Project Blue and the application of FA 2003 s71A and s75A for SDLT purposes

Wed 20 Jun 2018

The Supreme Court has overturned the Court of Appeal’s decision in the case of Project Blue Ltd (PBL) and held that PBL is liable for £50m SDLT on consideration of £1.25bn, as a result of the operation of the broadly drafted SDLT anti-avoidance provisions at FA 2003 s.75A. This is some £12m more than would have been payable on a straight forward purchase at the agreed price of £959m.

The Judgement is available here, and the press release here.  Although the subsale relief applying at the time of the transaction has since been substantially amended, the decision is a useful indication of how alternative finance relief (FA 2003 s.71A) and the broadly drafted SDLT ‘anti-avoidance’ provision (FA 2003 s.75A-C) should be applied.

Background

On 5 April 2017 PBL contracted with the ministry of Defence (MOD) to acquire Chelsea Barracks for £959m, paying a £191.8m deposit. On 29 January 2008 PBL contracted with Qatari Bank Masraf al Ryan (MAR) to subsell the freehold for $2.467bn (equivalent to £1.25bn), payable in four instalments between January 2008 and 2011, one of $757.34m and three of $378.67m. The additional sums were, broadly, intended to provide funding for the subsequent development. MAR would have paid the balance of the original purchase price, £767.2m, to the MOD.  In return MAR agreed to lease the property back to PBL with put and call options requiring PBL to purchase the land at the end of the lease.  The rentals payable by PBL under the terms of the lease would ensure MAR received an appropriate return for its financing of the transaction.  In the event MAR never paid over the last payment ($378.67m, amounting to £191.8m using the same exchange rate as applied at the start of the contract).

At the time the transaction was undertaken, subsale relief (FA 2003 s.45) was available for the subsale from PBL to MAR (meaning PBL was not liable for any SDLT on the purchase from the MOD). Alternative finance relief (FA 2003 s.71A) was also considered to be available on the transaction between PBL and MAR, meaning that MAR’s purchase from PBL and its subsequent lease to PBL were exempt from SDLT.  Subsale relief (FA 2003 s.45) was substantially amended in 2011 so that a transaction undertaken in similar circumstances now would not qualify for that relief.

The Court of Appeal considered that the Alternative Property Finance relief (FA 2003 s.71A) could not apply to MAR as that relief would only apply if the lease granted by MAR was made to the same person that MAR acquired the property from. They considered the legislative disregard of the transaction between PBL and the MOD due to the sub-sale relief provision in s.45 – also operated for s.71A. As a result they considered MAR to be deemed to have acquired the land from the MOD rather than from PBL.  The Court of Appeal thus considered MAR was the person liable for the SDLT on the full amounts of consideration (£1.25bn) it paid.  However, HMRC was out of time to assess MAR, no SDLT was due.  It considered FA 2003 s.75A was not applicable.

In case it was wrong it also considered how FA 2003 s.75A could apply. This requires consideration of who is the purchaser “P”, and who is the vendor “V”. As the Court of Appeal considered that MAR was the purchaser and it had paid £1.25bn, that was the consideration subject to SDLT.  In the previous hearings on this case, the First tier Tribunal had considered that PBL was “P”, whereas the Upper Tribunal had considered that either MAR or PBL could be “P”.

The Supreme Court’s reasoning

In contrast with the Court of Appeal, the Supreme Court considered alternative finance relief was available to MAR under FA 2003 s.71A for four reasons:

• S.71A uses the language of ‘real world’ transactions rather than the statutory constructs of ‘land transaction’ and ‘chargeable interest’ and therefore could be interpreted by considering the actual sales without reference to the legislative disregard imposed by the sub-sale relief provision in s.45;
• Exempting the financier in the transaction is consistent with the aim of s.71A;
• There is nothing in s.71A to say that it cannot apply if subsale relief applies;
• If it applied as the Court of Appeal interpreted, then the consideration for a land transaction could be much smaller or much larger (as in this case) than the value of the land transferred.

In applying FA 2003 s.75A, the Supreme Court considered that on a purposive approach, “P” in this case was PBL. As that section operates to bring into charge the highest amount paid by any purchaser, the amount of consideration subject to SDLT for PBL was £1.25bn.

One might therefore conclude that by entering into the subsale and alternative finance arrangement, PBL has increased the amount of consideration subject to SDLT increasing the SDLT charge from £38.36m to £50m. However the Supreme Court commented that, as the last payment had not been made by MAR, some relief was available to PBL via a claim under FA 2003 s.80.  In the circumstances the Supreme Court held that PBL was not subject to discrimination in terms of the European Convention on Human Rights.

The above decision was reached on a four to one majority. The dissenting judge, Lord Briggs agreed with the overall conclusion of the Court of Appeal, but for different reasons.  He considered FA 2003 s71A could not apply, as PBL was not the vendor (meaning MAR would be liable for the SDLT).  This would result in a different interpretation of who the ‘vendor’ is for the purpose s.71A, from the rest of the Supreme Court.

Comment

In this long running saga, a decision on the application of SDLT alternative finance relief and anti-avoidance has been reached which appears to accord with real world transactions. Those who have used similar planning in the past should be reviewing their particular circumstances in the light of this decision, in particular the implications of the potential issue of follower notices.

For further advice please get in touch with a member of the Mazars Land taxes team or tax investigations team.