Project Blue Ltd v Revenue and Customs Commissioners
| Jurisdiction | England & Wales |
| Judge | Lady Hale,Lord Hughes,Lord Lloyd-Jones,Lord Hodge,Lord Briggs |
| Judgment Date | 13 June 2018 |
| Neutral Citation | [2018] UKSC 30 |
| Court | Supreme Court |
| Date | 13 June 2018 |
[2018] UKSC 30
Lady Hale, President
Lord Hughes
Lord Hodge
Lord Lloyd-Jones
Lord Briggs
Appellant
Malcolm Gammie QC
Hui Ling McCarthy QC
(Instructed by HMRC Solicitors Office)
Respondent
Roger Thomas QC
(Instructed by Clifford Chance LLP)
Heard on 28 February and 1 March 2018
( with whomLady Hale, Lord HughesandLord Lloyd-Jonesagree)
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.
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.
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.
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.
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.
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.
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.
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.
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...
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