Category Archives: Stamp Duty Land Tax

SDLT claimed from wrong party in case of Shari’a financing

In Project Blue Ltd v Revenue and Customs [2016] 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.

Court upholds retrospective nature of latest stage of anti Stamp Duty Land Tax avoidance drive

In St Matthews (West) Ltd & Ors, R (on the application of) v HM Treasury & Anor [2014], the claimant used a tax avoidance scheme structured by Blackfriars Tax Solutions LLP (“Blackfriars”) to minimise their exposure to Stamp Duty Land Tax (“SDLT”) (“the Blackfriars Scheme”).

The claimant sought leave for judicial review as to Sections 194(1)(a) and 194(2) of the Finance Act 2013 (“FA 2013”) which, by amending Section 45 of the Finance Act 2003, with retrospective effect from 21 March 2012, clarified that SDLT is chargeable in full on transactions structured under the Blackfriars Scheme.

The claim was based upon alleged infringement of Article 1 of Protocol 1 (“A1P1”) and Article 14 of the European Convention of Human Rights (“ECHR”).

So far as relevant, A1P1 provides, that:

“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary …. to secure the payment of taxes….”

It was argued that the claimant was deprived of a possession in the form of the alleged proprietary interest in the nature of his claim to tax relief.

However the High Court said Sections 194(1)(a) and 194(2) FA 2013 did not impose a liability on the claimant to make any payment. The claimant’s underlying premise, which was that there had been no such liability, and thus an entitlement to keep the money, until that retrospective legislation had been passed, had not been established, and relied on the application and interpretation of the previous legislation, which had always been contentious.

Sections 194(1)(a) and 194(2) FA 2013 deprived the claimant of an argument that they were not liable to pay the tax, or of a defence to HM Revenue and Customs (“HMRC”)’s claim. A legal argument, whatever its merits, was not a “possession” for the purposes of A1P1.

So the court was not convinced AIPI was even engaged but assuming it was: the 2012 Budget had nullified tax avoidance schemes based on the Finance Act 2003’s SDLT “transfer of rights rules”, and the Chancellor had expressed his determination to close all similar loopholes. Thereafter any well advised person must have known that, when HMRC discovered any variant of an existing scheme, HMRC would act swiftly to end that variant as from the same date.

The Government could not have given clearer signals as to its policy and its intentions in that regard.

The enactment of retrospective legislation to put it beyond doubt that this variant was caught by Section 45(1A) was entirely foreseeable. Anyone in the claimant’s position who entered into the Blackfriars scheme did so at their own risk.

There was nothing arbitrary about the legislation. The amendments to Section 45(1A) were part and parcel of the overall package of measures designed to obliterate the abuse of “the transfer of rights rules”.

The legislation was enacted for good reason, and after proper consideration of all relevant factors.

Critically, the legislation made sure that Section 45(1A) took effect in the way that it had always been intended to, at and from the time of the 2012 Budget, and blocked the perceived loophole in Section 45.

Furthermore, in 2013, the proposed amendments to that section were scrutinised in accordance with the usual democratic processes before the legislation was passed by Parliament.

Any alleged lack of compliance with the Protocol did not derogate from the clarity or foreseeability of the legislation or the justification for Parliament’s decision to make it retrospective.

This blog has been posted as a matter of general interest. It does not replace the need to get bespoke legal advice in individual cases.