Project Blue Limited (Respondent) v Commissioners for Her Majesty's Revenue and Customs (Appellant)

Trinity Term

[2018] UKSC 30

On appeal from: [2016] EWCA Civ 485

Project Blue Limited (Respondent) v Commissioners for Her Majesty’s Revenue and Customs (Appellant)

before

Lady Hale, President

JUDGMENT GIVEN ON

13 June 2018

Heard on 28 February and 1 March 2018

Appellant

Respondent

Solicitors Office)

Chance LLP)

LORD HODGE: (with whom Lady Hale, Lord Hughes and Lord Lloyd-Jones agree)

1. This appeal is concerned with Stamp Duty Land Tax (“SDLT”), which was introduced by the Finance Act 2003 (“the FA 2003”) to replace Stamp Duty, a tax

on written instruments which had been the subject of many successful tax avoidance

schemes. The principal question in the appeal is whether Project Blue Ltd (“PBL”)

is due to pay SDLT of £50m arising out of its purchase from the Ministry of Defence

(“the MoD”) of the former Chelsea Barracks in Chelsea Bridge Road, London. Since

its enactment, the FA 2003 has been amended on several occasions. This appeal is
concerned with that Act as it existed on 31 January 2008.

2.         Two issues lie at the heart of the appeal. The first concerns the relationship

between section 45 of the FA 2003, which provides what is often called “sub-sale

relief” where there is a transfer of rights to a contract for a land transaction which is

to be completed by a conveyance, and section 71A of that Act, which creates exemptions for alternative property finance which complies with the prohibition of

usury in Shari’a law. The first issue does not arise in relation to transactions after 24

March 2011 because of an amendment to section 45(3) of the FA 2003 which was made by the Finance Act 2011, to which I refer in para 33 below. The second issue concerns the correct interpretation of the anti-avoidance provisions in section 75A of the FA 2003, which was introduced by the Finance Act 2007. If the anti- avoidance provisions do not apply to the transactions, PBL is not liable to pay the SDLT which HMRC claims; if they do apply, there is a dispute over the amount of SDLT which is due and who was or is liable to pay it.

3. PBL purchased the Chelsea Barracks through a sealed bid deadline tender process for the price of £959m and exchanged contracts with the Secretary of State for Defence on 5 April 2007. A 20% deposit was paid on exchange of contracts and the balance of the price was to be paid in four equal instalments. Completion of the purchase was postponed by the contract until 31 January 2008 to allow the MoD to re-house the troops from the barracks. The principal shareholder in PBL was Qatari

Diar Real Estate Investment Company (“QD”), which was owned by the Qatari

Investment Authority, a sovereign wealth fund owned by the Qatari government. QD provided the funding for the initial deposit but PBL required to obtain finance

for the purchase of the barracks from Qatari Bank Masraf al Rayan (“MAR”), a

Qatari financial institution which provided a portfolio of Shari’a-compliant

products, and which syndicated the finance for the purchase.

4. Financial institutions, which seek to comply with the Islamic prohibition on usury, have adopted structures for financing deals which do not involve lending in return for interest and the taking of security for the repayment of the borrowed sums

and interest by means of a mortgage. One such form of Shari’a -compliant financing, known as Ijara finance, was used to fund the purchase of the barracks. PBL’s written

case (paras 14 and 15) contains a convenient summary of the paradigm forms of

Ijara arrangements, which I quote in full:

“14. Such transactions are likely to occur in one of two

categories of case. In the first, the counterparty wishes to acquire a property from a third party and requires funding to enable it to do so. The financial institution buys the property from the third party, leases it to the counterparty and, at the same time, grants the counterparty an option to acquire the

financial institution’s interest at a later stage. In the event that

the counterparty has some, but insufficient, capital to acquire the property, each party can take an undivided share in the land; and the rent charged by the financial institution takes account of its reduced interest.

15. In the second case, the counterparty already owns the property but wishes to obtain funds to use for another purpose. In this case the Ijara involves the counterparty selling his own interest in the property to the financial institution and taking a

lease back, together with an option to repurchase.”

HMRC in para 44 of their written case described the two situations in which Ijara finance was used in essentially similar terms and stated (as is clearly the case) that section 71A was drafted with those situations in mind.

5. The funding of the purchase of the barracks was an adaptation of the first of the two categories. I set out the transactions in the following steps so as to assist understanding of the arguments which follow in relation to the tax consequences of the transaction:

(1)	5 April 2007: PBL and the MoD entered into a contract to purchase

the barracks.

(2)	29 January 2008: PBL contracted to sub-sell the freehold to MAR.
(3)	29 January 2008: MAR agreed to lease the barracks back to PBL.

(4) 31 January 2008: On completion, (a) MAR and PBL entered into call and put options respectively entitling or requiring PBL to repurchase the freehold in the barracks; (b) the MoD conveyed the freehold in the barracks to PBL; (c) PBL conveyed the freehold in the barracks to MAR, and (d) immediately after that, MAR leased the barracks back to PBL.

On 1 February 2008 PBL granted a 999-year lease to its subsidiary, Project Blue

Developments Ltd (“PBDL”) with call and put options for the purchase of the

freehold, but that transaction is not relevant to this appeal. As will be seen, it is not disputed that stages 4(b) and (c) brought into play the sub-sale relief provided by section 45 of the FA 2003, while it is contested whether stage 4(c) engaged the exemption for alternative property finance which section 71A(2) of the Act provides. This is the first of the two principal issues mentioned in para 2 above.

6.         On 1 February 2008, Clifford Chance LLP submitted a notification

“Disclosure of Tax Avoidance Scheme” in accordance with the Stamp Duty Land

Tax Avoidance (Prescribed Descriptions of Arrangements) Regulations (SI

2005/1868). The notification stated:

“No SDLT is payable by [PBL] on the sale from [the MoD] to

[PBL] by virtue of sub-sale relief under section 45(3) Finance Act 2003. No SDLT is payable by [MAR] on the sale of the property from [PBL] to [MAR] by virtue of alternative property

finance relief under section 71A(2) Finance Act 2003.”

Such a notification is not an acknowledgement that the arrangements were entered into for the purpose of tax avoidance. Arrangements are notifiable under section 306(1) of the Finance Act 2004 if they enable, or might be expected to enable, any person to obtain a tax advantage and are such that one of the main benefits that might be expected to arise from the arrangements is the obtaining of that advantage. The focus of the statutory provision is on the consequences of the arrangements and not on the intention of the parties who enter into them.

7. On 22 February 2008 several land transaction returns were filed in relation to these transactions. Three are relevant to this appeal. First, a return lodged on behalf of PBL, which related to the completion on 31 January 2008 of the contract of 5 April 2007 between the MoD and PBL, claimed that there was no liability to SDLT because of the sub-sale relief in section 45(3) of the FA 2003. Secondly, a return lodged on behalf of MAR related to the completion on 31 January 2008 of the sale agreement between PBL and MAR dated 29 January 2008. The consideration was stated to be £1.25 billion, which was the Sterling equivalent of US$2,467,875,000 which was specified in the sale agreement. In the return MAR

claimed “alternative property finance relief” under section 71A of the FA 2003.

Thirdly, a return was filed relating to the grant by MAR of a lease to PBL on 31

January 2008. Again, “alternative property finance relief” was claimed under section

71A. The consequence was that the taxpayers claimed that nobody incurred a
liability to SDLT as a result of the completion of those transactions.

8. HMRC opened an inquiry into the SDLT returns which had been submitted in relation to these transactions. In relation to the first return, which was lodged on behalf of PBL, HMRC concluded the inquiry by a closure notice contained in a letter dated 13 July 2011, which amended that return by adjusting the amount of SDLT due from £0 to £38.36m. This sum is the SDLT which would be due on the completion of the sale by the MoD to PBL for the consideration of £959m if that were a chargeable transaction. PBL now argues that HMRC were not empowered to

amend that return as they did. I discuss this challenge under the heading “The ‘wrong return’ challenge” in paras 81-84 below. HMRC did not require any amendment to

the other land transaction returns as a result of their inquiry. But when PBL appealed the amendment of the return, HMRC successfully applied to amend its case to increase the amount of SDLT due from £38.36m to £50m. This was because the total consideration which MAR agreed to provide to PBL was £1.25 billion, and, at first sight at least, £50m would be the tax due on that transaction. I discuss those figures in greater detail below.

9. The sale contract which PBL and MAR entered into on 29 January 2008 involved payments by instalments which were subject to contingencies (clause 4.1 and 4.2). The fourth tranche of consideration, which was US$378,670,740 payable on 31 January 2011, was never paid because the arrangement was terminated on 1

March 2010. This is relevant to the dispute about the actual consideration and PBL’s

human rights challenge which I consider in paras 57-80 below.

The Finance Act 2003

10.       Part 4 of the FA 2003 introduced SDLT into British tax law. It is a tax on

land transactions (section 42(1)). A “land transaction” is “any acquisition of a

chargeable interest” (section 43(1)); and a “chargeable interest” is defined (in

section 48(1)) as including “an estate, interest, right or power in or over land in the

United Kingdom” other than an exempt interest. A “security interest”, which is “an

interest or right (other than a rentcharge) held for the purpose of securing the

payment of money or the performance of any other obligation” (section 48(3)), is an

exempt interest (section 48(2)). Thus, in relation to land purchases and conventional property funding arrangements in the United Kingdom, the tax is levied on the acquisition of chargeable interests, such as freehold or leasehold interests in land, while security interests, including those which secure the financing of such acquisitions, are exempted.

11. When persons enter into a contract for a land transaction under which the transaction is to be completed by a conveyance, section 44(2) provides that they are not regarded as entering into a land transaction by reason of entering into the contract. Thus steps (1) and (2) in para 5 above would not of themselves give rise to any liability to SDLT. Instead, if the transaction is completed without previously having been substantially performed, the contract and the transaction effected on completion are treated as parts of a single land transaction, whose effective date is the date of completion (section 44(3)). If the contract is not completed but is substantially performed (for example, if the purchaser takes possession of the subject matter of the contract or a substantial amount of the consideration is paid) the contract is treated as if it were the transaction provided for in the contract and its effective date is when the contract is substantially performed (section 44(4) and (5)).

12. It is common ground in this appeal that section 45, which creates sub-sale relief by modifying the operation of section 44, applies in relation to the completion of the two contracts for the sale of the barracks (steps (1) and (2) in para 5 above) to prevent a charge to tax on the completion of the contract between the MoD and PBL at step 4(b) in para 5 above. Section 45 (as amended by section 49 of and paragraph 2 of Schedule 10 to the Finance (No 2) Act 2005) provides:

“(2) The transferee is not regarded as entering into a land transaction by reason of the transfer of rights, but section 44 (contract and conveyance) has effect in accordance with the following provisions of this section.

(3)	That section applies as if there were a contract for a land

transaction (a ‘secondary contract’) under which -

(a)	the transferee is the purchaser, and
(b)	the consideration for the transaction is -

(i) so much of the consideration under the original contract as is referable to the subject- matter of the transfer of rights and is to be given (directly or indirectly) by the transferee or a person connected with him, and

(ii) the consideration given for the transfer of

rights.

The substantial performance or completion of the original contract at the same time as, and in connection with, the substantial performance or completion of the secondary contract shall be disregarded except in a case where the secondary contract gives rise to a transaction that is exempt from charge by virtue of subsection (3) of section 73 (alternative property finance: land sold to financial institution

and re-sold to individual).”

The consequence of the tailpiece of section 45(3) was that the completion of the contract between the MoD and PBL for the purchase of the barracks was disregarded.

Section 71A

13. The FA 2003 as originally enacted contained an exemption for Ijara financing in section 72. Section 71A was added in April 2005 by section 94 of and paragraph 2 of Schedule 8 to the Finance Act 2005 and applies in place of section 72, except in relation to land in Scotland, to which sections 72 and 72A apply. Section 71A(1) sets out the scope of the section; it provides:

“(1) This section applies where arrangements are entered into between a person and a financial institution under which -

(a)	the institution purchases a major interest in land

or an undivided share of a major interest in land (‘the

first transaction’),

(b) where the interest purchased is an undivided share, the major interest is held on trust for the institution and the person as beneficial tenants in common,

(c) the institution (or the person holding the land on trust as mentioned in paragraph (b)) grants to the person out of the major interest a lease (if the major interest is freehold) or a sub-lease (if the major interest is

leasehold) (‘the second transaction’), and

(d) the institution and the person enter into an agreement under which the person has a right to require the institution or its successor in title to transfer to the person (in one transaction or a series of transactions) the whole interest purchased by the institution under the

first transaction.”

14. The section therefore has the scope to cover the contracts between PBL and MAR at steps (2), (3) and (4)(a) in para 5 above. The section then spells out the exemptions which it confers on Ijara arrangements as follows. First, subsection (2)

exempts the first transaction (the institution’s purchase of a major interest in land)

if the vendor is the counterparty to the arrangement with the financial institution (or is another financial institution which has provided Ijara finance to that person). It provides:

“(2)	The first transaction is exempt from charge if the vendor
is -
(a) the person, or
(b) another financial institution by whom the interest was acquired under arrangements of the kind mentioned in subsection (1) entered into between it and the
person.”

15. Secondly, subsection (3) exempts from charge the grant of the lease of the subjects to the counterparty by providing:

“The second transaction is exempt from charge if the

provisions of this Part relating to the first transaction are

complied with (including the payment of any tax chargeable).”

16. Thirdly, subsections (4), (5) and (7) exempt from charge the re-conveyance

by the financial institution of the major interest in land to the counterparty. They
provide:

“(4) Any transfer to the person that results from the exercise

of the right mentioned in subsection (1)(d) (‘a further
transaction’) is exempt from charge if -

(a) the provisions of this Part relating to the first and second transactions are complied with, and

(b) at all times between the second transaction and the further transaction -

(i) the interest purchased under the first transaction is held by a financial institution so far as not transferred by a previous further transaction, and

(ii) the lease or sub-lease granted under the second transaction is held by the person.

(5)	The agreement mentioned in subsection (1)(d) is not to

be treated -

(a) as substantially performed unless and until the whole interest purchased by the institution under the first transaction has been transferred (and accordingly section 44(5) does not apply), or

(b) as a distinct land transaction by virtue of section 46 (options and rights of pre-emption).

…

(7) A further transaction that is exempt from charge by virtue of subsection (4) is not a notifiable transaction unless the transaction involves the transfer to the person of the whole interest purchased by the institution under the first transaction,

so far as not transferred by a previous further transaction.”

17. Section 71A therefore reflects the two paradigm forms of Ijara finance set out in para 4 above. First, if the financial institution purchases the property from a third party, that transaction is not exempted under subsection (2) and the financial institution pays SDLT on completion or the substantial performance of that contract; but the lease to the party who is being financed and the eventual transfer of the interest by the financial institution to that party on repayment of the financing are exempt under subsections (3) and (4) respectively. Secondly, if the financial institution purchases the property from the counterparty whom it is financing, subsection (2) applies to exempt the transfer of the major interest in land to the financial institution and subsections (3) and (4) exempt the second transaction (the lease) and the further transaction (the re-transfer of the major interest in land to the counterparty).

18. Because the arrangements for financing the purchase of the barracks involved PBL completing its purchase and its sale of the barracks to MAR on the same day in a connected transaction, PBL, as I have said, claimed sub-sale relief under section 45(3). Because MAR had purchased the barracks from PBL in the context of an Ijara arrangement, it claimed exemption under section 71A(2) for that purchase and a claim was also submitted on behalf of PBL for exemption under section 71A(3) for the lease to PBL.

1. When HMRC amended PBL’s return to assert a liability to pay SDLT of

£38.36m, PBL appealed to the First-tier Tribunal (“the FTT”). Before the FTT the

parties agreed that the combined effect of sections 45(3) and 71A was to exclude any liability to SDLT on the part of PBL or MAR in relation to the transactions unless the anti-avoidance provisions of section 75A applied to the transactions. The arguments before the FTT therefore concentrated on the meaning and application of section 75A, to which I turn later in this judgment. But when the appeal came before

the Upper Tribunal (the “UT”), PBL changed its position. It continued to argue that

it was not liable for SDLT on its purchase of the barracks from the MoD because of its entitlement to sub-sale relief under section 45(3). But it now argued that MAR was not entitled to exemption on its purchase of the barracks under section 71A(2) (para 14 above) because, on a proper understanding of the related provisions of the

FA 2003, PBL was not the “vendor” of the barracks to MAR under that subsection.

The tailpiece of section 45(3) (para 12 above) required that the completion of the sale by the MoD to PBL be disregarded and that tax was due on the notional contract created by section 45(3). Giving effect to that disregard and the notional contract meant that the vendor of the barracks was the MoD, and not PBL. The exemption in section 71A(2) therefore did not apply and MAR would have been liable to pay SDLT on the purchase price of £1.25 billion, if HMRC had not failed to so determine or to assess MAR within the six-year time limit since the transaction.

20. This argument did not succeed before the UT (Morgan J and Judge Nowlan). Morgan J, with whom Judge Nowlan agreed in relation to section 71A held, at para

43, that the purpose of the section was “to equate the position of a provider of an

alternative form of finance (such as MAR), who acquires a chargeable interest, with the position of a funder who acquires a security interest (which is an exempt

interest)”. He relied on section 45(5A) which I discuss in para 32 below, in

interpreting “the vendor” in para 71A(2) as referring to PBL but also pointed out

that his interpretation promoted the purpose of section 71A. If PBL were correct in its submission, SDLT would be paid on the level of funding provided by the

financial institution and not on the price paid by the “borrower” for the land. He

acknowledged that his interpretation meant that neither PBL or MAR was liable to pay SDLT in respect of the transactions unless section 75A applied, but considered the legislation to be flawed at the relevant time because the tailpiece of section 45(3) did not contain an exception to the disregard where the sub-sale was exempt from a charge under section 71A.

21. The Court of Appeal (Patten, Lewison and Underhill LJJ) [2018] 1 WLR 368

disagreed with the Upper Tribunal’s interpretation of the relationship between

section 45(3) and section 71A. Patten LJ began by observing, at para 28, that

HMRC’s approach by its reliance on section 75A produced “a particularly inapt and

harsh result” because PBL would have to pay SDLT on the larger sum which MAR

provided to it rather than on the purchase price which it paid to the MoD. Secondly,

he held that PBL could not be “the vendor” in section 71A(2) because, as a result of

the disregard of the transaction between the MoD and PBL in the tailpiece of section 45(3), the only contract by which MAR acquired the barracks for SDLT purposes was the secondary contract under that subsection. He referred to the Court of Appeal’s earlier judgment in DV3 RS LP v Revenue and Customs Comrs [2014] 1

WLR 1136 (“DV3”) in support of his analysis: “vendor” in section 71A(2) must be

a reference to the person from whom MAR purchased the barracks; that person could not be PBL as, by virtue of the disregard, it had no chargeable interest so as to be regarded as entering into the secondary contract, which under section 45(3) was a

contract for a land transaction. He rejected Mr Gammie’s submission on behalf of

HMRC that section 71A was not addressing land transactions “in the SDLT world”

but was framed to address transactions “in the real world”, and also his submission

relying on section 45(5A). Thirdly, he considered that the scheme of section 71A was to limit SDLT in all cases to a single charge on the acquisition of the property from the third party vendor, whether the acquirer was the financial institution or its customer. Fourthly, he thought that it was unlikely that Parliament had intended to leave transactions, which fell within both of sections 45(3) and 71A, exempt from any SDLT charge and to have dealt with the problem by the anti-avoidance

provisions of section 75A, which was introduced over a year later. The “vendor”

under section 71A(2) was therefore the MoD, and not PBL, with the result that that
subsection did not exempt MAR from the charge.

22. Lewison LJ added two further points. First, he disagreed with the approach of the Upper Tribunal which equated the position of MAR with a traditional lender and saw the aim of section 71A as being that SDLT was to be paid by purchasers and not financiers. As under an Ijara arrangement the financial institution owned the asset for the duration of the lease, it was not surprising that it should be liable to pay SDLT on the purchase. Secondly, because section 75A did not apply until 20 months

after section 71A had taken effect, the result of HMRC’s approach was that no SDLT

would have been payable on transactions which combined sub-sale relief and the

section 71A exemption in that period. This provided “a very strong context” which

made it inappropriate to apply an extended meaning of “vendor” in section 45(5A):

para 49.

23. I recognise the difficulty in interpreting the legislation which has been subjected to repeated incremental amendments and additions since 2003, as Parliament has struggled to optimise this new tax. But I have come to the conclusion

that the Upper Tribunal was correct in concluding that PBL was “the vendor” under

section 71A(2) and therefore that MAR’s purchase of the barracks from PBL was

exempt from SDLT for the following four reasons.

24. First, it is in my view significant that Parliament has chosen, when describing the alternative property finance transactions to be exempted from charge in section

71A, and also in sections 72, 72A and 73, not to use the language of “land

transaction” and “chargeable interest” but to use what Mr Gammie described as the

language of “real world” transactions. Parliament also adopted this practice in

paragraphs 2-4 of Schedule 3, which exempt specified transactions from charge.

Thus in section 71A(1)(a) the first transaction is described as the purchase of “a

major interest in land” and in subsection (1)(c) the second transaction is described

as the granting of “a lease” out of the major interest. This contrasts with the language

of sections 42-45 which are concerned with the statutory constructs of land transactions, contracts for land transactions, and the acquisition and disposal of chargeable interests.

1. As descriptions of “real world” transactions the provisions of section 71A

match the paradigm descriptions of Ijara arrangements in para 4 above so that in the first example, when the financial institution purchases the property from a third party

and then finances its customer’s acquisition by means of a lease and a contract to

purchase, the institution pays SDLT on its purchase but not on the financing arrangements which follow, whereas in the second example, where the financial institution purchases the property from its customer, that purchase and the subsequent transactions are exempt. The distinctive treatment of the two examples

is achieved by section 71A(2) which exempts “the first transaction” from charge if

the vendor is the customer of the financial institution (or a financial institution which has previously provided Ijara finance to that customer). It appears to me that in

enacting the section using “real world” terms, Parliament has sought to describe the

two paradigms of Ijara finance. In the second example, in which subsection (2)

exempts “the first transaction”, the customer may have purchased the major interest

in land and paid SDLT on that purchase, or he may have received the major interest in land as a gift or through inheritance and therefore have incurred no charge to SDLT. It is not relevant to the application of section 71A(2) to ask whether or not the customer has incurred a liability to pay SDLT before entering into the Ijara

arrangement. Subsection (2) requires one only to ask the “real world” question: “who sold the major interest in land to the financial institution?” If the answer to that question is “the customer”, no charge to SDLT would arise. In the present case,

if one asks, “who sold the barracks to MAR?”, the answer is PBL.

26. Secondly, this approach is consistent with the aim of section 71A, which the UT identified, of seeking to equate Ijara financing with conventional lending in the United Kingdom by taxing the purchaser of the property and exempting the financier. In conventional lending, security interests are exempt in all circumstances (section 48(2)). Section 71A operates as a self-contained statutory regime to achieve this result. As was stated in the Explanatory Notes to the original clauses 72 and 73 of the Finance Bill 2003 the aim was to place the amount of tax due on purchases

by means of Islamic financing “on a level footing with the amount due for purchases

with ‘conventional’ mortgage products”. Thus in the case where the financial

institution purchases from its customer, the whole transaction may be seen as the equivalent of a security transaction. In the case where the financial institution purchases from a third party, that purchase may be seen as a precursor of the equivalent of a security transaction effected by the lease and the conferring on the customer of the right to buy the property from the financial institution.

27. Thirdly, there is nothing within section 71A which suggests that the exemption in subsection (2) will not apply when the sale by the customer to the financial institution is a sub-sale which takes place contemporaneously and in

connection with the customer’s purchase of the major interest in land. What

Parliament appears to have overlooked at the outset is the possibility of the combination of sub-sale relief with the exemption of Ijara arrangements.

28. Fourthly, this interpretation has the benefit (subject to the operation in particular cases of section 75A which I discuss below) that, where the financial institution purchases the property from its customer, SDLT will not be charged on the amount which the financial institution provides its customer, which may in many circumstances be significantly less than the purchase price of the property, for example where the customer has provided a proportion of the purchase price of the land from its own resources. In some cases, as here, the amount which the financial institution contracts to provide may be significantly more than the purchase price of the property which the customer has paid. It is of note that the interpretation of section 71A(2) which the Court of Appeal has favoured in the context of a sub-sale has the effect of imposing a tax charge by reference to the amount which the financial institution provides the customer. This would not achieve the level footing which the section was designed to achieve.

29. In DV3 the Court of Appeal was addressing relief under paragraph 10 of Schedule 15 to the FA 2003 which was available when a person transfers a chargeable interest to a partnership of which he is a partner. In that case the partner (A) purchased a lease from an insurance company (C) and transferred the lease to a newly created partnership (B) of which A and four others were the partners. Both contracts were completed on the same day. A claimed sub-sale relief under section 45(3) and also relief for B (the partnership) under paragraph 10 of Schedule 15. The claim for the Schedule 15 relief failed because the section 45(3) disregard prevented A from acquiring a chargeable interest from C, and paragraph 10 of Schedule 15 applies only if a partner transfers a chargeable interest to a partnership. Lewison LJ,

when discussing the definition of “land transaction” in section 43(1), stated, at para

23:

“the fact that B acquires a chargeable interest as the result of an

instrument giving effect to a transaction between him and A does not necessarily entail the proposition that the interest in

A’s hands was itself a chargeable interest. If there is no land

transaction, there cannot have been the acquisition of a

chargeable interest.”

He continued at para 30:

“Paragraph 10 of Schedule 15 to the 2003 Act is not so much

concerned with the acquisition of a chargeable interest by a partnership as the transfer by a partner of a chargeable interest. It looks at a transaction from the perspective of the transferor.

… It seems to me to be clear that a partner cannot transfer a

chargeable interest to a partnership unless he has a chargeable

interest to transfer.”

30. HMRC accept as correct the Court of Appeal’s analysis in DV3 but argue that the case casts no light on the correct interpretation of section 71A(2) because it is irrelevant to the operation of that subsection whether the completion of the sale from

the MoD to PBL was a “land transaction” for the purpose of SDLT with the result

that PBL acquired a chargeable interest. Equally, it is irrelevant to the interpretation of section 71A(2) whether or not the transaction between the customer and the

financial institution is a land transaction. When the FA 2003 spoke of “the vendor”

in section 71A and in the equivalent subsections in the other sections exempting

alternative property finance, it was referring to the vendor in the “real world”

transaction of the sale of the major interest in land. It was not concerned with

whether or not the “real world” transaction was a “land transaction” for the purposes

of SDLT. Accordingly, HMRC submit that section 43(4), which defines “vendor”

in relation to a land transaction in Part 4 of the FA 2003 as “the person disposing of the subject-matter of the transaction” is not in point. For the reason set out in

paras 24 and 25 above, I agree. It follows that the disregard in the tailpiece of section
45(3) has no bearing on the operation of section 71A(2).

31. A consideration which influenced the Court of Appeal in reaching its view on section 71A(2) was that Parliament could not have intended to leave transactions which involved a sub-sale financed by an Ijara arrangement (and thus fell within both section 45(3) and section 71A) free of charge for over one year before it introduced the anti-avoidance provision of section 75A. I see the force of this point; it is without question a legitimate method of purposive statutory construction that one should seek to avoid absurd or unlikely results. But SDLT was a new tax created by the FA 2003 and, as I have said, required repeated amendments to make it effective. It is not surprising that lacunas may have existed in the early years of a new tax.

32. In the early years of the tax, Parliament enacted amendments to close identified lacunas caused by the combination of sub-sale relief and exemptions. Thus section 45(5A) was inserted into the FA 2003 by section 296 of and paragraph 5 of Schedule 39 to the Finance Act 2004. It provided:

“In relation to a land transaction treated as taking place by

virtue of subsection (3) -

(a) references in Schedule 7 (group relief) to the

vendor shall be read as references to the vendor under
the original contract;

(b) other references in this Part to the vendor shall be read, where the context permits, as referring to either the

vendor under the original contract or the transferor.”

This provision would not have needed to define “the vendor” for the purpose of

group relief in para (a) as it did if, consistently with the Court of Appeal’s reasoning, the disregard in the tailpiece to section 45(3) operated already to make “the vendor”

a reference to the vendor under the original contract. Similarly, the insertion by the Finance (No 2) Act 2005 into the tailpiece of section 45(3) of the words of exception

(ie “except in a case where the secondary contract gives rise to a transaction that is

exempt from charge by virtue of subsection (3) of section 73 (alternative property

finance: land sold to financial institution and re-sold to individual)”) would not have

been required to impose a charge to SDLT. If the Court of Appeal were correct in

holding that the “vendor” in section 71A(2) had to have a chargeable interest and

that the tailpiece of section 45(3) prevented it from having such an interest, sections 72(2), 72A(2) and 73(2), which are similarly worded, would operate in the same

way in the context of a sub-sale so that the “vendor” in each case could not be the

customer.

33. The parties have not explained to the court what prompted each of the various amendments, but Parliament may have been responding to particular schemes which had the effect of avoiding SDLT. HMRC explained in their written case that section 75A, which the Stamp Duty Land Tax (Variation of the Finance Act 2003) Regulations 2006 (SI 2006/3237) and section 71 of the Finance Act 2007 inserted into the FA 2003, was a response to the formulation of tax avoidance schemes which combined reliefs (including sub-sale relief) and exemptions in ways which Parliament had not intended. As will be clear when I turn to section 75A, it has a very broad ambit. The problem of tax avoidance by combining sub-sale relief and the exemptions for the various forms alternative property finance was capable of a more focussed resolution. While subsequent amendments are not a legitimate tool in ascertaining prior parliamentary intention, it is relevant to note that the problem of the combination of the sub-sale relief and those exemptions was eventually resolved by a simple expedient. In section 82 of and paragraph 2 of Schedule 21 to the Finance Act 2011 Parliament amended the exception in the tailpiece of section

45(3) to read: “except in a case where the secondary contract gives rise to a

transaction that is exempt from charge by virtue of any of sections 71A to 73 (which

relate to alternative property finance)” (new wording emphasised). This

amendment, like those referred to in para 32, would not have been needed to create a charge to SDLT if the interpretation which the Court of Appeal favoured were correct.

34. The courts adopt a purposive approach to the interpretation of taxing statutes following the guidance of the House of Lords in Barclays Mercantile Business Finance Ltd v Mawson (Inspector of Taxes) [2005] 1 AC 684. In accordance with that guidance, summarised by Lord Nicholls of Birkenhead at para 32, the court asks itself two questions. First, it must determine the nature of the transaction to which a statutory provision is intended to apply; and secondly it must decide whether the actual transaction answers to the statutory description. If I am correct about the self- contained nature of the provisions of section 71A, the answer to the first question is

that the exemption in section 71A(2) applies to the “first transaction” of the Ijara

arrangement in section 71A(1) where the customer sells a major interest in land to

the financial institution. The question whether PBL’s sale of the barracks to MAR

answers that description is answered in the affirmative. A purposive construction will not always operate in favour of HMRC and against the taxpayer as MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311 shows. Similarly, if there are lacunas in a statutory regime which enable tax avoidance, a purposive interpretation

may not always remove them as the Court of Appeal’s judgment in Mayes v Revenue

and Customs Comrs [2011] STC 1269 shows.

35. I therefore conclude that, but for section 75A, the combination of the operation of sub-sale relief under section 45(2) and (3) and the exemption under section 71A(2) relieved the sale by the MoD to PBL and exempted the sale by PBL to MAR from a charge to SDLT.

36. An argument against this approach, which has attracted Lord Briggs, is that section 71A(2) must be construed as exempting a transaction which would otherwise be a chargeable transaction under Part 4. The only transaction which is so chargeable, so the argument goes, is the completion of the notional secondary contract which section 45(3) creates, and section 45(5A)(b) gives instructions on the identification of the vendor in the notional land transaction. Because the

identification of “the vendor” in section 45(5A)(b) depends on the context in which

the word is used and that context would give rise to the avoidance of tax if “vendor”

referred to the transferee because the combination of sub-sale relief and section

71A(2) would exempt both transactions, it is argued that “the vendor” in section

71A(2) must refer to the original vendor, ie the MoD. I do not agree. In relation to the first point, the statement that a transaction is exempt from charge, such as that in

section 71A(2) referring to “the first transaction”, is an unqualified statement that a

transaction of that description is free from a liability to pay the tax. That exclusion of liability is not removed if, for some extraneous reason such as the operation of sub-sale relief under section 45, the transaction in question would not have imposed a liability to SDLT: viz the first of my four reasons (paras 24 and 25 above). If that is correct, the second argument does not arise because operation of the exemption does not depend on section 45(5A)(b).

37.       In any event, if section 45(5A)(b) were relevant, (a) the context of the use of

the word “vendor” was in relation to “real world” transactions and (b) the history of

the amendment of the FA 2003 in the years before the transactions were carried out on 31 January 2008 suggests that HMRC were struggling to respond to schemes which exploited lacunas in the legislation. In that context the existence of a loophole in the tax legislation would not militate against the interpretation which I favour. This is not to say that a contextual construction of a statutory provision may not have regard to the consequences of a particular interpretation and lead one to prefer another interpretation, especially when the former interpretation would have absurd or unreasonable results. It is simply to say that in the early years of SDLT Parliament created a patchwork of provisions, which, for a while, allowed a transaction, which combined sub-sale relief and Ijara arrangements, what Lord Briggs correctly calls

“an unintended tax holiday”.

38. I recognise that the exclusion by the Finance (No 2) Act 2005 of the completion or substantial performance of the first contract from the section 45(3) disregard when the secondary contract would give rise to an exempt transaction under section 73(3) suggests that the draftsman in 2005 sought to impose a charge on the first transaction under section 73 while not addressing a similar problem in section 71A. But that indication of intention at that time is not sufficient in my view to outweigh the factors which have persuaded me to regard section 71A, which had been introduced earlier in 2005, as a self-contained statutory regime which confers

exemption on “real world” transactions. Further, the different treatment in section

45(3) of the similarly-worded exemptions in sections 71A and 73 at the time of the

relevant transactions has the result, on Lord Briggs’ approach which is focussed on

avoiding tax loss, that “vendor” is interpreted differently under sections 71A(2) and

73(2). While section 45(5A)(b) may allow such an interpretation, I find HMRC’s

explanation of a patchwork of provisions and a lacuna a more persuasive explanation
of the relevant provisions as they were then.

39. Because, as a result of the combination of sections 45 and 71A(2), there is no SDLT charge on the sales between the MoD and PBL and between PBL and MAR, it is necessary to consider the correct interpretation and application of section 75A, to which I now turn.

Section 75A

(i)        Whether and if so how it applies

1. Section 75A is headed “Anti-avoidance” and provides:

“(1)	This section applies where -
(a) one person (V) disposes of a chargeable interest and another person (P) acquires either it or a chargeable interest deriving from it,
(b) a number of transactions (including the disposal and acquisition) are involved in connection with the
disposal and acquisition (‘the scheme transactions’),
and
(c) the sum of the amounts of stamp duty land tax payable in respect of the scheme transactions is less than the amount that would be payable on a notional land
transaction effecting the acquisition of V’s chargeable
interest by P on its disposal by V.
(2)	In subsection (1) ‘transaction’ includes, in particular -
(a) a non-land transaction, (b) an agreement, offer or undertaking not to take
specified action,
(c) any kind of arrangement whether or not it could otherwise be described as a transaction, and
(d) a transaction which takes place after the acquisition by P of the chargeable interest.
(3)	The scheme transactions may include, for example -
(a) the acquisition by P of a lease deriving from a freehold owned or formerly owned by V;
(b) a sub-sale to a third person; (c) the grant of a lease to a third person subject to a
right to terminate;
(d) the exercise of a right to terminate a lease or to take some other action;
…
(4)	Where this section applies -
(a) any of the scheme transactions which is a land transaction shall be disregarded for the purposes of this Part, but
(b) there shall be a notional land transaction for the
purposes of this Part effecting the acquisition of V’s
chargeable interest by P on its disposal by V.

(5) The chargeable consideration on the notional transaction mentioned in subsections (1)(c) and (4)(b) is the largest amount (or aggregate amount) -

(a) given by or on behalf of any one person by way of consideration for the scheme transactions, or

(b) received by or on behalf of V (or a person connected with V within the meaning of section 839 of the Taxes Act 1988) by way of consideration for the scheme transactions.

(6)	The effective date of the notional transaction is -
(a) the last date of completion for the scheme
transactions, or
(b) if earlier, the last date on which a contract in respect of the scheme transactions is substantially performed.

(7) This section does not apply where subsection (1)(c) is satisfied only by reason of -

(a)	sections 71A to 73, or
(b)	a provision of Schedule 9.”

41. The breadth of section 75A was implicitly acknowledged by Parliament which in section 75C(11) and (12) empowered the Treasury to make an order, including an order with retrospective effect, which provides that section 75A is not to apply in specified circumstances.

42. PBL’s first argument, that section 75A could not apply because it had not been established that the parties entered into the transactions for the purpose of tax avoidance, failed before the FTT, the UT and the Court of Appeal. In my view the tribunals and the Court of Appeal reached the correct conclusion. The heading of

the section, “Anti-avoidance”, is the only indication in the section which could

support PBL’s contention. The heading is relevant to assist an understanding as to

the mischief which the provision addresses, but it says nothing as to the motives of the parties to the scheme transactions. There is nothing in the body of the section which expressly or inferentially refers to motivation. The provision was enacted to counter tax avoidance which resulted from the use of a number of transactions to effect the disposal and acquisition of a chargeable interest. It is sufficient for the operation of the section that tax avoidance, in the sense of a reduced liability or no liability to SDLT, resulted from the series of transactions which the parties put in place, whatever their motive for transacting in that manner. This is clear from subsection (1)(c) which compares the amount of SDLT payable in respect of the actual transactions against what would be payable under the notional land

transaction in section 75A(4), by which P acquired V’s chargeable interest on its

disposal by V.

43. Section 75A does not identify who is V and who is P in relation to the transactions to which the section applies. As there is a number of transactions, it is possible that more than one person may be V and more than one person may be P. But Parliament has not conferred a discretion on HMRC to select whom they wish to treat as V or P. HMRC do not contend otherwise. In Vestey v Inland Revenue Comrs (Nos 1 and 2) [1980] AC 1170, in which the Revenue contended that they had a discretion to select whom among a class of beneficiaries it should assess as liable to tax, Lord Wilberforce identified the following principles as fundamental objections to that contention, at p 1172:

“Taxes are imposed upon subjects by Parliament. A citizen

cannot be taxed unless he is designated in clear terms by a taxing Act as a taxpayer and the amount of his liability is clearly defined.

A proposition that whether a subject is to be taxed or not, or, if he is, the amount of his liability, is to be decided (even though within a limit) by an administrative body represents a radical

departure from constitutional principle.”

It is necessary therefore for the courts to analyse the words of a broadly-worded anti- avoidance provision to identify the persons on whom Parliament has imposed this charge to tax.

44. The words of section 75A by themselves do not disclose who is V and who is P in a particular case. But the mischief which the provision addresses and the context of the provision within Part 4 of the FA 2003 provide the answer. The court adopts the purposive approach which the House of Lords sanctioned in Barclays Mercantile Business Finance Ltd, to which I have referred in para 34 above. The explanatory notes on clause 70 of the Finance Bill 2007 explained that the provision was introduced to counter avoidance schemes which have been developed to avoid payment of SDLT. It appears to be drafted in deliberately broad terms to catch a wide range of arrangements which result in tax loss. The examples of scheme transactions which are set out in subsection (3), although merely examples, give an indication of some at least of the targets of the provision. The task is to identify where the tax loss has occurred as a result of the adoption of the scheme transactions in relation to the disposal and acquisition of the relevant interest or interests in land. This in turn involves identifying the person on whom the tax charge would have fallen if there had not been the scheme transactions to which subsection (1)(b) refers and which exploited a loophole in the statutory provisions.

1. It is clear from (i) subsection (1)(a), which refers to P acquiring either V’s

chargeable interest “or a chargeable interest deriving from it”, and (ii) subsection

(3)(a), which refers to “the acquisition by P of a lease deriving from a freehold

owned or formerly owned by V” (emphasis added), that the section may operate not

only when P acquires the chargeable interest directly from V but also when P acquires a chargeable interest, such as a lease, which is derived from a chargeable interest which V formerly owned. Thus the section can cover a series of transactions by which V disposes of its chargeable interest which comes to be acquired by another person and P ultimately acquires a chargeable interest derived from it from that other person.

46. Turning to the application of the section to the transactions in this case, it is agreed by the parties that V in subsection (1)(a) is the MoD; its chargeable interest was the freehold in the Chelsea Barracks. I agree. In the course of the scheme transactions, PBL did not acquire a chargeable interest, the freehold, when the contract between the MoD and it was completed on 31 January 2008 because the transaction fell to be disregarded under section 45(3); on the same day MAR acquired a chargeable interest, again the freehold, when its contract with PBL was implemented as a result of the completion of the notional transaction in section 45(3); and, on the same day, PBL acquired a chargeable interest, the lease, from MAR. The put and call options were designed to enable PBL to re-acquire the freehold in the barracks, a result which was the ultimate aim of the series of transactions summarised in para 5 above. But those options did not result in the acquisition of a chargeable interest on 31 January 2008. They were nevertheless a

“scheme transaction” within subsection (1)(b) because they were involved in

connection with the disposal and acquisition of a chargeable interest and subsection

(2)(d) includes within the definition of “transaction” under subsection (1) a

transaction which takes place after P acquires the chargeable interest. They are part

of the context in which the scheme transactions, which led to P’s acquisition of a

chargeable interest on 31 January 2008, fall to be analysed as they were the final

stage of the transactions by which MAR was to finance PBL’s acquisition of the

freehold in the barracks.

47. If the court were to confine its attention to subsection (1)(a) alone, either MAR or PBL could be P, the former because it acquired a chargeable interest on its acquisition of the freehold in the barracks and the latter because it acquired the lease of the barracks from MAR. But the court cannot so confine its attention. It must go on to analyse how the scheme transactions gave rise to the loss of tax.

48. In the real world the nature of the transaction is clear: PBL acquired the barracks with the benefit of finance from MAR. The sub-sale to MAR and the lease

back to PBL were transactions “involved in connection with” the disposal by MoD

of its chargeable interest, the freehold in the barracks, and the acquisition by PBL of its chargeable interest, the leasehold interest. The loophole which has enabled the avoidance of tax is the combination of sub-sale relief under section 45(3) with the exemption conferred on Ijara financing when the customer of the financial institution sells its freehold interest in land to the institution and then leases back the land. The simple means of removing the loophole, which Parliament eventually identified in 2011, was to exclude from the disregard in the tailpiece of section 45(3) a case where the secondary contract was exempt because of sections 71A to 73. Thus it was PBL which obtained the benefit of the avoidance of tax in relation to the completion of its contract with MoD.

49. I recognise that the method which Parliament subsequently chose to remove the tax loss cannot be decisive. There might have been other ways of removing the tax loss. For example, it might have been possible to amend section 71A(2) to remove the exemption of the sale transaction between the customer and the financial institution if the vendor had benefited from the section 45(3) disregard and thereby impose the burden on the financial institution. But, as Judge Nowlan stated in his impressive judgment (para 137), it is appropriate to have regard to the overall structure of SDLT which seeks to impose the tax on purchasers and not financiers. The amendment of section 45(3) rather than section 71A(2) had the advantage of preserving this structure by keeping intact the exemption of the two paradigms of Ijara financing to which I referred in para 4 above. If the opportunity for tax avoidance were removed by amending section 71A(2), the consequence would be that SDLT would be paid on the price which the financial institution paid its customer in the context of the Ijara financing which, as I have said, might differ significantly from the purchase price of the major interest in land. Thus I conclude, like Judge Nowlan, that the error obviously lay in the failure to disapply the section 45(3) disregard, an error which benefited PBL.

50. Taking a purposive approach to the interpretation of section 75A, therefore, I conclude that PBL is P; and, because the completion of the contract between the MoD and PBL is disregarded under section 45(3), the chargeable interest which PBL acquires in section 75A(1) is the lease which it received from MAR.

51. The parties advanced two alternative approaches to the identification of P, which I comment on briefly to explain why I cannot accept either approach.

52. First, PBL submits that the court should adopt a sequential approach and identify as P the first person who acquires a chargeable interest. As the completion of the MoD-PBL contract is disregarded under section 45(3), MAR is that person. But there is no justification in the wording of section 75A for the adoption of a sequential approach, when applying the section to the transactions which in fact took place, which stops the search at the first person to acquire a chargeable interest. One would thereby remove from consideration the leaseback and the grant of the options which were part of the contractual scheme which the section is designed to address. That approach appears to me to be inconsistent with the purpose of section 75A, which is to prevent a tax loss which otherwise would occur because of the totality of the connected transactions which have taken place in the real world.

53. Secondly, HMRC submit that MAR could not be P because section 75A(7) disapplies section 75A if subsection (1)(c) is satisfied only by reason of sections

71A to 73. HMRC argues that, from MAR’s perspective, the only reason why MAR

did not incur liability to SDLT on its acquisition of the freehold interest in the barracks from PBL was because of the exemption in section 71A. That may be so; but it is irrelevant. Subsection (1)(c) does not look at the question from the perspective of a party to one of the transactions. It sets up a comparison between the sum of SDLT payable on all of the connected transactions and that payable on the notional transaction. Subsection (7) would disapply section 75A in relation to the transactions in para 5 above only if the section 71A exemption were the sole reason why the amounts of SDLT payable on those transactions is less than the amount payable on the notional transaction. The first of those transactions was the completion of the MoD-PBL contract and the reason why the sum payable on that transaction was £nil was because of the section 45(3) disregard. Thus subsection (7) would not disapply section 75A.

54. PBL advanced a refinement of this approach in its written case, namely that if one adds up all of the SDLT which would have been charged if there had been no sub-sale relief and no exemption for the Ijara finance, it is only the section 71A exemption which takes the tax due on the scheme transactions below that due on the notional transaction in the subsection (1)(c) balance. Subject to its challenge on the quantum of the charge on the notional transaction, which I discuss below, PBL presents the sums payable on the four transactions in para 5 above, if there were no sub-sale relief and no section 71A exemption, as follows:

(i)        £38.36m in respect of the MoD-PBL transfer;

(ii)       £50m in respect of the PBL-MAR transfer;

(iii)      £16.41m in respect of the lease granted by MAR to PBL; and

(iv)      £0 for the option to purchase,

A total of £104.77m

If £50m is payable for the notional transaction, PBL argues that it is only the section 71A exemption (£50m plus £16.41m) which takes the sums payable in respect of those transactions below the sum payable on the notional transaction (ie £104.77m - £66.41m = £38.36m). I do not accept this approach. I consider that the purpose of subsection (7)(a) is to exclude the application of section 75A where the only cause of the tax loss which the section counters is the exemptions available under sections 71A to 73. Those alternative property finance provisions involve a series of

129. In conclusion therefore, I have not been persuaded by any of the objections to construing and applying sections 45 and 71A of the Act in a way which, in the unusual context of a sub-sale coupled with an Ijara financing structure, leads to SDLT being payable by MAR on the consideration payable under the completed secondary contract by which it acquired a chargeable interest in the Chelsea barracks under a chargeable land transaction, and all the other transactional parts of the structure being either disregarded or exempt. Of the only two interpretations of the relevant statutory provisions (from which I would exclude section 75A for the reasons given), that is the one which broadly achieves, rather than wholly frustrates, what must have been the underlying purpose of Part 4 in the relevant context. If MAR cannot now be made to pay, which the Revenue do not accept, and this leads to the shocking consequence that the public purse gets nothing from this large transaction by way of SDLT, that will only be because, in the words of Mr Thomas QC for PBL, the Revenue have been relentlessly pursuing the wrong taxpayer. It is a sad irony that, at all stages until the appeal to the Upper Tribunal, both parties appear to have thought that the only candidate as the taxpayer was PBL, but it is of no consequence to the outcome. In my view the Court of Appeal reached the right answer, and I would therefore dismiss the appeal.