Still Blue – Upper Tribunal find that motive is irrelevant in determining whether s75A FA 2003 applies and that the company should pay SDLT on £959m consideration

Late in December, the Upper Tribunal (‘UT’) announced their findings in respect of Project Blue and the SDLT payable under the transactions.   Under their ruling, SDLT is payable by Project Blue Limited (‘PBL’) on £959m, due to the application of s75A FA 2003.  This particular provision has historically been referred to as SDLT’s own mini anti-avoidance provision.  Both the First-tier and Upper Tribunals have now found that SDLT was payable under the transaction arrangements entered into by PBL.

While the case will no doubt be appealed against, given the amounts and principles involved, the findings of the Tribunal have, in the meanwhile, provided some more guidance regarding the operation and application of this complex anti-avoidance provision.

The commercial transaction underpinning the case involved the sale by Secretary of State for Defence (‘SSD’) of the land to PBL for £959m.  Following exchanging on this transaction, PBL contracted to sell the land to a Qatari Bank (‘MAR’) under a Sharia’h financing arrangement.

Under FA 2003 s45 (before its 2008 amendments) PBL was not liable to SDLT, as the completion of the contract between SSD and PBL was ‘disregarded’ under sub-sale relief and no SDLT was then subsequently payable on the transfer from SSD to MAR under s71A, a Sharia’h financing exemption.  Therefore unless FA 2003 s75A applied to the transaction, no SDLT was payable on the above transactions.

It is worth noting at the outset that these sub-sale rules have now been substantially changed so that they no longer operate this way and in particular the first contract is no longer “disregarded” as before.  However, the UT findings will have implications not only for those taxpayers who undertook any of earlier sub-sale tax schemes which applied the old rules (of which they were several variations), but also increases the risk of s75A being applied to normal ongoing commercial arrangements.  This will also have repercussions for transactions such as ‘de-enveloping’ certain residential properties to avoid the ATED which have external debt attached to them which will remain a tricky path and s75A will need to look at on a case by case basis.

In looking at the anti-avoidance legislation, the UTT highlighted how difficult the s75A legislation was to read referring to as a “labyrinth” and that even in applying it to the simplest of commercial circumstances its drafting “left a lot to be desired”.  In fact such were the variations of possible interpretation under this legislation, that the judges were unable to agree on how it should be applied to the above transaction and which elements should be brought into account, to such an extent that a casting vote had to be applied.  There was considerable deliberation on who “P” (Purchaser) could be, although they did both stress that it need not be either the party avoiding the tax, or the last or first person to the scheme, and also what elements of consideration could be applied.   However, one point that they did all agree upon was that there was nothing to state that s75A FA 2003 only applies once a tax avoidance purpose has been established and that somehow HMRC has discretionary powers on how when it would be applied.  In their view “Section 75A applies in a mandatory way whenever the facts of the case come within the words of the section”.

Going forward, and as noted above, this case will no doubt be appealed and therefore there continues to remain some doubt about how and when s75A should be applied. It would be nice to think that if two judges are struggling with its interpretation that some serious consideration is given to withdrawing it in its current form entirely and rewriting this legislation, so that everyone can clearly understand when and how it should be applied – don’t, however, hold your breath on that one: the taxpayer is likely to have to continue to watch and learn as Project Blue rumbles on through the judicial system.

If you require any further information in relation to this case please call the TaxDesk on 0845 4900 509 and ask for Caroline Fleet.