HMRC "capable of pursuing and winning" SDLT avoidance cases, expert says

Property law expert Alan Cook of Pinsent Masons, the law firm behind Out-Law.com, said that the decision against Vardy Property Group (VPG) was significant as it showed that HMRC was "capable of pursuing and winning" stamp duty land tax (SDLT) avoidance cases.

HMRC has struggled in the past to identify taxpayers using such schemes, which are often particularly secretive, despite high profile Government announcements that there should be a clamp down on what Chancellor of the Exchequer George Osborne has referred to "morally repugnant" property tax avoidance schemes.

The First-tier Tribunal held that VPG was not entitled to claim 'sub-sale' relief on its SDLT liability for the purchase of a business park in Stockton-on-Tees. The relief is intended to prevent a double SDLT charge when someone contracts to buy property and then sells the property on before they have acquired it from the original seller, so that the property is transferred directly from the original seller to the new purchaser.

"The decision is significant as it represents a notable success for HMRC in their ongoing fight against what they see as unacceptable avoidance of SDLT," Cook said. "As well as hitting the specific planning structure which was employed here, it signals more widely that HMRC is capable of pursuing and winning cases in the tax tribunal. It remains to be seen whether the taxpayer will appeal the decision, but it is bound to cause those who are minded to engage in some of the more imaginative tax mitigation structures to think twice before they do so."

HMRC lost the first case it  brought to the Tax Tribunal alleging misuse of sub-sale relief, he said. That case, heard in March 2011, involved a sub-sale to a partnership. The decision has been appealed to the Upper Tribunal.

Durham-based property company VPG entered into the £7.25 million property deal in 2006. The site was first acquired by an intermediate company which then transferred it to VPG as a dividend. The company argued that SDLT was not payable on the first transaction due to sub-sale relief, while the second transaction was not taxable because there was no "chargeable consideration".

The tribunal said that the company was "forthright" in saying that it structured the acquisition of the property in "a very particular way" in order to avoid exposure to SDLT. Similar schemes account for around £100m of lost SDLT, according to HMRC.

John Christian, a tax expert at Pinsent Masons, said that the arrangements in the VPG case involved a "deliberate tax avoidance scheme". "The decision should not prevent sub-sale relief being available in genuine cases," he said.

Updated regulations on the disclosure of tax avoidance schemes (DOTAS) related to SDLT will require promoters to notify HMRC of certain transactions involving transfers of rights, such as sub-sales, even if they have previously notified HMRC of similar arrangements. The new regulations also remove the financial thresholds for disclosure of schemes and update the list of excluded arrangements. The new provisions will take effect from 1 November 2012.

In a policy statement last year HMRC said that these changes were part of its ongoing anti-avoidance strategy and a response to developments in the marketing and use of SDLT avoidance schemes. There had, it said, been an "increase in the use of old avoidance techniques", and schemes were also being marketed for use in relatively low-value transactions.

The DOTAS regulations require promoters of certain schemes to avoid SDLT on property transactions to disclose those schemes to HMRC. The rules previously only applied to schemes involving non-residential property with an aggregate market value of at least £5 million or residential property with an aggregate market value of at least £1 million.