UK this
is usually done by lending at interest on the security of a mortgage. Mortgages
are exempt from SDLT. But an increasing number of the purchasers of land in the
UK finance their acquisition by forms of finance which do not offend against
the Shari’a prohibition of usury (a prohibition once applied in Christendom,
but abolished in the UK in the early 19th century). This may be because the
purchaser is an individual of the Muslim faith, or (as here) because the
purchaser wished to use a finance institution which itself carries on its
business in accordance with Shari’a principles.
97.
Shari’a law does not prohibit the taking of security, but it does forbid
the payment of interest in connection with the lending of money. Over time a
variety of alternative financing structures were developed, in which the
commercial return to the finance house was provided by something other than the
payment of interest on a loan. In the present case the structure chosen, called
Ijara, involved the acquisition of the freehold interest in property by the
finance house (“the bank”), its lease to the finance customer (“the customer”),
and the grant of put and call options which would enable the customer to
acquire the freehold reversion from the bank. The commercial return for the
bank lay initially in the rentals payable under the lease, and then (once
exercised) in the amount payable under the options, which in effect capitalised
the outstanding rental stream under the lease. Originally the lease and the
transfer of the freehold under the options were exempted from SDLT by section
72 of the Finance Act 2003, later replaced, for land in England, by section
71A.
98.
The acquisition of the freehold by the bank was also exempted by section
71A(2), if but only if the vendor under that transaction was the customer. Thus
if the customer had already purchased the property (and paid SDLT on that
purchase), or inherited it, but wished to refinance by an Ijara structure, the
first relevant finance transaction would be a sale of the property by the
customer to the bank. It needed to be exempted from tax if the objective of
making Ijara finance free from SDLT was to be achieved. Conversely, if the
finance was being provided to fund the purchase, then the first relevant
transaction would be the purchase of the property, usually by the bank direct from
the third party seller. In that case there was no reason to exempt that
purchase from SDLT. Although the bank had to pay the tax, the customer would
indemnify the bank under a tax indemnity included in the terms of the Ijara
financing.
99.
Viewed separately, the provisions for relief from the double taxation of
sub-sale chains and for the exemption of alternative Shari’a-compliant
financing structures broadly achieved their objectives. All the intractable
problems in the present case, which have divided the courts below, and divide
the members of this court, derive from a structure for the simultaneous
purchase of land and its Shari’a-compliant financing which also involves a
sub-sale. For particular reasons concerned with the nature of the marketing of
Chelsea Barracks, and the desire of its seller, the Ministry of Defence (MOD),
for a delayed completion, the Shari’a compliant finance house (MAR) selected by
the buying customer PBL could not make the original purchase from MOD. Instead
PBL contracted to purchase from MOD, with MAR as a sub-purchaser.
100.
The result of using a sub-sale in connection with Ijara financing was
that, for SDLT purposes, the MOD / PBL and the PBL / MAR transactions were both
replaced by a secondary contract by reason of section 45(3), the completion of
which gave rise to a land transaction which would have been chargeable to SDLT,
unless excluded from charge under section 71A(2) because it was part of Shari’a
compliant alternative financing. That much is common ground. The critical
question on this appeal is whether that land transaction was exempted from a
charge to SDLT by section 71A(2) of the Finance Act 2003. Lord Hodge thinks
that it was exempt, with the result that the series of transactions which began
with the transfer by MOD to PBL and ended with the lease by MAR to PBL, coupled
with the put and call options, was entirely tax-free, subject only to the
effect of section 75A. If that were the effect of section 71A(2) then I would agree
with all his conclusions as to the consequences, and with all his reasons for
those conclusions. I also agree with his conclusion that the transactions are
not to be treated as giving rise to a loan on mortgage security.
101.
In my view however the transfer to MAR was not exempt, because PBL was
not the vendor under the relevant land transaction within the combined meaning
of sections 45(5A)(b) and 71A(2). The vendor was MOD. Thus the condition in
section 71A(2)(a) was not satisfied. MAR was therefore chargeable to SDLT on
its purchase of Chelsea Barracks. In that respect I agree with the conclusion of
the Court of Appeal, although my reasoning is not the same as theirs. In
setting out my own reasons I gratefully adopt Lord Hodge’s summary of the
facts, and do not need to set out again the relevant statutory provisions.
102.
The operative parts of section 71A are subsections (2), (3) and (4). Each
of them exempts from charge to tax specific land transactions. Each has
specific conditions which must be satisfied, even if the conditions of the
gateway into section 71A, in subsection (1), are all satisfied, as they were in
this case. But the common feature of subsections (2), (3) and (4) is that they
apply, if at all, only to land transactions which would otherwise be chargeable
under Part 4.
103.
In an ordinary Ijara financing which satisfied the gateway conditions in
subsection (1), the purchase of the major interest by the institution (called
“the first transaction” in subsection (1)(a)) would itself be a chargeable land
transaction, regardless whether the vendor was the “person” to whom the lease
was to be granted, or a third party. It would then be exempted under section
71A(2) only if the vendor was that “person”. The identity of the vendor would
be readily apparent. It would be the person disposing of the subject-matter of
the transaction: see section 43(4). In the context of a purchase effected (as
here) by a Land Registry Transfer, it would be the transferor under that
transfer. In the present case, but for the matter I am about to describe, that
would have been PBL.
104.
But where, as here, the purchase by the institution takes place under a
contract by way of a sub-sale to which section 45(1) applies, then the
institution is not treated as having entered a land transaction at all by
virtue of that purchase, let alone a chargeable land transaction: see section
45(2). This is because the agreement to purchase is a “transfer of rights”
within the meaning of the last sentence of section 45(1) and the institution is
the transferee. The ordinary consequence of the completion of that purchase
laid down by section 44(3) (namely that the contract and its completion is
treated as a single land transaction) is displaced by section 45(2) and (3). The
contract is replaced by the statutory construct called a “secondary contract”
under which the transferee institution is the purchaser, but the vendor is not
identified. The secondary contract is not, on its own, a land transaction but,
when it is completed by a conveyance, the secondary contract and its completion
are together treated as a land transaction: see again section 44(3). I will
call it, for short, the completed secondary contract. The identity of the
vendor under that land transaction, wherever it matters elsewhere in Part 4, is
regulated by section 45(5A)(b).
105.
The reference to the vendor in section 71A(2) is plainly within the
contemplation of the phrase “other references in this Part to the vendor” in
section 45(5A)(b). Thus, where there is a sub-sale, the vendor under section
71A(2) is either the vendor under the original contract (here MOD) or the
transferor under the transfer of rights (here PBL), depending on the context.
106.
The relevant context, for present purposes, is a sub-sale under section
43, coupled with an Ijara finance structure compliant with section 71A(1), and
the determination whether exemption is to be available under section 71A(2) for
the completed secondary contract. In this context it is plain that this is the
relevant land transaction, by analogy with the reference in the tail-piece to
section 45(3) to exemption in section 73(3). It speaks of “a case where the
secondary contract gives rise to a land transaction that is exempt from charge
by virtue of subsection (3) of section 73”. That section exempts another kind
of alternative finance structure. In a section 45 context, the scheme of Part 4
treats the alternative contract, rather than the “real world” contract which it
replaces, as giving rise to the land transaction qualifying (or not qualifying
as the case may be) for exemption under section 73. The same must be true of
section 71A, which confers exemption in a very similar way.
107.
So, what choice, as between MOD and PBL is permitted by this context? There
are considerations which may be said to pull both ways. In favour of PBL is the
fact that it was the vendor under the real world contract by which MAR agreed
to buy the Barracks, and the transferor under the Land Registry transfer by
which the freehold interest was actually transferred to MAR. In favour of MOD
is the fact that, if the completion of the original contract between MOD and
PBL is to be disregarded under section 45(3), then PBL never received from MOD
the chargeable interest which is deemed to be transferred to MAR by the
completion of the secondary contract. Thus the person disposing of that
chargeable interest (the “subject matter of the transaction” under section
43(4)) can only have been MOD, so that MOD is the only candidate as vendor in
this context, under section 45(5A). The first of these considerations persuaded
the Upper Tribunal, where the issue first arose for decision. The second persuaded
the Court of Appeal. In this court the main battle between counsel has centred
on the question whether the relevant context is one which calls to be resolved
by a real world or an SDLT-world analysis. In my view neither of those ways of
looking at the matter is decisively better than the other. The issue arises
precisely at the point where the two worlds collide.
108.
Treating either MOD or PBL as vendor may loosely be said to be
“permitted” by the context, if the contest is simply between those parallel
worlds. Section 71A(1) sets out what appear to be real world conditions for the
exemption of Ijara finance structures from SDLT. But the land transaction which
either is or is not to be exempted by section 71A(2) is a pure SDLT construct,
namely that notional land transaction to which the secondary contract imposed
by section 43 gives rise. But there cannot be two vendors, nor is the taxpayer
or HMRC free to choose between two available permitted candidates. The
application of section 45(5A) to the context of section 71A(2) must produce a
single answer in each case, although the context will not always lead to the
same result.
109.
In my opinion there is a much more powerful third factor which provides
a decisive answer to that question, namely an appreciation of the consequences.
If the vendor is to be PBL then, subject only to section 75A, the combined
sub-sale and Ijara financing means that the whole transactional structure by
which Chelsea Barracks was purchased from MOD is exempted from SDLT. By
contrast, if MOD is to be the vendor, there is a single charge to SDLT. The
first outcome cannot have been one which Parliament intended. The second
outcome accords with the overall purpose of Part 4 to charge SDLT on purchases
of land in the UK, with the avoidance of double taxation on a sub-sale, and
with the general objective of section 71A, namely to exempt those who use Shari’a
compliant alternative finance from incurring SDLT where finance by a loan on
mortgage security would not do so. A choice, under section 45(5A) which, in
this context, produces an unintended tax holiday for all the participants in
the purchase, viewed as a whole, is simply not one permitted by the context,
where the alternative choice produces a result broadly in accordance with the
purpose of the legislation.
110.
I must now address some of the contrary arguments. The first is that a
statutory requirement to have regard to the context does not permit regard to
be had to the consequences. I respectfully disagree. A hallmark of the modern
contextual approach to the construction of a contract is that a choice which
produces a result which the parties cannot have intended is to be rejected if
there is a less unsatisfactory alternative. I can see no reason why the same
approach is inapplicable to the construction of a statute. On the contrary it
is frequently used: see Bennion on Statutory Interpretation, section
9.6, In re British Concrete Pipe Association’s Agreement [1983] 1 All ER
203, per Sir John Donaldson MR at p 205 and, in the context of a taxing
statute, Fry v Inland Revenue Comrs [1959] Ch 86, per Romer LJ at p 105.
The only distinction in the present case is that the need to make a contextual
choice is expressly required by the plain meaning of the statute itself, namely
section 45(5A)(b). But that is a distinction without a difference.
111.
The second, and main, argument is that section 71A itself commands a
real-world approach to the identification of the vendor, because the
transaction looking for a vendor in subsection (2) is the “first transaction”
described in real world terms by subsection (1)(a). Since it is the same “first
transaction” which is exempted by subsection (2) then any issue as to the
satisfaction of the vendor condition must be addressed by a real world test as
to who is the vendor, treating the first transaction as the real world sale by
PBL to MAR, not the notional land transaction to which the secondary contract
gives rise. This argument treats section 45(5A) as not being engaged at all,
because it is not the completed secondary contract that is looking for a
vendor. This is the argument which has persuaded Lord Hodge.
112.
I agree that both subsections (1)(a) and (2) describe the same
transaction. That is the clear purpose of linking them by a common definition. But
in my view the use of that link works the other way. Subsection (2) is plainly
designed, and is only of any use, to exempt from tax land transactions which
would otherwise be chargeable to SDLT. Usually they will be real world
transactions but, in the present case because of the sub-sale, the relevant
land transaction is a statutory construct, namely the completed secondary
contract. If subsection (2) is not dealing with that land transaction, but some
different transaction, then it simply misses its target altogether. If that is
right, then the effect of the linking definition is that section 71A(1)(a) must
also be dealing in this context with the completed secondary contract, if its
language will bear that construction.
113.
There is nothing in the language of section 71A(1) which makes
subsection (1)(a) inapposite as a reference to the completed secondary
contract, where that is what section 45 requires. Subsection (1) speaks of
arrangements under which certain transactions take place. Where (as here) the
relevant arrangements include provision for a simultaneous sub-sale, then the
first transaction to which SDLT might otherwise be chargeable is necessarily a
completed secondary contract.
114.
Focus on the very similar language of section 73 is compelling. Section
73(1) also speaks of arrangements under which transactions take place. In fact
the second transaction there described always takes place by way of sub-sale
(because the same interest is the subject matter of both), so that the second
transaction being exempted from charge by section 73(3) will always be a
completed secondary contract. And this is what section 45(3) says in
unambiguous express terms when it refers to section 73(3).
115.
For this real world argument to have real force it would be necessary to
re-write section 71A(2) as follows:
“The first transaction and any
land transaction to which a secondary contract gives rise where the first
transaction is by way of sub-sale is exempt from charge if the vendor under the
first transaction is …”
But it makes no sense to re-write the subsection in that
way just to produce a result which gives rise to an unintended tax holiday, if
the ordinary meaning of the words enacted does no such thing.
116.
The next argument is that there cannot be a choice of the vendor under
the original contract (here MOD) because, where there is a simultaneous
sub-sale, the effect of section 45(3) is to disregard the original contract altogether,
including its vendor. There are in my view two objections to that argument. The
first is that section 45(3) does not require the original contract itself to be
disregarded, but only its substantial performance or completion. The contract
itself remains visible, together with its vendor.
117.
The second more serious objection is that section 45(5A) assumes that
the vendor under the original contract remains an available choice, precisely
where section 43(3) brings a completed secondary contract into deemed
existence, and disregards the performance or completion of the original
contract. Indeed it is only where there is a completed (or performed) secondary
contract that it was thought necessary to provide a special means for the
identification of its vendor. It may be suggested that, under section 45(3),
there can be both a completed secondary contract and a performed or completed
original contract which is not disregarded, for example where the two are not
simultaneous and connected, or where section 73(3) applies, but this is not why
section 45(5A) was introduced. Its main target was precisely the unintended
potential tax holiday which would arise where there was a sub-sale, because of
a disregard of the original completed contract and an exemption for the
sub-sale, eg because of the simultaneous potential application of group relief.
118.
It is next said that what I have described as the compelling
consequences in terms of an unintended tax holiday do not arise, because
section 75A comes to the rescue of the public purse. I accept that, if need be,
it does so on the facts of this case, which occurred after it came into force. But
20 months passed between the introduction of section 45(5A) and section 75A,
during which, if facts such as these did give rise to a tax holiday, the
Revenue was entirely unprotected. There are in my view powerful reasons why the
construction and application of section 45(5A) should be undertaken without
reference to the fact that, much later, section 75A floated into view, as a
plank in a shipwreck.
119.
First, the exercise of construction and application of section 45(5A)
ought to be based upon a perception of the intention of Parliament when
enacting it. That is, by the same token, why the re-casting of section 45(3) in
2011, in a way that solved the present difficulties by removing the disregard
of the completed original contract where the sub-sale was exempted by section
71A, cannot be prayed in aid in interpreting section 45 in its earlier form.
120.
Secondly, the impetus for enacting section 75A was not a perception that
sections 45(3) and 71A, working together, produced a tax holiday. Section 75A
was, by its title, primarily designed to deal with tax avoidance schemes,
although I accept that it was cast in wide enough terms to provide the Revenue
with a rescue from the tax holiday to which linking Ijara finance to a sub-sale
might give rise.
121.
Thirdly it is counter-intuitive, to say the least, to adopt a
construction and application of section 45(5A) which then gives rise to a
further set of difficulties in the application of section 75A, when there is an
alternative approach that does nothing of the kind. This is, in my view, an a
fortiori case where section 45(5A) expressly requires that choice to be
made.
122.
Fourthly, if a construction of sections 45(5A) and 71A(2) before the
introduction of section 75A does not produce an unintended tax holiday, then
there is no reason why the earlier sections need be re-interpreted in the light
of section 75A.
123.
A rather different and more detailed objection to the identification of
MOD as the vendor under section 71A(2) is that its effect is to charge the
wrong taxpayer with the wrong amount of tax. By this the proponents mean that
the policy objectives of a single charge to tax, based upon the real purchase
price for the Barracks, with Ijara structures being altogether exempt, would
only truly be satisfied if PBL rather than MAR was liable, and SDLT was payable
as a percentage of the price paid to MOD, rather than the inflated price stated
in the PBL / MAR agreement, which was driven by financing considerations. This
is precisely what the amendments to section 45 made in 2011 now do achieve. Even
the section 75A solution charges the right taxpayer, albeit still with the
wrong amount of tax.
124.
This objection has significant force at first sight but there are
compensating matters which in my view largely deflate its effect. Dealing first
with the identity of the taxpayer, an ordinary Ijara structure to finance a
purchase imposes SDLT on the bank rather than on the customer. This is because
the first relevant land transaction is a purchase by the bank from the third
party seller. Section 71A(2) does not apply because the vendor is not the
customer. There is no sub-sale, because (as is common ground) a purchase
followed by a lease does not trigger section 45. In commercial reality, (as in
the present case) the customer ends up footing the tax bill, because the bank
takes a tax indemnity from the customer. The Ijara structure to which the
exemption in section 71A(2) typically applies is a re-finance by a customer who
has already purchased the property and paid SDLT on completion. There is,
again, no sub-sale.
125.
An interpretation and application of section 45(5A) in a sub-sale
context so as to charge SDLT on the bank therefore imposes the same consequence
of taxing the bank as does an ordinary Ijara structure to finance a purchase
where there is no sub-sale. In both cases, the usual tax indemnity imposes the
ultimate tax burden on the customer. In the present case the evidence suggests
that the sub-sale route was chosen because MOD decided to use a sealed bid
process in which MAR would have found it difficult to participate, and because
MOD wanted a delayed completion, while it re-billeted the troops in the
Barracks. These are relatively unusual fact-specific matters which ought not to
affect the issues of construction.
126.
The reason why, in the present case, the tax payable was (at least
initially) greater than the specified percentage of the price payable to MOD is
because MAR and PBL chose to include within the financing a large amount over
and above that purchase price, structured as part of the purchase price payable
by MAR to PBL on the sub-sale. The main element in the excess appears to have
been the deferred payment of amounts needed by PBL to make early rental payments
under the lease from MAR. Their commercial effect, in cash flow terms, was to
give PBL an initial rent holiday, in broadly the same way as is often achieved
under conventional mortgaged-backed finance by the bank lending an additional
amount above the purchase price to fund early payments of interest.
127.
It is possible, although the evidence does not so state in terms, that
this at least could have been a reason for constructing the Ijara finance by
way of sub-sale, because the excess finance amounts could hardly have been
payable to MOD, if MAR had purchased directly. After 2011 it would attract no
additional SDLT if achieved by way of sub-sale, because the original purchase
(here between MOD and PBL) would not be disregarded, and section 71A(2) would
exempt the completed secondary contract. Before 2011, taxation of this
additional finance amount appears to have been inevitable, whether by treating
MOD as the vendor under section 71A(2), or under section 75A.
128.
This is, again, not an ordinary consequence of Shari’a compliant
financing. Where the finance amount is less than the full purchase price, a
shared ownership structure was usually adopted, with different tax treatment
which the court did not need to investigate. The Ijara structure used here was
applied where the whole purchase price was being financed. In such cases the
amount of tax paid by the bank will not differ substantially from the tax which
would have been payable on the price paid to the third party seller. Ironically,
substantially the same result may yet ensue here, because the Ijara structure
was terminated early, before most of the excess finance amount had been paid. In
such circumstances it is common ground that Part 4 permits a claim for
repayment of the excess tax from the Revenue. This is because SDLT is paid
up-front on contingent consideration on an assumption that the contingency will
occur, and then reclaimed if it does not.
129.
In conclusion therefore, I have not been persuaded by any of the
objections to construing and applying sections 45 and 71A of the Act in a way
which, in the unusual context of a sub-sale coupled with an Ijara financing
structure, leads to SDLT being payable by MAR on the consideration payable
under the completed secondary contract by which it acquired a chargeable
interest in the Chelsea barracks under a chargeable land transaction, and all
the other transactional parts of the structure being either disregarded or
exempt. Of the only two interpretations of the relevant statutory provisions
(from which I would exclude section 75A for the reasons given), that is the one
which broadly achieves, rather than wholly frustrates, what must have been the
underlying purpose of Part 4 in the relevant context. If MAR cannot now be made
to pay, which the Revenue do not accept, and this leads to the shocking
consequence that the public purse gets nothing from this large transaction by
way of SDLT, that will only be because, in the words of Mr Thomas QC for PBL,
the Revenue have been relentlessly pursuing the wrong taxpayer. It is a sad
irony that, at all stages until the appeal to the Upper Tribunal, both parties
appear to have thought that the only candidate as the taxpayer was PBL, but it
is of no consequence to the outcome. In my view the Court of Appeal reached the
right answer, and I would therefore dismiss the appeal.
