After four long years through the Courts, the Project Blue SDLT case has reached its final verdict with the publication of the Supreme Court decision (https://www.supremecourt.uk/cases/uksc-2016-0137.html).
This case has been closely followed by many in the SDLT and property world for a number of reasons including the high profile transaction being the purchase of the Chelsea barracks from the Ministry of Defence (‘MOD’), the amounts involved with a property purchase price of £959 million and the complexities of the SDLT legislation, in particular the interaction of subsale relief and alternative finance regime and SDLT’s general anti-avoidance provisions under FA 2003 s75A.
In Project Blue V HMRC, we have seen some interesting curves and differing views taken by courts and judges alike. Although it is noted that all stages of the Tribunals and Courts have held that SDLT was due, but by different reasoning.
Outline of the case
MOD agreed to sell the Chelsea Barracks to Project Blue Limited (PBL) for £959 million in April 2007. Following exchange, PBL obtained Sharia based funding from a Qatari Bank, Masraf al Rayan (MAR). Effectively this involved the purchase of the property by the bank for £1.26bn and a lease back to PBL for 999 years in exchange for monthly rental. There were also put and call options put in place. On the day of completion, the sale by the MOD to PBL, the subsale to MAR and the grant of the new finance lease occurred.
From an SDLT perspective, the first arm of the transaction – the sub- sale from PBL to MAR, PBL contended that was exempted under s45A of the Finance Act 2003 on the basis that the assignment of rights was entered into without the contract between PBL and MOD being completed.
For the second arm and third arms of the transaction, the purchase by MAR of the property and the leaseback, relief was claimed under the exemption from SDLT under s71A of the Finance Act 2003 for alternative property finance arrangements.
HMRC subsequently opened enquiries into the SDLT returns submitted and the SDLT analysis of the transaction
Previous finding on the case
The First Tier Tribunal looked beyond the s45A and s71A reliefs and held SDLT on £1.25 billion to be payable, on the basis of s75A applying. The SDLT payable was higher than the SDLT that would have been paid (£38.6 million) if PBL had purchased the property directly and there was no series of sub-sale and leaseback transaction.
The case was then presented to the Upper Tribunal who took a slightly relaxed approach and held that SDLT on £959 million was payable and provisions in s71A applied. Their rationale was to associate the tax payable with what would have been payable in absence of any schemes.
An appeal from the defendants was then appropriated to the Court of Appeal, who took a different approach to the case. They concluded that it was not necessary to consider s75A as the subsale under s45A meant that the exemption under s71A would not apply. Accordingly. the judgment concluded MAR should be considered to the vendor and liable for SDLT on £1.25billion. However, it was noted that no SDLT would become payable as HMRC had closed an enquiry on MAR and no longer had authority to assess.
The case subsequently proceeded to Supreme Court and a verdict was reached recently.
Supreme Court Judgment
The leading judge, Lord Hodge considered that under s45A and s71A legislation and their interaction no stamp duty liability would have occurred on this transaction. However, they considered that s75A anti-avoidance provisions to charge SDLT did apply and that SDLT was payable at the highest amount exchanged in the transactions for the property, ie £1.25billion.
The decision was reached by majority to one. PBL would have to pay more SDLT than otherwise if it had purchased the property directly. The financing arrangements were unwound subsequently so that PBL only ever paid £959million under the arrangement and HMRC has agreed to allow this to be taken into account in the SDLT payment, so under these circumstances the actual SDLT payable will be the same as if PBL had purchased directly from the MOD.
Although s45A and s71A failed to impose any tax, HMRC’s defence armour lay in s75A. The provision allowed HMRC to assess SDLT on the largest amount given by anyone for the scheme transactions. In applying s75A, the Supreme Court agreed with lower tribunals and Courts in holding that the heading of “anti-avoidance” is only relevant in assisting “an understanding the mischief to which the provision addresses, but it says nothing as to the motives of the parties to the scheme transaction”. S75A can therefore be applied, where the commerciality of the transaction dictates the form. For S75A to apply, it is sufficient that there is a reduced lialibyt or no liability to SDLT based on the series of transactions put in place, regardless of the motives. Bolstered by this statement, taxpayers can expect HMRC to raise the application or potential application of s75A to more transactions, where the SDLT may be less than originally expected on first blush.