Project Blue - Supreme Court allows HMRC's appeal in SDLT sub-sale case

In Project Blue Limited v HMRC [2018] UKSC 30, the Supreme Court (by a majority) has found that section 75A, Finance Act 2003 (an anti-avoidance provision), was applicable resulting in SDLT being payable notwithstanding that sections 45 (sub-sale relief) and 71A (exemption for alternative property finance) Finance Act 2003, would have otherwise resulted in no stamp duty land tax (SDLT) being payable.

Background

In 2007, Project Blue Limited (PB), owned by the Sovereign Wealth Fund of Qatar, purchased the freehold of the Chelsea Barracks in London from the Ministry of Defence (MoD) for £959m. In order to make the purchase, PB obtained finance from a Qatari bank, Masraf al Rayan (MAR), which specialises in Islamic finance. Islamic finance seeks to comply with Sharia law, which prohibits interest being paid in connection with the lending of money.  

On 5 April 2007, PB and the MoD entered into a contract to purchase the barracks. On 29 January 2008, PB contracted to sub-sell the freehold to MAR. Also on 29 January 2008, MAR agreed to lease the barracks back to PB. Upon completion, on 31 January 2008, the following occurred:

(1)  MAR and PB entered into put and call options respectively requiring or entitling PB to repurchase the freehold in the barracks;

(2)  the MoD conveyed the freehold in the barracks to PB;

(3)  PB conveyed the freehold in the barracks to MAR; and

(4)  immediately after that, MAR leased the barracks back to PB.

PB claimed that there was no liability to SDLT because of sub-sale relief provided by section 45(3), Finance Act 2003. Section 45 enables a purchaser of land to drop out of the SDLT equation if a secondary contract is substantially performed at the same time and in connection with the original property transfer. MAR claimed alternative property finance relief under section 71A, Finance Act 2003. Section 71A relief was also claimed in relation to the lease by MAR to PB. The parties therefore claimed that no SDLT was payable in relation to the acquisition of the barracks. 

HMRC challenged PB's £0 SDLT return and issued a closure notice which amended the amount of SDLT due from £0 to £38.6m. 

PB appealed to the First-tier Tribunal (FTT). In the FTT, HMRC successfully applied to amend its case to increase the amount of SDLT due from £38.6m to £50m (being 4% of the total £1.25bn which MAR paid to PB). The FTT dismissed PB's appeal holding that the anti-avoidance provision in section 75A, Finance Act 2003, was applicable. 

PB appealed to the Upper Tribunal (UT). In the UT, PB changed its position and argued that MAR was not entitled to section 71A relief because, on a proper understanding of the related provisions of Finance Act 2003, MoD was the vendor of the barracks in terms of section 71A(2). The UT rejected this argument and concluded that PB was the vendor. PB's appeal was dismissed but the UT revised the chargeable consideration back to £959m.

Both parties appealed to the Court of Appeal (CA).

In the CA, PB successfully argued that MAR should be treated as the purchaser for SDLT purposes and therefore it was MAR who was liable to £50m SDLT on the £1.25bn it had paid to PB for the barracks.  This was on the basis that alternative property finance relief, under section 71A, was not available due to the interaction with the sub-sale rules.  

Following the CA's decision in DV3 RS LP v HMRC [2013] EWCA Civ 907, the CA was obliged to disregard PB's acquisition from the MoD for SDLT purposes. Accordingly, for the purposes of SDLT, MAR was to be treated as acquiring an interest in land directly from the MoD and it was on MAR that the liability for SDLT fell.

HMRC argued that section 71A had the effect of shifting any liability for SDLT from MAR to PB. The CA found, however, that section 71A relief only applied in circumstances where the vendor was the person making the financial arrangements with the financial institution. Following the decision in DV3 RS LP, the vendor was not PB, as the transaction between MAR and PB had to be disregarded under sections 44-45, Finance Act 2003. Rather, the vendor was the MoD. Accordingly, in the view of the CA, the exemption to SDLT contained in section 71A did not apply to MAR and SDLT remained payable by MAR. 

The CA dismissed HMRC's arguments on the application of section 75A, on the basis that the amount of SDLT that would have been payable on the 'notional transaction' was equal to the £50m that was payable by MAR. HMRC appealed.  

Supreme Court judgment 

The appeal was allowed (Lord Briggs dissenting).

The Court considered: 

1. who acquired the chargeable interest from the sale of the property by the MoD (ie who was the vendor for the purposes of section 71A); and

2. does section 75A apply to impose SDLT on PB and if so, what was the value of the chargeable interest? 

On the first issue, the Court concluded that PB was the vendor (under section 71A(2)), despite PB not acquiring a typical chargeable interest. The contract between the MoD and PB was disregarded, so the chargeable interest was considered to be the lease from MAR under section 75A.

With regard to the second issue, the Court concluded that the combined effect of sub-sale relief under section 45 and alternative property finance relief under section 71A, would have resulted in the transactions escaping SDLT, but for the anti-avoidance rule in section 75A. Following Barclays Mercantile Business Finance Ltd v HMRC [2015] 1 AC 684, the Court adopted a wide purposive approach to its interpretation and concluded that the relevant 'notional transaction' to be assessed involved the MoD as vendor and PB as purchaser, of its chargeable interest in land, being the leasehold interest it obtained from MAR. In the view of the Court, the various transactions were all 'involved in connection with' the disposal by the MoD of its chargeable freehold interest in the barracks. The chargeable consideration was £1.25bn paid by MAR to PB, as this was the largest amount given by any one person under the arrangements. As the SDLT payable in respect of the arrangements was £0 and this was less than the amount that would have been payable on the 'notional transaction', SDLT of £50m (4% of £1.25bn) was due under section 75A. 

Comment

The Supreme Court has endorsed the position adopted by both the UT and CA that section 75A has a broad application and that the taxpayer's motive for entering into the transactions is irrelevant. There is no requirement that the taxpayer has a tax avoidance motive. HMRC will no doubt be encouraged by this decision and given the pressure it is under to raise as much tax as possible it is likely that it will seek to rely on section 75A whenever a series of transactions produces less SDLT than would otherwise have been the case. In other words, HMRC is likely to invoke section 75A in circumstances where more SDLT could have been charged irrespective of whether there is an avoidance motive. 

A copy of the judgment can be viewed here.