The judgment, by a majority of four judges to one, restores a finding by the First-tier Tribunal against an SDLT avoidance scheme used by developer Project Blue Ltd (PBL) and means that PBL pays more SDLT than if it had not used the scheme. PBL obtained finance under a Shari'a-compliant funding model, ijara, from Qatari bank Masraf al Rayan (MAR) to fund the scheme, which also involved the use of a sub-sale from the bank back to the company.
PBL sought to claim sub-sale relief on the transaction under section 45(3) of the 2003 Finance Act (FA 2003), as it was on 31 January 2008 when the transaction took place. MAR also claimed 'alternative property finance relief' under section 71A of FA 2003. HMRC's case was that the anti-avoidance provisions in section 75A of FA 2003, as introduced by the 2007 Finance Act, created a charge to SDLT in the case. Section 75A applies where a number of transactions are involved and the SDLT payable is less than if the purchaser had just acquired the property directly from the seller.
PBL is a company owned by the Qatari sovereign wealth fund. In 2008, it agreed to purchase the Chelsea Barracks site from the Ministry of Defence (MoD) for £959 million. In order to finance the purchase and development of the site in a way which was compliant with Shari'a law, PBL contracted to sell the site to MAR for £1.25 billion and then immediately lease it back for a 999 year term. The £1.25 billion represented the purchase price of £959 million plus an additional amount to fund development work. If the SDLT scheme had not been used and PBL had simply purchased the property from the MOD, SDLT of £38.6 million would have been payable.
This method of financing is called ijara. It respects the Islamic prohibition on usury by providing for the property to be acquired by the financial institution as its property and then leased to the person seeking the finance in exchange for agreed rental payments which give the financial institution a return on its money.
The First-tier Tribunal decided that section 71A applied to the acquisition of the land by MAR, but PBL was subject to SDLT on the £1.25 billion paid by MAR as a result of the operation of section 75A. The Upper Tribunal decided PBL was subject to SDLT as a result of the operation of section 75A, but on the £959 million paid to the MOD.
The Court of Appeal decided that PBL was not subject to duty, because MAR should have been subject to SDLT on the £1.25 billion it paid, but HMRC could not assess it as it had closed its enquiry into MAR.
After analysing the different individual transactions involved in the deal, the Supreme Court concluded that PBL was the 'vendor' as far as the alternative property finance relief provisions were concerned and so MAR's purchase of the barracks from the MOD was exempt from SDLT. The provisions were designed to "equate ijara financing with conventional lending in the United Kingdom by taxing the purchaser of the property and exempting the financier".
However, the Supreme Court then applied the anti-avoidance provisions in section 75A to restore the charge to SDLT. 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 was irrelevant whether the parties had actively intended to avoid tax when they structured their transactions the way that they did, the court said.
"[T]he provision was introduced to counter avoidance schemes which have been developed to avoid payment of SDLT," said Lord Hodge, giving the judgment of the majority. "It appears to be drafted in deliberately broad terms to catch a wide range of arrangements which result in tax loss."
Section 75A requires a comparison between the SDLT actually paid in respect of the transactions (nil in this case) with the amount that would be payable on a notional land transaction effecting the acquisition of one person, V’s, chargeable interest by another, P, on its disposal by V. The Supreme Court said that the 'V' referred to in section 75A in this case was the MoD and, looking at section 75 as a whole and taking a purposive approach to interpretation, 'P' was PBL
The Court said that the relevant notional land transaction involved PBL acquiring the MoD’s interest in the barracks. The effect of Section 75A was that SDLT was payable on the largest amount or aggregate amount given by any one person for the scheme transactions. The Supreme Court said that HMRC had correctly asserted that the relevant sum was £1.25 billion, being the purchase price which MAR contracted to pay to PBL and so SDLT of £50 million was due.
"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 the 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 ... Thus it was the PBL which obtained the benefit of the avoidance of tax in relation to the completion of its contract with MoD," Lord Hodge said.
Additional arguments by PBL were also rejected by the Supreme Court. These arguments included that HMRC's position interfered with the freedom to manifest one's religion set out in the European Convention on Human Rights, and was therefore discriminatory towards those of the Islamic faith; as well as a number of procedural arguments.
The rules around sub-sales have been reformed since the Chelsea Barracks acquisition was completed. Under the new rules, the party acquiring the property from the seller is regarded as making an acquisition for SDLT purposes and will need to make a return, but will be able to claim full relief against any SDLT in 'normal' cases where it assigns its rights or enters into a sub-sale transaction "with no SDLT avoidance purpose".
Property tax expert Richard Croker of Pinsent Masons, the law firm behind Out-Law.com, said that the £50m sought by HMRC in this case was actually more than would be payable on the same transaction under the new rules.
"The judgment also avoids the embarrassment which flowed from the effect of the Court of Appeal decision that no tax was collected because the enquiry into tax payable by MAR had been closed," he said. "Most importantly, it affirms HMRC's power to use section 75A where there is otherwise an unsatisfactory result for the tax authority from the operation of the rules, but does not require them to establish an avoidance motive on the part of the taxpayer - all that has to be established is that less tax has actually been paid than would be the case under a notional land transaction. Although the Supreme Court had to acknowledge that section 75A is 'a difficult provision ... to interpret and to apply', it seems there will be many cases where HMRC will now feel bound to apply it."
"One curious aspect of the decision is that there may be one or two cases where the effective date for SDLT pre-dates the enactment of section 75A in 2007. The effect of the Supreme Court's decision is that the 'scheme' here - seeking a tax holiday for the participants - would have worked if carried out in that 20-month window because the majority judgment explicitly found that without section 75A, there could be no charge on either limb of the transaction. However, applying the Court of Appeal decision, which the dissenting judgment of Lord Briggs does in the Supreme Court, would have caused duty to be paid by the sub-purchaser in such cases. It will be interesting to see how many of the cases which have been held over pending the final Project Blue decision – which may be other kinds of sub-sale – turn on that point," he said.