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SDLT anti-avoidance: Hannover Leasing decision impacts commercially driven structuring

SDLT anti-avoidance: Hannover Leasing decision impacts

First-tier Tribunal decision holds SDLT anti-avoidance legislation can apply whether or not there is ‘avoidance’.

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Neil Whitworth

Stamp Taxes Senior Manager

KPMG LLP (UK)

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The recent decision in Hannover Leasing v HMRC held that ‘statutory Ramsay’ Stamp Duty Land Tax (SDLT) anti-avoidance legislation (section 75A FA 2003) can apply, whether or not there is ‘avoidance’ in the conventional sense and whether or not transactions are commercially motivated. If this decision is correct taxpayers may see HMRC using section 75A to challenge many more transactions.

Hannover Leasing v HMRC (a First-tier Tribunal decision) is the first substantive case to consider the application of section 75A since the Supreme Court’s decision in Project Blue. It has general relevance to any transaction in land in England or Northern Ireland (and historically Wales and Scotland) where a number of steps are or were involved with the land’s acquisition.

The case has specific relevance to transactions that involve purchasing a company or unit trust after some restructuring of that entity but, if the decision is correct, its much wider relevance is that section 75A was held to be a charging provision that sits within the general scheme of the legislation, rather than a check to counter ‘unintended tax holidays’ for the taxpayer where the normal charging provisions go wrong (as they clearly did in Project Blue). The case also reaffirms the difficulties of adequately disclosing to protect against lengthy enquiry periods being available to HMRC where they choose to invoke section 75A.

The facts
The taxpayer (Hannover Co) wished to acquire an English commercial property and hold it in a German partnership (Hannover KG). The seller (Greycoat) held the property in a limited partnership of which a unit trust was the main partner. Hannover Co did not wish to acquire the partnership (purely for commercial reasons), so Greycoat sold the property out of the partnership to the unit trust and the partnership was removed. Hannover Co purchased the unit trust, wound it up and took the property. These steps took place over a few days. Just over two months later, Hannover Co contributed the property to Hannover KG.

Absent section 75A (an SDLT ‘statutory Ramsay’ rule), none of these steps triggered an SDLT charge by reason of the SDLT partnership provisions, the distribution exemption and the opacity of unit trusts for SDLT purposes.

The decision
The Tribunal found that all these steps were ‘scheme transactions’ involved with a purchase by Hannover KG, essentially because the steps were pre-ordained, contractually or commercially. Hence there was a notional transaction between the partners in the Greycoat partnership that originally held the property and the partners in Hannover KG that fell to be taxed under section 75A. The consideration for this transaction (set by section 75A as the highest amount paid or received for any of the scheme transactions) was £139 million (either the price for the units or the transfer of the property from the Greycoat partnership to the unit trust) and hence SDLT was due from the taxpayer on this figure. As it was decided the sale of the units was not the first scheme transaction, it was not possible to rely on the rule that ignores consideration for shares or units where the transfer of these is the first scheme transaction.

Essentially, the decision was that the taxpayer was incorrect to assert that ‘scheme transactions’ must be read purposively to mean transactions that go against the evident aims of the SDLT charging provisions. Rather, the purpose of section 75A is to counter any arrangement that gives an SDLT saving to which section 75A can apply (section 75A effectively defines the tax avoidance at which it is aimed), whether or not that tax saving would otherwise be considered tax avoidance. HMRC argued their published guidance to the contrary was simply incorrect. It is assumed that HMRC will not feel compelled in practice to apply section 75A to every complex transaction, however this case potentially gives HMRC broad discretion in their use of section 75A.

Comment
It is important to note that this is the first case to focus on section 75A as it applies to a fairly routine transaction as opposed to complex SDLT planning (as for example was the case in Project Blue). Therefore, despite it only being a Lower Tribunal decision, it has relevance to any transactions where there is another, less SDLT-efficient route to achieving the same commercial outcome, including transactions which HMRC has previously confirmed are not avoidance.

This is in some ways a surprising outcome: it is argued that the steps in Hannover were routine structuring and, given the transparency of partnerships, the transactions amounted to nothing more than a sale of units in a property unit trust. However, in reality the property itself moved three times to arrive at its final destination, which is prima facie at least, the kind of thing section 75A seems to be targeting. Nevertheless, the complete rejection of the taxpayer’s purposive construction of section 75A raises questions, given the much wider implications.

Clearly the decision will cause considerable anxiety among taxpayers, but there are some key points to bear in mind:

  • First, the Tribunal decision is based on the facts before the judge. Like any other case, conclusions drawn on the meaning of the statute were not tested against other hypothetical situations to ensure the conclusions hold good generally across all the transactions a taxpayer might carry out; and
  • Second, the decision (being a Lower Tribunal decision) is not binding in other cases.

So for these reasons, where fact patterns are different, the outcome can be different – the Hannover decision may not influence the decision in other cases. For example, it should still in principle be possible to acquire units or shares in property-owning vehicles and implement post-sale restructuring, to structure sale and leasebacks along the lines of HMRC’s published guidance, and to carry out partnership transactions without attracting a charge to SDLT under section 75A.

This position is even supported to some extent within the case itself:

  • The sale of the units was conditional on some pre-sale restructuring. The Tribunal indicated that had the unit trust sale been the first transaction, it might well have found for the taxpayer. Therefore the case does not directly touch on transactions where no such reorganisation is required; and
  • It is unclear whether financing steps were taken to be ‘involved in connection’ with the purchase or not as conflicting statements are made with regard to this point. Therefore the case does not necessarily mean a capitalisation of an entity to enable it to repay seller debt followed by a distribution of the property (for example) triggers section 75A.

However, taxpayers are reminded that a technical defence against section 75A (so for example one that shows the only transaction for consideration was the first step and that is the first scheme transaction) not just one that relies on ‘no mischief’, is much to be preferred.

There is also a procedural point raised by Hannover which suggests that protecting against lengthy enquiry periods may be difficult: HMRC closed their enquiries into the returns filed and issued determinations, presumably on the basis that the returns filed did not report the notional transaction they contended was taxable. This raises the question of whether it is possible to protect against section 75A by making full disclosure, thus leaving arrangements open to challenge for four years (or possibly longer). HMRC may therefore now attempt to challenge disclosed transactions that would ordinarily be out of time and for future transactions warrant and indemnity insurance cover for section 75A may be more difficult to obtain.

For further information please contact:

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