Brown and Another v R & C Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 15 November 2022 |
| Neutral Citation | [2022] UKUT 298 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2022] UKUT 298 (TCC)
Mr Justice Trower, Judge Timothy Herrington
Upper Tribunal (Tax and Chancery Chamber)
Stamp duty land tax – Avoidance scheme – Arrangement under which house sold to unlimited company and then distributed to shareholders on reduction of share capital – Application of s. 45(3) FA 2003 to the scheme – Whether determination of SDLT payable capable of imposing liability in relation to any liability arising under s. 75A FA 2003.
In Brown & Anor v R & C Commrs [2022] BTC 533, the Upper Tribunal dismissed the taxpayers’ appeal against the decision of the First-tier Tribunal in that the chargeable consideration for the transaction concerned under the former FA 2003, s. 45 was not zero as the taxpayers maintained, but reduced the amount of that consideration.
The facts
- The appellants, Mr & Mrs Brown, entered into a scheme to avoid paying SDLT on their purchase of a house in 2007.
- They subscribed for shares in an unlimited company for £95,502.
- The company entered into a contract to purchase the house for £955,000 and paid a deposit of £95,000.
- The company then issued further shares at par to the appellants, for a nominal value of £864,500.
- The company resolved to reduce its share capital from £960,002 to £2 by way of a distribution in specie of the house simultaneous with the completion of the house purchase. On the same day, it used the balance of the cash from the share subscriptions to complete the transfer of the house to it and transferred the house to the appellants for no (further) consideration.
- The appellants made no land-transaction return on the basis that they had given no chargeable consideration for its transfer to them, and it was therefore an exempt transaction.
- Four years later, HMRC issued a notice of determination to the appellants in respect of their acquisition of the house, charging tax at the then-applicable rate of 4% on £955,000.
The scheme to exploit subsale relief under former FA 2003, s. 45, was similar to that used in Vardy Properties & Anor, except that in Vardy, the transfer to the appellant was by way of an in specie dividend rather than pursuant to a reduction of capital.
The legislation
Former FA 2003, s. 45 as it applied at the time deemed there to be a notional contract (the ‘secondary contract’) under which ‘the transferee’ (Mr and Mrs Brown) was the purchaser and the consideration for the deemed transaction was (i) so much of the consideration under the original contract (between the vendor and the company) as was referable to the subject-matter of the transfer of rights (from the company to Mr and Mrs Brown) and was to be given (directly or indirectly) by the transferee or a person connected with the transferee (s. 45(3)(b)(i)) and (ii) the consideration given for the transfer of rights (s. 45(3)(b)(ii)).
What is more, the substantial performance or completion of the original contract was to be disregarded.
The effect of s. 45(3) was to create a notional contract for a land transaction that completed on the transfer of the land to Mr and Mrs Brown. They asserted that this transaction was exempt because it was a distribution in specie and so for no consideration.
The FTT’s decision
FA 2003, s. 45 applied to the transaction in its form at that time.
The distribution in specie was not the nature of the transaction under the secondary contract, which was the conveyance to Mr and Mrs Brown. There was no provision that exempted that transaction. If the consideration for it as determined by s. 45(3) was not nil, that was the consideration by reference to which the transaction was taxable.
The amount of consideration under s. 45(3)(b)(i) had to be given (directly or indirectly) by the transferee for the subject-matter (or part of it) of the original contract. Here, Mr and Mrs Brown had paid the company and the company had paid the vendor. They had given no consideration under the contract between the vendor and the company, so the amount of consideration under s. 45(3)(b)(i) was nil. The only chargeable consideration was that given for the transfer of rights under s. 45(3)(b)(ii), if any.
The actual distribution may have been made for no consideration, but the resolution to make it followed from the share subscription and would not have been passed without it. Realistically, the payment for the shares was also the quid pro quo for the resolution. Accordingly, the consideration for the notional land transaction was the amount under s. 45(3)(b)(ii) given by the appellants in consideration for the resolution to reduce the company’s share capital and convey the house. That amount was £960,002.
Separately, the FTT found that if, contrary to its decision, the consideration under former FA 2003, s. 45 were to be less than £955,000, FA 2003, s. 75A would come into play instead, with consideration of £955,000, but that HMRC’s determination could not also cover any liability arising under that section.
The appeal
Mr and Mrs Brown appealed on the grounds that the FTT had erred in law in finding that the consideration for the secondary contract was the amount payable on the issue of shares in the company.
They also appealed on a procedural ground (see below).
HMRC also contingently cross-appealed against the FTT’s finding that any liability under FA 2003, s. 75A could not be included in its determination.
The UT’s decision on the consideration under former s. 45(3)
It was not necessary for there to be an antecedent contract for there to be chargeable consideration for a land transaction, contrary to the assertion made on behalf of Mr and Mrs Brown.
In the context of a preordained scheme under which Mr and Mrs Brown provided funds to the company to purchase the property from the vendor, those funds constituted consideration under the original contract given indirectly by them and therefore fell within the scope of former FA 2003, s. 45(3)(b)(i). The FTT had reached the same conclusion in Vardy, with which the UT agreed. The amount of consideration so given was £955,000, the amount payable under the original contract, via their subscription for shares in the company.
The FTT had been wrong in finding that the amount of consideration under s. 45(3)(b)(i) was zero. It had also been wrong in finding that there was any consideration under s. 45(3)(b)(ii). All the consideration for the secondary contract arose under s. 45(3)(b)(i).
The determination issue
Although given the UT’s decision on the consideration, this issue did not strictly arise, the fact was that HMRC had decided that SDLT was payable in respect of Mr and Mrs Brown’s acquisition of the chargeable interest. In the UT’s opinion, there was no requirement for HMRC to have specified in its determination whether the result was that tax was payable by the application of former s. 45(3) or by reference to a notional transaction under the operation of s. 75A. The FTT had taken too narrow an approach in this case on this issue.
The procedural issue
Mr and Mrs Brown had argued that the FTT had acted unfairly by deciding that there was consideration under s. 45(3)(b)(ii) in circumstances in which that issue had not been expressly pleaded.
Although given its decision, it was again unnecessary for the UT to decide on this point, it did find that there would have been no injustice to Mr and Mrs Brown if it had had to rule on this issue. Given there had been a preordained scheme, it was both permissible and necessary not just to consider the particular steps individually but to consider the scheme as a whole. The case before the FTT would not have been conducted differently nor would different evidence have been provided had HMRC pleaded reliance on former s. 45(3)(b)(ii).
Conclusion
The appeal would be dismissed but the chargeable consideration on which SDLT was payable would be reduced from £960,002 to £955,000.
The FTT had been wrong on three counts:
- that there had been no consideration under former s. 45(3)(b)(i);
- that there had been consideration under former s. 45(3)(b)(ii);
- that HMRC’s determination would not have applied to a liability under s. 75A.
Nevertheless, the net result was that the avoidance scheme failed, as the FTT had found, but that the consideration on which tax was payable was reduced by £5,002 (resulting in a tax liability reduced by £200). One wonders whether the appeal to the UT was worthwhile.
Presumably, the matter will rest there, a mere 15 years after the original transaction.
Comment by Zigurds Kronbergs, Senior Tax Writer, Croner-i Ltd.
Ross Birkbeck, Counsel, instructed by Blackfriars Tax Solutions LLP appeared for the appellant
Ben Elliott, Counsel, instructed by the General Counsel and Solicitor to His Majesty's Revenue and Customs appeared for the respondents
[1] This is an appeal of the appellants (“Mr & Mrs Brown”) against the decision (“the Decision”) of the First-tier Tribunal (“FTT”) (Judge Charles Hellier) released on 7 June 2021. The FTT dismissed Mr and Mrs Brown's appeal against a determination (“the Determination”) of the Respondents (“HMRC”) issued under paragraph 25 of Schedule 10 Finance Act 2003 (“FA 2003”) to impose on Mr and Mrs Brown a liability for the payment of Stamp Duty Land Tax (“SDLT”) in relation to the acquisition of a house in Surrey.
[2] Mr and Mrs Brown acquired the house (“the Property”) pursuant to an arrangement under which the Property was first sold to an unlimited company (“the Company”), and then transferred by the Company to Mr and Mrs Brown on a distribution in specie by the Company. Under this marketed avoidance scheme the ultimate purchaser (“C”) acquires a property from an unconnected vendor (“A”) via an unlimited company (“B”). In summary, the scheme operates as follows:
- C forms an unlimited company, B, and contributes cash to the unlimited company of a sufficient amount to purchase the target property. The contribution of funds is effected by...
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