Fanning
| Jurisdiction | UK Non-devolved |
| Judgment Date | 09 July 2020 |
| Neutral Citation | [2020] UKFTT 292 (TC) |
| Date | 09 July 2020 |
| Court | First Tier Tribunal (Tax Chamber) |
[2020] UKFTT 292 (TC)
Judge Victoria Nicholl
Patrick Cannon, Counsel, instructed by Levy & Levy, appeared for the appellant
Elizabeth Wilson, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Stamp duty land tax – Land transaction – Effect of transfer of rights by grant of option – FA 2003, s. 44–46 and 75A.
The First-tier Tribunal (“FTT”) dismissed an appeal against a £250,000 discovery assessment issued in respect of the taxpayer's participation in a SDLT scheme which involved the sub-sale relief and option provisions in s. 45 and 46 of the Finance Act 2003 (“FA 2003”).
This case concerned the determination of whether a series of transactions designed to avoid Stamp Duty Land Tax (“SDLT”) delivered the intended tax saving.
The taxpayer was at the relevant time, Executive Chairman of San Leon Energy Plc, an Irish AIM listed company (“the Company”). The taxpayer had a 2% shareholding in the Company and no major voting rights. He was resident in Ireland and split his working time between London (one week per year), Nigeria and Dubai. The Company rented a small flat in London for staff accommodation but it was decided that if the taxpayer would purchase a flat in Mayfair, the Company would assist him provided the flat would be available for rent by the Company for staff use.
In July 2011, the taxpayer purchased a garden flat (“the property”) for a price of £5.2m (£200,000 for chattels) and was introduced by his conveyancing solicitors to Stratega Ltd to advise on SDLT mitigation.
The scheme was intended to work as follows:
- the vendor and purchaser would enter into a contract for sale of a chargeable interest in land to be completed by conveyance. This contract would fall within the terms of s. 45(1)(a) FA 2003 (the original contract);
- simultaneously, the purchaser would grant a third person a call option over the chargeable interest for nominal consideration (£100 in this case) for an option price at full market value (the Option). The Option was expected to be an an assignment sub-sale or other transaction (relating to … the original contract) under which another person other than the purchaser becomes entitled to call for a conveyance to him pursuant to s. 45(1)(b) FA 2003;
- the property was occupied by the purchaser having paid the full price under the original contract to the vendor;
- the third party does not exercise the Option and co-operates in the scheme. S. 45(3) FA 2003 would deem the third party as purchaser and the Option consideration as the deemed consideration and the original contract would be disregarded for SDLT purposes.
- the result in this case being that until the Option was exercised, SDLT was charged on the deemed consideration of £100 on a residential purchase price of £5m. In this case, The Option was granted by the taxpayer to the Company and was set to be exercisable between 5 and 15 years from grant. The Option was not registered at the Land Registry.
An SDLT Return was filed with HMRC showing the purchase price and tax due as “nil” but without further explanation. HMRC issued a discovery assessment in the sum of £250,000. The validity of that assessment was not challenged by the taxpayer.
The FTT found, on the facts, that the grant of the Option fell within the definition of “other transaction” in s. 45(1)(b) FA 2003. The Option was a valid agreement that gave the Company the option to call for a conveyance of the property. S. 45 does not exclude options that are within s. 46 and contrary to HMRC's submissions, there is no requirement that the right to call for a conveyance to be immediate or unconditional.
Consequently, s. 45(3) FA 2003 means that s. 44 FA 2003 applies to the purchase of the property as if the grant of the Option was the “secondary contract” under which the Company is the purchaser. In addition, the taxpayer is not treated as connected with the Company because he has no control of it. However, the final part of s. 45(3) provided relief only if the substantial performance/ completion of the original contract is at the same time, and in connection with, the substantial performance or completion of the secondary contract.
The FTT rejected the taxpayer's argument that the secondary contract was “substantially completed” by the payment of the Option grant price. First, under s. 45(3), the secondary contract was not the granting of the Option but a deemed land transaction where the Company is the deemed purchaser and the subject matter of the contract the subject matter of the “transfer of rights” of the original contract for the property (s. 45(1)(b)).
Applying s. 44, it is clear that the secondary contract had not been substantially performed because it had not been completed by a conveyance under s. 44(3); the Company had not taken possession under s. 44(5)(a) and the taxpayer continued to exclusively enjoy the property. There are two elements of consideration: one is the price paid under the grant of the Option and the second is the payment to be given when the Option is exercised and there is a “transfer of rights”. Therefore, a substantial amount of the aggregate consideration required had not been paid.
Secondly, or alternatively, while s. 45(3) does not require an actual conveyance to be effected due to the concept of substantial performance, the relief is dependent on the original contract being substantially performed/ completed at the same time as the secondary contract. On these facts, until there is consideration paid for the exercise of the Option, a substantial amount of the aggregate consideration has not been paid and the secondary contract has therefore not been substantially performed.
In terms of the anti-avoidance provisions, the FTT ruled that if it was incorrect on the application of s. 45(3) above, s. 75A FA 2003 would apply as follows:
The first step was to identify the “notional transaction” or as the Supreme Court held in Project Blue Ltd v R & C Commrs [2018] BTC 23, where the tax loss has occurred as a result of the scheme transactions and the person on whom the tax charge would have fallen but for the scheme transactions. In the immediate case, the notional transaction was between the original vendor and the taxpayer and the chargeable consideration £5m. The effective date was the last date of the scheme transactions or, if earlier, the last date on which the contract in respect of the scheme transactions is substantially performed, here 16 September 2011.
As an alternative analysis, the FTT held that the exercise of the Option cannot be a scheme transaction. The presence of a possible commercial motive for the grant of the Option to the Company rather than to a special purpose vehicle did not affect the application of s. 75A. Whilst there was a possibility of the Company exercising the Option in the future, this was a decision which was dependent on various commercial and tax factors and such a remote possibility could not be treated as “involved in connection with the disposal and acquisition” in order to be part of the scheme transactions.
For these reasons the appeal was dismissed.
Although this decision turned on its own facts, the FTT treated it as a lead case for similar appeals in which taxpayers entered into sub-sale schemes seeking to exploit the temporary “lacuna” in s. 45, FA 2003 closed by Parliament with the enactment of s. 194(1) and (2) of FA 2013 with effect from 21 March 2012. Due to this being the first appeal of its kind, there is a likelihood that it will be appealed to the Upper Tribunal and perhaps beyond.
[1] This case concerns a stamp duty land tax (“SDLT”) avoidance scheme that involves the “sub-sale relief” and option provisions in sections 45 and 46 Finance Act 2003 (“FA 2003”) (“the Scheme”). The appeal is against a discovery assessment issued by the Respondents (“HMRC”) to Oisin Fanning (“Mr Fanning”) under paragraph 28 Schedule 10 Finance Act 2003 on 28 March 2014. The assessment is for £250,000, representing a 5% SDLT charge on the purchase price of £5,000,000 paid by Mr Fanning.
[2] The parties agree (save as noted in the footnote) that the Scheme comprises the following steps:
- The Vendor (V) and a third-party purchaser (P) enter into a contract for the sale of a chargeable interest in land to be completed by a conveyance.
- At the same time as the completion of the V-P contract of sale, P grants another person (O) a call option over the chargeable interest for nominal consideration. The option exercise price is not less than the market value of the chargeable interest at the date of the exercise.
- P occupies the property having paid the full purchase price demanded under the VP contract of sale.
- The option is not exercised by O (save as part of any onward sale to some other person).11Mr Fanning claims that the option may be exercised.
- O co-operates in the Scheme.
[3] The Scheme was intended to work as follows:
- The V-P contract of sale is a contract for a land transaction (the original contract) under which the transaction is to be completed by a conveyance (within section 45(1)(a) FA 2003).
- The grant of the option is an assignment subsale or other transaction (relating to the whole or part of the subject matter of the original contract) as a result of which a person other than the original purchaser becomes entitled to call for a conveyance to him (within section 45(1)(b) FA 2003).
- Section 44 FA 2003 applies as if there was a contract for a land transaction (a secondary contract) under which O is the deemed purchaser and the consideration payable for the option agreement is the deemed consideration (section 45(3)).The original contract is completed simultaneously with the completion of the secondary contract (i.e., the option grant).Alternatively, the original contract is completed simultaneously with the substantial performance of the secondary...
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Redmount Trust Company Ltd
...as a trustee of a different settlement (para 4, Sch 16 FA 2003). In this respect, the position is different from that in Fanning [2020] TC 07776 where there was no agreement for the grant of an option which was to be completed by a conveyance. In Fanning, the only possible conveyance was on......
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Redmount Trust Company Ltd
...option simultaneously with the completion of the original contract. The scheme therefore failed in the same way as the scheme in Fanning [2020] TC 07776, where there was no option deed. Even if that analysis were wrong, the scheme fell within the anti-avoidance rule of FA 2003, s. 75A. The ......
- Oisin Fanning v The Commissioners for HM Revenue & Customs