Court of Appeal overturns the Lower Courts decision on the SDLT due under Project Blue

The Court of Appeal recently published their judgment in the case of Project Blue Limited (‘PBL’) v HMRC.  In what must seems somewhat of a hollow victory to HMRC, the Court held that SDLT was payable on the transaction – However this was a liability of MAR, the Bank involved in the financing of the project and not PBL, as the Sharia’h financing exemption should not apply.  Unfortunately HMRC had already closed their SDLT enquiry into MAR’s SDLT position and are now out of time to assess MAR directly.

Having won in the First-tier Tribunal and Upper Tribunal on the basis that s75A should be applied to the transaction and that the liability was that of PBL, no doubt HMRC will be looking for any further grounds to appeal against this decision.  In the meanwhile, the judgment provided by the Court helps to clarify the workings of the sub-sale rules (prior to their amendments under Finance Act 2013) as well as some further guidance on the workings of FA 2003 s75A.


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, for £1.25bn.  As part of the arrangements, the contract with MAR was completed on 31 January 2006 contemporaneously with the completion of PBL’s contract with SSD.  On the same day MAR granted to PBL a 999 year lease back to PBL and there were various put and call options in place.


The Court examined the interaction of the sub-sale rules under FA 2003 and the Sharia’h financing exemption provided under FA 2003 s71A.  It noted that “It is common ground that s 71A accommodates Shari’a compliant financing arrangements according to the Ijara model which depends upon the financial institution being the owner of the property in question.  Section 71A(1)(a) can therefore apply both to a case where the property is acquired by the financial institution directly from a third party owner (such as the MOD in this case) or where the institution’s own customer has already acquired the property and then sells it to the institution as part of an Ijara-based refinancing arrangement.”

However, the Court clarified that the exemption from charge is only limited to cases where “the vendor” is the person making the financial arrangements with the bank or other financial institution, under s71A(2) stating that “The exemption does not extend to the institution’s own acquisition of the property directly from a third party, even when that is undertaken at its customer’s request.”

Turning to the mechanics of the sub-sale rules as they applied to the Project Blue transactions, the acquisition by PBL would be disregarded for SDLT purposes and therefore PBL could not be regarded as the “vendor” for the purposes of s71A (2).  In establishing this SDLT position of PBL under the sub-sale rules the Court of Appeal drew further support for their analysis from the DV3 RS LP v HMRC [2013]  case – In that case the original party (MOD) and not the intermediate party (PBL) was held to be the vendor.

As PBL was not the “vendor”, the conditions for an exemption under FA 2003 s71A were not fulfilled.  Accordingly, MAR was liable to SDLT based on the £1.25bn purchase price.  Unfortunately as noted above, HMRC had already enquired into MAR’s return, concluded that no SDLT was due and had looked to assess PBL for the tax.  Having closed the enquiry, HMRC is now out of time to assess MAR for this liability.

Given that the exemption for the Sharia’h financing had failed, the Court of Appeal did not need to consider the workings of s75A in much depth.  However, the Court did make two useful observations regarding its operation:

  • Firstly, they concurred with the lower courts that the application of this provision was not limited to tax avoidance cases “as there are no reference to the scheme transactions being tax avoidance to any requirement to establish the existence of such a purposes or objective as a pre-condition to the operation of the section.
  • Secondly, in identifying who is “P” and who is “V” for the purposes of s75A, it should be applied according to what has first been identified as the disposal and acquisition of the chargeable interest. In the case of Project Blue, even if the Sharia’h exemption had been available to MAR, PBL would still be disregarded under the subsale rules and therefore, there was only one disposal and acquisition on which s75A could attach, which was from the MOD to MAR.

Given the clear judgment provided by the Court, it will be interesting to see whether HMRC will be given grounds for appeal.  However, no doubt in the meanwhile, HMRC will be swiftly reviewing other SDLT enquiries which rely on sub-sale arrangements to ensure that enquiries are open on all relevant parties and these remain in place until the matters are finally concluded.

If you would like further information on the case, please contact the TaxDesk on 0845 4900 509 and ask for Caroline Fleet.