Redmount Trust Company Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 24 November 2021 |
| Neutral Citation | [2021] UKFTT 443 (TC) |
| Court | First Tier Tribunal (Tax Chamber) |
[2021] UKFTT 443 (TC)
Dr Heidi Poon
Rory Mullan QC, instructed by Justin Bryant of Blackfriars Tax Solutions LLP, appeared for the appellant.
Elizabeth Wilson QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents.
Stamp duty land tax (SDLT) – Subsale relief avoidance scheme – FA 2003, s. 45(1A), (3) (before retrospective amendment by FA 2013, s. 194 – Whether scheme effective before amendment – No – Whether return in respect of original contract voluntary – No – Whether valid enquiry opened – Yes – Whether closure notice out of time – No – Whether in the alternative FA 2003, s. 75A applied – Yes – Whether alternative discovery assessment valid and in time – Yes – Appeals dismissed.
The First-Tier Tribunal (FTT) found that: (1) the avoidance scheme used by the appellant was ineffective even before the retrospective amendment made by FA 2013, s. 194 and hence that the return in respect of the original contract was not “voluntary”; (2) as a result, the enquiry into the return was validly opened; (3) there was no statutory time limit on the issue of an enquiry closure notice; (4) even if the scheme had been effective, FA 2003, s. 75A would have applied to counteract it; and (5) the discovery assessment issued in the alternative by HMRC was valid and in time.
The appellant company, acting as trustee of one trust (the Nanu Trust) purchased a property from private vendors for £4.2m (under “the original contract”). Using a subsale avoidance scheme, it exchanged a contract (“the Agreement”) with itself, acting as trustee of another trust (the Mariant Trust) requiring it to grant a call option to Mariant to purchase the property upon a payment of a price of £1,000 or £127,000. At the same time as the original contract was completed, the Agreement was completed by granting the option as an executed deed. The deed permitted the option to be exercised within a period of 30 to 35 years after the date of the deed (or earlier by agreement) for a payment equal to the market price of the property. The option had not been exercised.
It was the appellant's case that the scheme had effect under FA 2003, s. 44 and former s. 45 to provide subsale relief, thereby allowing the original contract to be disregarded, was effective at the effective date of the transactions. It was common ground that the amendment made to FA 2003, s. 45(1A) had effect to block the scheme.
The appellant filed two returns in respect of the transactions. The first return was filed in respect of the original contract and contained a claim for subsale relief. The amount of tax self-assessed was accordingly nil. It then filed a second return, being in respect of the acquisition of the option. The tax self-assessed was £127,000 at 1%. Both returns were in time.
HMRC opened an enquiry into the first return on 13 September 2012, within the prescribed time limit. It concluded with a closure notice issued on 7 September 2016, charging tax on the full amount of the purchase price plus interest. The notice was upheld on review. The appellant appealed against the closure notice on the grounds that it was invalid.
On 25 September 2018, HMRC issued a discovery assessment for the same amount of tax, as an alternative to the closure notice, in case the appeal against the closure notice succeeded. The appellant also appealed against this assessment.
The two appeals were heard together.
The appellant raised two grounds of appeal under this head:
- The enquiry and the closure notice under it were invalid since the first return (the one in respect of the original contract) was voluntary
- Even if the enquiry was valid, the closure notice was out of time
It was the appellant's contention that at the time the transaction was effected (before the retrospective amendment made by FA 2013, s. 194) the scheme was effective to disregard the original contract. That being the case, there had been no obligation under FA 2003, s. 76 to deliver a return at all. That being so, the first return was “voluntary” and no legal consequences (no filing date, hence no enquiry period and no obligation to pay tax) could flow from it.
The first question to answer was, therefore, was the scheme effective to engage FA 2003, s. 45 so as to disregard the original contract and substitute a secondary contract, namely the acquisition of the option?
On a purposive construction of s. 44 and 45, the scheme failed ab initio on three grounds:
- There was no secondary contract for the purposes of s. 45(1)
- Even if there were a secondary contract, it was neither substantially performed nor completed at the same time as the original contract
- In the alternative, FA 2003, s. 75A applied to counteract it
There was no secondary contract, in the view of the FTT, since s. 45(1) required the secondary contract to be one as a result of which a person other than the original purchaser became entitled to call for a conveyance to that other person. The option granted by the appellant, on the other hand, did not confer any relevant entitlement to call for a conveyance on a person other than the appellant as purchaser. The grantee of the option (the appellant as trustee of the Mariant Trust) had not stood in the shoes of the appellant as purchaser and had had no present right to call for a conveyance. Furthermore, the acquisition of an option was a land transaction distinct from any land transaction resulting from the exercise of that option, whereas s. 45(1)(b) required the subsale or similar transaction to relate to the whole or part of the subject matter of the original contract.
As to substantial performance or completion, there had been no substantial performance or completion, even if the option Agreement was the secondary contract. There had not been substantial performance, since the grantee of the option had neither been in possession of the property nor paid a substantial amount of the consideration, which was the market value of the property at the time. For there to have been completion of the secondary contract, the transaction that had needed to take place would have been the exercise of the option and the payment of the full exercise price. Nor was the fundamental flaw in the scheme cured by the simple insertion of the option deed. The material fact in the real world was that there was no substantial performance or completion of the secondary contract (even if there were one) by way of exercising the 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 appellant had entered into a set of transactions under which it directly or indirectly acquired a chargeable interest from the vendors. As a result of the transactions, less tax would have been paid than on a straightforward acquisition of the property from the vendors.
It followed from the above conclusions that the scheme was ineffective as it stood at the effective date of the transaction. The appellant's acquisition of the property under the original contract was therefore a notifiable transaction and the return filed in respect of that transaction was a return filed under FA 2003, s. 76, with all the legal consequences that followed from that. The return was thus not “voluntary” and the appellant's appeal on those grounds failed.
In any case, the whole concept of a “voluntary” return was based on the judgment in Patel [2018] TC 06426 in respect of the direct-tax code in TMA 1970, as it had been before the enactment of TMA 1970, s. 12D. It was held in that case that a valid enquiry into a return could only have been opened in respect of a return the taxpayer had been required to make under TMA 1970, s. 8(1). In the absence of a notice under s. 8(1), returns were “voluntary” and, inter alia, could not be the subject of an enquiry. However, there was no such mechanism in SDLT. The duty to make a return followed automatically from entering into a notifiable land transaction.
As the first return was obligatory and carried full legal consequences, the enquiry had been validly opened within the prescribed time limit and the closure notice concluding it was valid. The appellant's argument concerning the closure notice was that it was out of time because it was issued more than four years after the enquiry commenced and hence was outside the time limit stated in FA 2003, Sch. 10, para. 31. However, that provision was specific to discovery assessments and had not been imported into the enquiry regime, which set no time limit for the issue of closure notices. The taxpayer was protected against unduly prolonged enquiries by the right under FA 2003, Sch. 10, para. 24 to apply to the Tribunal for a closure notice. The appeal on this ground therefore also failed.
Briefly, the appellant's argument was twofold. There had been no new discovery by HMRC, whose position had always been that tax had been underassessed. The possibility that there had been no statutory enquiry and hence that the closure notice was invalid did not amount to a new discovery – it was merely the adoption of a new mechanism for issuing an assessment.
The Tribunal did not agree. It had been established in Atherton v R & C Commrs [2019] BTC 507 that an officer of HMRC could make successive different discoveries in relation to a taxpayer's liability to tax. When the appellant's counsel advanced the new argument on 1 February 2018 that there was no valid enquiry, that constituted a new discovery on HMRC's part and the decision to issue the discovery assessment had been the only alternative if the “voluntary return argument” were to prevail. The eight-month...
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