In Project Blue Ltd v Revenue and Customs  the issue for the Court of Appeal was whether Project Blue Limited (“PBL”) was liable for stamp duty land tax (“SDLT”) for its acquisition of the former Chelsea Barracks (“the Site”).
PBL was controlled by the sovereign wealth fund of the State of Qatar.
It agreed to buy the Site from the Ministry of Defence (“MoD”) for £959m.
It funded the purchase and development of the Site in a way which was compatible with Shari’a law.
A loan at interest secured by a legal charge on the Site would not have been Shari’a-compliant.
It therefore contracted to sell the site to Masraf al Rayan (“MAR”), a Qatari bank, for about £1.25bn being the £959m required to complete the purchase from the MoD plus substantial extra money to cover SDLT and future development costs.
The contract with MAR was completed contemporaneously with the completion of PBL’s contract with the MoD. On the same day MAR granted PBL a lease of the Site for 999 years and various put and call options were entered into which would entitle PBL in due course to re-acquire the freehold of the Site from MAR. Later PBL granted an underlease to Project Blue Development Limited (“PBDL”), a company in the same group.
The rent under the lease was calculated in such a way that the bank would receive a return on it’s investment.
It was “critical to appreciate that the bank [would] be the real owner of the asset for the term of the lease, and the customer [would] not.”
HMRC contended that PBL was the taxable party but that the chargeable consideration on which SDLT was payable would be the £1.25bn paid by MAR to PBL rather than the £959m paid by PBL to the MoD. This would result in a SDLT liability of £50m.
PBL said that the party liable for the tax was MAR but that HMRC was now out of time for making any determination or assessment in order to recover it.
The court said completion of the contracts between the MoD and PBL and between PBL and MAR engaged the provisions of ss.44 and 45 of the Finance Act 2003 which dealt with contracts for land transactions under which the contract was to be completed by a conveyance or transfer (s.44) and cases where the completion of the contract for a land transaction was effected by a “sub-sale or other transaction (relating to the whole or part of the subject matter of the original contract) as a result of which a person other than the original purchaser [became] entitled to call for a conveyance to him”: s.45(1)(b).
The effect of s.44 was that the contract was not treated as a land transaction unless completion did not in fact take place but the contract was nevertheless substantially performed.
This would normally include the payment of most of the purchase price. But when, as here, completion occurred in accordance with the contract then “the contract and the transaction effected on completion [were] treated as parts of a single land transaction. Here the effective date of the transaction was the date of completion”: s.44(3).
Therefore the contract between the MoD and PBL was not a land transaction nor was the contract between PBL and MAR nor was the lease agreement between MAR and PBL. The put and call options were land transactions under s.46 but they were granted for no consideration so no charge to SDLT arose.
So the only potential land transactions were the transfer of the Site between the MoD and PBL, the transfer from PBL to MAR and the lease from MAR to PBL.
s.45(1) applied in relation to the two contracts for the sale of the Site so the provisions of s.44 which treated the contract and conveyance as a single land transaction taking effect on completion were modified so as to prevent a charge to tax on both legs of the sub-sale or composite completion of the two contracts.
Here, the existence of the sale on to MAR meant that under s.45(3) the substantial performance or completion of the sale to PBL was disregarded leaving the completion or substantial performance of the deemed secondary contract to MAR as the only possible acquisition of a chargeable interest.
The next transaction to be considered was the acquisition of the Site by MAR.
S.71A accommodated Shari’a-compliant financing arrangements according to the Ijara model which depends upon the financial institution becoming the owner of the relevant property. Where, as here, the financial institution acquired the property from a third party owner the financial institution would be liable for SDLT on the purchase price whether or not that was undertaken at it’s customer’s request.
Cases falling within s.45(3) were intended to be treated as direct acquisitions by the financial institution from the third party vendor in terms of their tax consequences. MAR was therefore liable for SDLT on completion of the secondary contract under s.45(3) and was not entitled to claim relief elsewhere under s.71A.
So HMRC had pursued the wrong party for the tax.
Usually the customer will have some money of it’s own to put towards the purchase. So if SDLT was only charged on the amount provided by the bank there would be an undercharge.
In such cases the type of arrangement is called Musharaka financing. Here there is a form of partnership by which the partners jointly acquire an asset. The asset will be held by them as beneficial tenants in common in the proportions in which they contributed to the purchase price.
But under that kind of arrangement both the bank and the customer will be liable for the SDLT. However there is no risk of an undercharge as both will have contributed to the purchase from the third party vendor.
This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.
This case concerned the SDLT provisions of Finance Act 2003 which has undergone a series of amendments since 2003. This appeal was concerned with the legislation in force in January 2008.