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The carried-back FII should therefore be regarded as having been applied to relieve only lawful ACT. Ratio |
HMRCs answer in their written case is that EU law does not mandate a form of credit for overseas-sourced dividends. Ratio |
They quote the statement of the CJEU in para 72 of FII ECJ II: As is clear from para 62 [of the present judgment], the obligation presently imposed on the resident company by national rules, such as those at issue in the main proceedings, to pay ACT when profits from foreign-sourced dividends are distributed is, in fac... |
HMRC, unexceptionably, interpret this statement as meaning that it is lawful to charge ACT on a dividend paid by company A only to the extent that it was lawful to charge MCT on the profits out of which that dividend was paid. Ratio |
But HMRC go on to say that the relief required was not in the form of a credit which was the equivalent of further FII. Ratio |
We do not accept HMRCs submission on Issue V(b) for the following three reasons. Ratio |
First, it follows from the answer which we have given on Issue I that we reject the contention that no particular form of credit is mandated by EU law. Ratio |
What the CJEU said in para 72 of FII ECJ II must be construed in the light of what it said in paras 61-65 which we have quoted in para 26 above. Ratio |
That in turn falls to be understood against the earlier ruling of the CJEU in FII ECJ I, which we have quoted in para 7 above. Ratio |
In other words, EU law requires a tax credit by reference to the FNR to which the profits of the overseas company have been subject. Ratio |
As a result, the UK can charge ACT in relation to company As dividends so far as they comprise profits from overseas-sourced dividends only to the extent that there is tax due in respect of those dividends after it has given company A that tax credit. Ratio |
Secondly, the consequence of this is that PAC is correct in its contention that HMRCs approach would result in depriving company A of the tax credits on overseas-sourced dividends which EU law mandates. Ratio |
Using the example which PAC gave in its written case, suppose that company A paid ACT of 100 in the first quarter when it had received overseas-sourced dividends which (if EU law had been applied correctly) would have entitled it to a credit of 25. Ratio |
If EU law had been applied correctly in that quarter, the ACT paid would have been 75. Ratio |
Suppose then that in the third quarter company A received FII for UK-sourced dividends which carried credits of 75 which it carried back to the first quarter. Ratio |
On PACs approach, the carried back FII would result in the repayment of all the ACT which had properly been paid. Ratio |
If, as on HMRCs approach, the 75 of FII, which is carried back from the third quarter, were utilised pro rata between the lawful and unlawful ACT which comprised the 100 paid in the first quarter, 18.75 (1/4 of the 75) would be attributed to the unlawful ACT, thereby cancelling to that extent the credit to which compan... |
Thirdly, we are not persuaded by the arguments as to fairness which influenced the Court of Appeal in relation to both of Issues V(a) and V(b). Ratio |
As unlawful ACT is a nullity, the principled answer is that domestic FII carried back to an earlier quarter is to be regarded as having been applied to relieve only lawful ACT so that any excess FII remained available for carry forward under section 241(3). Ratio |
We therefore answer Issue V(b) by holding that domestic FII which is carried back to an earlier quarter under paragraph 4 of Schedule 13 of ICTA is to be regarded as having been applied to relieve only lawful ACT. Ratio |
In further written submissions HMRC and PAC disagree on factual matters which may affect the working out of the rulings which we have made. Ratio |
This court is not in a position to resolve these matters. Ratio |
We will invite submissions in response to our judgment as to how our rulings may be applied. Ratio |
Conclusions RPC |
For the foregoing reasons, we allow HMRCs appeal on Issues II and III, and dismiss it on Issue I. PACs proposed cross-appeal on Issue IV does not arise, as a result of its success on Issue I, and it also succeeds in its cross-appeal on Issue V(a). RPC |
In relation to Issue V(b), the court holds that FII carried back to an earlier quarter is to be treated as having been applied to relieve only lawful ACT. RPC |
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. FAC |
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. Ratio |
Since its enactment, the FA 2003 has been amended on several occasions. Ratio |
This appeal is concerned with that Act as it existed on 31 January 2008. Ratio |
Two issues lie at the heart of the appeal. FAC |
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 fin... |
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. FAC |
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. FAC |
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. FAC |
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. FAC |
A 20% deposit was paid on exchange of contracts and the balance of the price was to be paid in four equal instalments. FAC |
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. FAC |
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. FAC |
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 Sharia-compliant products, and which syndicated the finance for the purchase. FAC |
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. FAC |
One such form of Sharia -compliant financing, known as Ijara finance, was used to fund the purchase of the barracks. FAC |
PBLs written case (paras 14 and 15) contains a convenient summary of the paradigm forms of Ijara arrangements, which I quote in full: 14. FAC |
Such transactions are likely to occur in one of two categories of case. FAC |
In the first, the counterparty wishes to acquire a property from a third party and requires funding to enable it to do so. FAC |
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 institutions interest at a later stage. FAC |
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. FAC |
15. FAC |
In the second case, the counterparty already owns the property but wishes to obtain funds to use for another purpose. FAC |
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. FAC |
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. FAC |
The funding of the purchase of the barracks was an adaptation of the first of the two categories. Ratio |
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. Ratio |
(2) 29 January 2008: PBL contracted to sub-sell the freehold to MAR. Ratio |
(3) 29 January 2008: MAR agreed to lease the barracks back to PBL. Ratio |
(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 le... |
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. Ratio |
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. Ratio |
This is the first of the two principal issues mentioned in para 2 above. Ratio |
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). FAC |
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. FAC |
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. FAC |
Such a notification is not an acknowledgement that the arrangements were entered into for the purpose of tax avoidance. FAC |
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. FAC |
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. FAC |
On 22 February 2008 several land transaction returns were filed in relation to these transactions. FAC |
Three are relevant to this appeal. FAC |
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. FAC |
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. FAC |
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. FAC |
In the return MAR claimed alternative property finance relief under section 71A of the FA 2003. FAC |
Thirdly, a return was filed relating to the grant by MAR of a lease to PBL on 31 January 2008. FAC |
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. FAC |
HMRC opened an inquiry into the SDLT returns which had been submitted in relation to these transactions. FAC |
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. FAC |
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. FAC |
PBL now argues that HMRC were not empowered to amend that return as they did. FAC |
I discuss this challenge under the heading The wrong return challenge in paras 81-84 below. FAC |
HMRC did not require any amendment to the other land transaction returns as a result of their inquiry. FAC |
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. FAC |
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. FAC |
I discuss those figures in greater detail below. FAC |
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). FAC |
The fourth tranche of consideration, which was US$378,670,740 payable on 31 January 2011, was never paid because the arrangement was terminated on 1 March 2010. FAC |
This is relevant to the dispute about the actual consideration and PBLs human rights challenge which I consider in paras 57-80 below. FAC |
The Finance Act 2003 STA |
Part 4 of the FA 2003 introduced SDLT into British tax law. STA |
It is a tax on land transactions (section 42(1)). STA |
A land transaction is any acquisition of a chargeable interest (section 43(1)); and a chargeable interest is defined (in section 48(1)) as including an estate, interest, right or power in or over land in the United Kingdom other than an exempt interest. STA |
A security interest, which is an interest or right (other than a rentcharge) held for the purpose of securing the payment of money or the performance of any other obligation (section 48(3)), is an exempt interest (section 48(2)). STA |
Thus, in relation to land purchases and conventional property funding arrangements in the United Kingdom, the tax is levied on the acquisition of chargeable interests, such as freehold or leasehold interests in land, while security interests, including those which secure the financing of such acquisitions, are exempted... |
When persons enter into a contract for a land transaction under which the transaction is to be completed by a conveyance, section 44(2) provides that they are not regarded as entering into a land transaction by reason of entering into the contract. STA |
Thus steps (1) and (2) in para 5 above would not of themselves give rise to any liability to SDLT. STA |
Instead, if the transaction is completed without previously having been substantially performed, the contract and the transaction effected on completion are treated as parts of a single land transaction, whose effective date is the date of completion (section 44(3)). STA |
If the contract is not completed but is substantially performed (for example, if the purchaser takes possession of the subject matter of the contract or a substantial amount of the consideration is paid) the contract is treated as if it were the transaction provided for in the contract and its effective date is when th... |
It is common ground in this appeal that section 45, which creates sub-sale relief by modifying the operation of section 44, applies in relation to the completion of the two contracts for the sale of the barracks (steps (1) and (2) in para 5 above) to prevent a charge to tax on the completion of the contract between the... |
Section 45 (as amended by section 49 of and paragraph 2 of Schedule 10 to the Finance (No 2) Act 2005) provides: (a) (b) (2) The transferee is not regarded as entering into a land transaction by reason of the transfer of rights, but section 44 (contract and conveyance) has effect in accordance with the following provis... |
(3) That section applies as if there were a contract for a land transaction (a secondary contract) under which - the transferee is the purchaser, and the consideration for the transaction is - (i) so much of the consideration under the original contract as is referable to the subject- matter of the transfer of rights a... |
the consideration given for the transfer of The substantial performance or completion of the original contract at the same time as, and in connection with, the substantial performance or completion of the secondary contract shall be disregarded except in a case where the secondary contract gives rise to a transaction t... |
The consequence of the tailpiece of section 45(3) was that the completion of the contract between the MoD and PBL for the purchase of the barracks was disregarded. Ratio |
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