Responsible stamp duty land tax planning is possible in spite of three sets of legislative provisions.
SDLT now has three types of general anti-avoidance rule.
Uncertainty over HMRC’s application of one rule in the context of corporate deals has mostly been resolved.
Uncertainty over another rule has significantly increased following a recent tribunal decision.
The nature of the GAAR requires those entering into land transactions to shift their point of reference.
Determining where the boundaries of the anti-avoidance provisions lie.
Stamp duty land tax (SDLT) anti-avoidance has been quite a dynamic area this summer. First, HMRC confirmed their interpretation of an anti-avoidance provision (see FA 2003, Sch 7 para 2(4A) – the “mini-GAAR”), which restricts the availability of SDLT group relief in certain circumstances.
Second, the First-tier Tribunal gave its decision in Project Blue Limited v HMRC  UKFTT 378 (TC), which concerns the application of the general anti-avoidance rule for SDLT (FA 2003, s 75A – the “SDLT GAAR”).
Finally, FA 2013, Part 5 gave birth to the general anti-abuse rule (the “GAAR”), which applies to a number of taxes, including SDLT.
The purpose of this article is to consider, from the perspective of SDLT, where we are after these developments and, in particular, to compare the scope of the three sets of legislative provisions. The subject deserves attention because the matter is not straightforward and is still fluid.
Those advising on the tax will need to decide for themselves whether or not any arrangement that reduces the amount of SDLT payable is within one or more of the provisions.
It is my firm opinion that, contrary to what some commentators have recently implied, arrangements that could properly be described as sensible and responsible tax planning should not fall foul of the provisions, especially the SDLT GAAR.
FA 2003, Sch 7 para 2(4A) blocks relief for intra-group land transactions where these are not carried out for genuine business reasons or where they form part of arrangements of which a main purpose is tax avoidance.
I do not describe it as a targeted anti-avoidance rule, as some do, because it is not targeted at a particular scheme and is not limited to SDLT avoidance. In my opinion, it is more appropriate to describe it as a mini GAAR.
Inserted into the FA 2003 in 2005, this mini-GAAR was to become a precedent for similar provisions introduced to restrict four other SDLT reliefs: acquisition relief; reconstruction relief; charities relief; and the relief for alternative finance investment bonds.
Incidentally, that precedent was abandoned this year when the regime for sub-sales was revamped in favour of a test that defines tax avoidance merely by reference to obtaining a tax advantage (see FA 2003, Sch 2A para 18).
The first limb of the mini-GAAR rarely presents a problem. Land transactions are, by their nature, invariably entered into for genuine business reasons. The more interesting aspect is the second limb: whether tax avoidance is a main purpose of the arrangements of which the land transaction forms part.
Avoidance and arrangements
Notwithstanding an isolated attempt by HMRC in 2012 to conflate “avoidance” with the prevention of payment of tax (applying a dictionary definition), HMRC should accept that the term in the mini-GAAR (and its equivalents) takes its meaning from established case law.
Earlier this year, HMRC conceded that hiving properties out of companies purchased from third parties is not normally tax avoidance.
That followed on from a number of enquiries into SDLT returns claiming group relief after a decision was made within HMRC to focus on SDLT compliance in this area. HMRC’s conclusion is correct, of course.
The ability of a person to gain ownership of a property indirectly by purchasing the company that owns it, before reorganising the ownership of it without incurring a charge to SDLT, is an advantage inherent in the nature of a company.
That a person might choose to avail themselves of that opportunity by structuring their affairs in this manner rather than purchasing the property directly is not tax avoidance, it is a straightforward legislative choice. And this is also the view of the GAAR advisory panel (HMRC’s GAAR guidance, D2.2.1).
That HMRC have qualified confirmation of their practice on this point means some doubt remains over what arrangements they would regard as tax avoidance. In practice, this is unlikely to trouble the majority of cases.
Rather, it is more likely to be directed at cases where parties have contrived to avoid a clawback of SDLT group relief arising in the target company or to require the seller to buy back the target company once the asset has been hived out.
This means we are back to where we were in 2005. In determining whether or not an arrangement is tax avoidance for the purpose of the mini-GAAR, advisers can continue to rely on comments made by the then economic secretary to the Treasury in the standing committee debates on the Finance Bill 2005 on the meaning of “tax avoidance”.
They can also draw upon the 11 examples of accepted tax arrangements in the “white list” in HMRC’s SDLT Manual at SDLTM23040 and case law.
As an example, see the remarks of Lord Nolan in CIR v Willoughby  STC 995:
“The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability. The hallmark of tax mitigation, on the other hand, is that the taxpayer takes advantage of a fiscally attractive option afforded to him by the tax legislation, and genuinely suffers the economic consequences that parliament intended to be suffered by those taking advantage of the option.”
Almost seven years after the introduction of the provision, this year marked the first occasion that a court or tribunal has considered the application of FA 2003, s 75A in detail.
The case (Project Blue Ltd (TC2777)) concerns the application of SDLT to the purchase of a £1bn site in London known as Chelsea Barracks in 2007/08. An essential feature of the case was the manner in which the purchase was financed.
In essence, the appellant completed its purchase using a Shari’a compliant (Ijara) method of financing. Under the financing arrangements, it sub-sold the land to a bank for: a higher amount than it had paid; a leaseback for a long term; and a call option to buy back the land at the end of the finance period.
It self assessed that it had no SDLT liability due to sub-sale relief as it then was (ie before the legislation was amended by FA 2013) and alternative finance relief.
HMRC disagreed, argued that the SDLT GAAR applied, and amended the appellant’s SDLT return to give effect to its conclusion. The appellant brought an appeal against that amendment.
The appellant’s main argument was that the SDLT GAAR, construed purposively, did not apply on the facts, because the transactions were wholly commercial.
In response, HMRC argued that there was no express or implied condition in the provision that the parties must have been engaged in tax avoidance as a precondition to its application; and if (which was not accepted) there were such a condition, the appellant had failed to prove the absence of a tax avoidance motive.
The tribunal accepted HMRC’s argument. Its approach in construing the provision and applying it to the facts placed emphasis on the decision of the House of Lords in Vestey v CIR  AC 1148.
The Lords in that case rejected an attempt by HMRC (then the Inland Revenue) to exercise discretion over which class of person should be taxed.
Prior to Project Blue, HMRC had stated publicly that they would not apply the SDLT GAAR where, in their opinion, transactions had already been taxed appropriately.
Ironically, that statement of an intention to exercise discretion appears to have driven the tribunal to refuse to accept the view that the scope of the provision should be restricted by reading in a motive or purpose test. The tribunal said:
“We derive from Vestey the proposition that, unless it clearly provides otherwise, [the SDLT GAAR] should be construed as not giving HMRC a discretion whether to apply the statute nor as conferring on HMRC a discretion either whom to tax or as to the amount of tax to be levied.”
Although the decision may be correct on the facts, the impression it will leave on the scope of the SDLT GAAR is unfortunate. As a decision of the First-tier Tribunal, the decision is not binding on anyone other than the parties to the case.
But those considering the application of the SDLT GAAR must try to reconcile the rejection of the appellant’s argument – that the provision does not apply where there is no tax avoidance – with the reality that, unrestrained by a tax abuse test or precondition, the SDLT GAAR attacks entirely benign transactions.
Some commentators have suggested that the decision, read closely, does import a tax abuse test indirectly by requiring that the purchaser in the notional transaction must have avoided the tax. I am not convinced that is not an over simplification of this part of the decision.
After all, the tribunal stated this after concluding that the appellant had avoided the tax. In my view, the tribunal erred by not considering in sufficient depth the extent of the collateral damage its approach would cause, other than to note the provision for order-making powers to exclude with retrospective effect specified situations.
Post Project Blue
For as long as the decision of the tribunal in Project Blue remains the only substantive case law on the SDLT GAAR, those advising on the application of the provision will need to take a robust view on its effect.
Whether one adopts the technical argument mentioned above, regarding the requirement of avoidance for the purpose of identifying the purchaser in the notional transaction, or simply confines the decision to the facts, one arrives at the right answer: the SDLT GAAR should not adversely affect a transaction where the SDLT advantage is derived from taking a reasonable choice.
Accordingly, the scope of the mini-GAAR and SDLT GAAR is the same. If a transaction does not fall foul of the former, it should not be taxed under the latter.
The failure by the appellant in Project Blue to rebut the presumption that a main purpose of the arrangements was SDLT avoidance is a salutary reminder that the burden of proving a negative is heavy, particularly where, as inProject Blue, circumstantial evidence invites a court to draw an inference that the arrangements may have been, at least in part, driven by tax avoidance considerations.
On the face of it, the limits of the GAAR should be easier to discern. After all, we know that it applies to “abusive” arrangements. The statute provides examples of characteristics possessed by abusive arrangements; and the GAAR advisory panel has made available detailed guidance, including examples of tax arrangements to which, in its view, the GAAR does or does not apply.
The difficulty, of course, lies in the detail. When one tries to apply the legislation to the facts, the material only identifies the most benign and the most aggressive types of arrangements. That leaves a grey area in the middle, seeRange of Risk (below; click image to enlarge), where arrangements are up for grabs.
For arrangements to be regarded as abusive, they must first be “tax arrangements”. Arrangements are so regarded if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was their main or one of their main purposes.
Pausing there, of course, if the obtaining of an SDLT advantage was merely an incidental result of the design of the arrangements, the GAAR would have no ill effect.
If the obtaining of an SDLT advantage was a main purpose of the arrangements, the arrangements would be “abusive” if the entering into or the carrying out of the arrangements could not reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances, including:
the principles on which the provisions are based and the policy objectives of the provisions;
the presence of any contrived or abnormal steps; and
the exploitation of any shortcomings in the provisions.
Arrangements and reasonableness
The mini-GAAR and SDLT GAAR also address arrangements that are abusive. So what work does the GAAR do?
The answer, I think, is that it requires the adviser to shift their point of reference: rather than decide whether the arrangements would be regarded as avoidance by a court or tribunal, instead they must decide whether the arrangements might not reasonably be so regarded.
Clearly, opinions will differ as to whether or not a particular set of arrangements are abusive: a cautious adviser might say they are abusive; a bullish adviser might say they are not. The GAAR requires one to determine whether the arrangements fall outside the range of reasonable views, having regard to the legislative context in which the statutory provisions are based.
From a practical perspective, this might require a person to test their (subjective) opinion against material that illuminates the meaning and scope of the relevant statutory provisions (eg standing committee debates, guidance produced by HMRC and explanatory notes), as well as the guidance produced by the GAAR advisory panel and any published opinion of it.
Where ambiguity exists – and there are a number of areas in the SDLT code where provisions are formulaic and prescriptive, and the principles on which they are based and their policy objectives are open to debate – specialist advice might sensibly be sought.
But this is not a new concept and taxpayers have been drawing a line in the sand between acceptable and unacceptable tax planning for years. They are aware that their view may be challenged and, ultimately, the opinion of the courts is decisive. That continues.
What is different perhaps is that now the exercise of drawing that line in the sand has even greater significance; and acting on a subjective view on risk without testing the assumptions on which that view is based to determine whether that view is reasonable in some circumstances will no longer be appropriate.
One could approach this subject from the perspective of examining whether multiple general anti-avoidance rules are necessary. After all, one of the observations made by the Aaronson committee in considering the introduction of a GAAR was the beneficial effect of simplifying legislation and repealing anti-avoidance provisions that, following the introduction of the GAAR, would become otiose.
That argument is valid; but without wishing to be unduly pessimistic, it is probably unlikely that parliament will be inclined to repeal the mini-GAAR and SDLT GAAR for many years, if at all, regardless of the strength of the arguments for doing so.
The more prudent exercise is, as this article purports to do, to examine how the provisions interact and where their boundaries lie.
In determining whether any apply, one needs to determine: first, whether the amount of SDLT payable in respect of a transaction is lower compared to a theoretical alternative; second whether that reduction in tax is a main purpose of the arrangements; and, finally, whether that reduction in tax would not fall within the range of reasonable views in relation to the SDLT provisions in question.
Unless all those questions are answered positively, none of the provisions should apply. Responsible tax planning, taking advantage of straightforward legislative choices, is unaffected.
And those wishing to make those choices should not be put off by the decision in Project Blue or the introduction of the GAAR.
Autor: Sean Randall