The Supreme Court has allowed HMRC’s appeal in this decision on the SDLT due on a Shari’a-financed land purchase.
In 2007 Project Blue Limited (PBL) purchased the former Chelsea Barracks site in London from the Ministry of Defence (MoD). This purchase was financed by a Ijara mortgage. In their SDLT returns, both MAR (the finance provider) and PBL claimed no SDLT was due, claiming alternative property finance relief and sub-sale relief respectively. The Supreme Court, in a majority decision, has ruled that PBL is chargeable to SDLT of c.£38 million (4 percent of £959 million).
This is an interesting case due to:
The Supreme Court accepted HMRC’s arguments that the arrangements were effective. Although the legislation was capable of being interpreted in more than one way – depending on the differences between the ‘SDLT world’ and the ‘real world’ – the Court held that the existence of an unintended ‘tax holiday’ caused by the effectiveness of the arrangements did not mean that the legislation must be interpreted in a way so as to prevent those arrangements being effective.
However, it also accepted HMRC’s arguments that section 75A applied. Section 75A is capable of broad application. It does not matter that the purpose of the arrangements does not involve tax avoidance, but the Court held that the provision must be read in light of its purpose to stop SDLT avoidance. That principle of interpretation enabled HMRC to choose PBL as the liable person, but did not prevent the highest amount given under the arrangements being taxed. The highest amount in fact exceeded the amount paid by PBL to MoD – so in effect, but for PBL having ended the financing arrangements early, PBL would have suffered a greater amount of tax than that which would have been payable if the arrangements had not been used. The result is not surprising on the facts.
HMRC will collect tax from the ‘real’ purchaser based on the ‘real’ price. But the unanswered question is how will the courts apply section 75A to SDLT-driven arrangements that could reasonably be described as responsible tax planning, not tax avoidance? Case law is expected this year when that question will start to be answered. For now, there is some concern that the transfer of property as part of a number of steps (not all necessarily involving the property) may be subject to SDLT under section 75A even though there is no avoidance motive.
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