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Section 71A STA |
The FA 2003 as originally enacted contained an exemption for Ijara financing in section 72. FAC |
Section 71A was added in April 2005 by section 94 of and paragraph 2 of Schedule 8 to the Finance Act 2005 and applies in place of section 72, except in relation to land in Scotland, to which sections 72 and 72A apply. FAC |
Section 71A(1) sets out the scope of the section; it provides: (1) This section applies where arrangements are entered into between a person and a financial institution under which - (a) the institution purchases a major interest in land or an undivided share of a major interest in land (the first transaction), (b) whe... |
The section therefore has the scope to cover the contracts between PBL and MAR at steps (2), (3) and (4)(a) in para 5 above. STA |
The section then spells out the exemptions which it confers on Ijara arrangements as follows. STA |
First, subsection (2) exempts the first transaction (the institutions purchase of a major interest in land) if the vendor is the counterparty to the arrangement with the financial institution (or is another financial institution which has provided Ijara finance to that person). STA |
It provides: (2) The first transaction is exempt from charge if the vendor is - (a) the person, or (b) another financial institution by whom the interest was acquired under arrangements of the kind mentioned in subsection (1) entered into between it and the person. STA |
Secondly, subsection (3) exempts from charge the grant of the lease of the subjects to the counterparty by providing: The second transaction is exempt from charge if the provisions of this Part relating to the first transaction are complied with (including the payment of any tax chargeable). STA |
Thirdly, subsections (4), (5) and (7) exempt from charge the re-conveyance by the financial institution of the major interest in land to the counterparty. STA |
They provide: (4) Any transfer to the person that results from the exercise of the right mentioned in subsection (1)(d) (a further transaction) is exempt from charge if - the provisions of this Part relating to the first and (a) second transactions are complied with, and (b) the further transaction - at all times betwe... |
the lease or sub-lease granted under the (5) The agreement mentioned in subsection (1)(d) is not to be treated - (a) as substantially performed unless and until the whole interest purchased by the institution under the first transaction has been transferred (and accordingly section 44(5) does not apply), or (b) 46 (opt... |
as a distinct land transaction by virtue of section (7) A further transaction that is exempt from charge by virtue of subsection (4) is not a notifiable transaction unless the transaction involves the transfer to the person of the whole interest purchased by the institution under the first transaction, so far as not tr... |
Section 71A therefore reflects the two paradigm forms of Ijara finance set out in para 4 above. Ratio |
First, if the financial institution purchases the property from a third party, that transaction is not exempted under subsection (2) and the financial institution pays SDLT on completion or the substantial performance of that contract; but the lease to the party who is being financed and the eventual transfer of the in... |
Secondly, if the financial institution purchases the property from the counterparty whom it is financing, subsection (2) applies to exempt the transfer of the major interest in land to the financial institution and subsections (3) and (4) exempt the second transaction (the lease) and the further transaction (the re-tra... |
Because the arrangements for financing the purchase of the barracks involved PBL completing its purchase and its sale of the barracks to MAR on the same day in a connected transaction, PBL, as I have said, claimed sub-sale relief under section 45(3). Ratio |
Because MAR had purchased the barracks from PBL in the context of an Ijara arrangement, it claimed exemption under section 71A(2) for that purchase and a claim was also submitted on behalf of PBL for exemption under section 71A(3) for the lease to PBL. Ratio |
When HMRC amended PBLs return to assert a liability to pay SDLT of 38.36m, PBL appealed to the First-tier Tribunal (the FTT). Ratio |
Before the FTT the parties agreed that the combined effect of sections 45(3) and 71A was to exclude any liability to SDLT on the part of PBL or MAR in relation to the transactions unless the anti-avoidance provisions of section 75A applied to the transactions. Ratio |
The arguments before the FTT therefore concentrated on the meaning and application of section 75A, to which I turn later in this judgment. Ratio |
But when the appeal came before the Upper Tribunal (the UT), PBL changed its position. Ratio |
It continued to argue that it was not liable for SDLT on its purchase of the barracks from the MoD because of its entitlement to sub-sale relief under section 45(3). Ratio |
But it now argued that MAR was not entitled to exemption on its purchase of the barracks under section 71A(2) (para 14 above) because, on a proper understanding of the related provisions of the FA 2003, PBL was not the vendor of the barracks to MAR under that subsection. ARG |
The tailpiece of section 45(3) (para 12 above) required that the completion of the sale by the MoD to PBL be disregarded and that tax was due on the notional contract created by section 45(3). ARG |
Giving effect to that disregard and the notional contract meant that the vendor of the barracks was the MoD, and not PBL. ARG |
The exemption in section 71A(2) therefore did not apply and MAR would have been liable to pay SDLT on the purchase price of 1.25 billion, if HMRC had not failed to so determine or to assess MAR within the six-year time limit since the transaction. ARG |
This argument did not succeed before the UT (Morgan J and Judge Nowlan). Ratio |
Morgan J, with whom Judge Nowlan agreed in relation to section 71A held, at para 43, that the purpose of the section was to equate the position of a provider of an alternative form of finance (such as MAR), who acquires a chargeable interest, with the position of a funder who acquires a security interest (which is an e... |
He relied on section 45(5A) which I discuss in para 32 below, in interpreting the vendor in para 71A(2) as referring to PBL but also pointed out that his interpretation promoted the purpose of section 71A. If PBL were correct in its submission, SDLT would be paid on the level of funding provided by the financial instit... |
He acknowledged that his interpretation meant that neither PBL or MAR was liable to pay SDLT in respect of the transactions unless section 75A applied, but considered the legislation to be flawed at the relevant time because the tailpiece of section 45(3) did not contain an exception to the disregard where the sub-sale... |
The Court of Appeal (Patten, Lewison and Underhill LJJ) [2018] 1 WLR 368 disagreed with the Upper Tribunals interpretation of the relationship between section 45(3) and section 71A. Patten LJ began by observing, at para 28, that HMRCs approach by its reliance on section 75A produced a particularly inapt and harsh resul... |
He referred to the Court of Appeals earlier judgment in DV3 RS LP v Revenue and Customs Comrs [2014] 1 WLR 1136 (DV3) in support of his analysis: vendor in section 71A(2) must be a reference to the person from whom MAR purchased the barracks; that person could not be PBL as, by virtue of the disregard, it had no charge... |
He rejected Mr Gammies submission on behalf of HMRC that section 71A was not addressing land transactions in the SDLT world but was framed to address transactions in the real world, and also his submission relying on section 45(5A). RLC |
Thirdly, he considered that the scheme of section 71A was to limit SDLT in all cases to a single charge on the acquisition of the property from the third party vendor, whether the acquirer was the financial institution or its customer. RLC |
Fourthly, he thought that it was unlikely that Parliament had intended to leave transactions, which fell within both of sections 45(3) and 71A, exempt from any SDLT charge and to have dealt with the problem by the anti-avoidance provisions of section 75A, which was introduced over a year later. RLC |
The vendor under section 71A(2) was therefore the MoD, and not PBL, with the result that that subsection did not exempt MAR from the charge. RLC |
Lewison LJ added two further points. RLC |
First, he disagreed with the approach of the Upper Tribunal which equated the position of MAR with a traditional lender and saw the aim of section 71A as being that SDLT was to be paid by purchasers and not financiers. RLC |
As under an Ijara arrangement the financial institution owned the asset for the duration of the lease, it was not surprising that it should be liable to pay SDLT on the purchase. RLC |
Secondly, because section 75A did not apply until 20 months after section 71A had taken effect, the result of HMRCs approach was that no SDLT would have been payable on transactions which combined sub-sale relief and the section 71A exemption in that period. RLC |
This provided a very strong context which made it inappropriate to apply an extended meaning of vendor in section 45(5A): para 49. RLC |
I recognise the difficulty in interpreting the legislation which has been subjected to repeated incremental amendments and additions since 2003, as Parliament has struggled to optimise this new tax. Ratio |
But I have come to the conclusion that the Upper Tribunal was correct in concluding that PBL was the vendor under section 71A(2) and therefore that MARs purchase of the barracks from PBL was exempt from SDLT for the following four reasons. Ratio |
First, it is in my view significant that Parliament has chosen, when describing the alternative property finance transactions to be exempted from charge in section 71A, and also in sections 72, 72A and 73, not to use the language of land transaction and chargeable interest but to use what Mr Gammie described as the lan... |
Parliament also adopted this practice in paragraphs 2-4 of Schedule 3, which exempt specified transactions from charge. Ratio |
Thus in section 71A(1)(a) the first transaction is described as the purchase of a major interest in land and in subsection (1)(c) the second transaction is described as the granting of a lease out of the major interest. Ratio |
This contrasts with the language of sections 42-45 which are concerned with the statutory constructs of land transactions, contracts for land transactions, and the acquisition and disposal of chargeable interests. Ratio |
As descriptions of real world transactions the provisions of section 71A match the paradigm descriptions of Ijara arrangements in para 4 above so that in the first example, when the financial institution purchases the property from a third party and then finances its customers acquisition by means of a lease and a cont... |
The distinctive treatment of the two examples is achieved by section 71A(2) which exempts the first transaction from charge if the vendor is the customer of the financial institution (or a financial institution which has previously provided Ijara finance to that customer). Ratio |
It appears to me that in enacting the section using real world terms, Parliament has sought to describe the two paradigms of Ijara finance. Ratio |
In the second example, in which subsection (2) exempts the first transaction, the customer may have purchased the major interest in land and paid SDLT on that purchase, or he may have received the major interest in land as a gift or through inheritance and therefore have incurred no charge to SDLT. Ratio |
It is not relevant to the application of section 71A(2) to ask whether or not the customer has incurred a liability to pay SDLT before entering into the Ijara arrangement. Ratio |
Subsection (2) requires one only to ask the real world question: who sold the major interest in land to the financial institution? If the answer to that question is the customer, no charge to SDLT would arise. Ratio |
In the present case, if one asks, who sold the barracks to MAR?, the answer is PBL. Ratio |
Secondly, this approach is consistent with the aim of section 71A, which the UT identified, of seeking to equate Ijara financing with conventional lending in the United Kingdom by taxing the purchaser of the property and exempting the financier. Ratio |
In conventional lending, security interests are exempt in all circumstances (section 48(2)). Ratio |
Section 71A operates as a self-contained statutory regime to achieve this result. Ratio |
As was stated in the Explanatory Notes to the original clauses 72 and 73 of the Finance Bill 2003 the aim was to place the amount of tax due on purchases by means of Islamic financing on a level footing with the amount due for purchases with conventional mortgage products. Ratio |
Thus in the case where the financial institution purchases from its customer, the whole transaction may be seen as the equivalent of a security transaction. Ratio |
In the case where the financial institution purchases from a third party, that purchase may be seen as a precursor of the equivalent of a security transaction effected by the lease and the conferring on the customer of the right to buy the property from the financial institution. Ratio |
Thirdly, there is nothing within section 71A which suggests that the exemption in subsection (2) will not apply when the sale by the customer to the financial institution is a sub-sale which takes place contemporaneously and in connection with the customers purchase of the major interest in land. Ratio |
What Parliament appears to have overlooked at the outset is the possibility of the combination of sub-sale relief with the exemption of Ijara arrangements. Ratio |
Fourthly, this interpretation has the benefit (subject to the operation in particular cases of section 75A which I discuss below) that, where the financial institution purchases the property from its customer, SDLT will not be charged on the amount which the financial institution provides its customer, which may in man... |
In some cases, as here, the amount which the financial institution contracts to provide may be significantly more than the purchase price of the property which the customer has paid. Ratio |
It is of note that the interpretation of section 71A(2) which the Court of Appeal has favoured in the context of a sub-sale has the effect of imposing a tax charge by reference to the amount which the financial institution provides the customer. Ratio |
This would not achieve the level footing which the section was designed to achieve. Ratio |
In DV3 the Court of Appeal was addressing relief under paragraph 10 of Schedule 15 to the FA 2003 which was available when a person transfers a chargeable interest to a partnership of which he is a partner. Ratio |
In that case the partner (A) purchased a lease from an insurance company (C) and transferred the lease to a newly created partnership (B) of which A and four others were the partners. Ratio |
Both contracts were completed on the same day. Ratio |
A claimed sub-sale relief under section 45(3) and also relief for B (the partnership) under paragraph 10 of Schedule 15. Ratio |
The claim for the Schedule 15 relief failed because the section 45(3) disregard prevented A from acquiring a chargeable interest from C, and paragraph 10 of Schedule 15 applies only if a partner transfers a chargeable interest to a partnership. Ratio |
Lewison LJ, when discussing the definition of land transaction in section 43(1), stated, at para 23: the fact that B acquires a chargeable interest as the result of an instrument giving effect to a transaction between him and A does not necessarily entail the proposition that the interest in As hands was itself a charg... |
If there is no land transaction, there cannot have been the acquisition of a chargeable interest. PRE |
He continued at para 30: Paragraph 10 of Schedule 15 to the 2003 Act is not so much concerned with the acquisition of a chargeable interest by a partnership as the transfer by a partner of a chargeable interest. PRE |
It looks at a transaction from the perspective of the transferor. PRE |
It seems to me to be clear that a partner cannot transfer a chargeable interest to a partnership unless he has a chargeable interest to transfer. PRE |
HMRC accept as correct the Court of Appeals analysis in DV3 but argue that the case casts no light on the correct interpretation of section 71A(2) because it is irrelevant to the operation of that subsection whether the completion of the sale from the MoD to PBL was a land transaction for the purpose of SDLT with the r... |
Equally, it is irrelevant to the interpretation of section 71A(2) whether or not the transaction between the customer and the financial institution is a land transaction. Ratio |
When the FA 2003 spoke of the vendor in section 71A and in the equivalent subsections in the other sections exempting alternative property finance, it was referring to the vendor in the real world transaction of the sale of the major interest in land. Ratio |
It was not concerned with whether or not the real world transaction was a land transaction for the purposes of SDLT. Ratio |
Accordingly, HMRC submit that section 43(4), which defines vendor in relation to a land transaction in Part 4 of the FA 2003 as the person disposing of the subject-matter of the transaction is not in point. Ratio |
For the reason set out in paras 24 and 25 above, I agree. Ratio |
It follows that the disregard in the tailpiece of section 45(3) has no bearing on the operation of section 71A(2). Ratio |
A consideration which influenced the Court of Appeal in reaching its view on section 71A(2) was that Parliament could not have intended to leave transactions which involved a sub-sale financed by an Ijara arrangement (and thus fell within both section 45(3) and section 71A) free of charge for over one year before it in... |
But SDLT was a new tax created by the FA 2003 and, as I have said, required repeated amendments to make it effective. Ratio |
It is not surprising that lacunas may have existed in the early years of a new tax. Ratio |
In the early years of the tax, Parliament enacted amendments to close identified lacunas caused by the combination of sub-sale relief and exemptions. STA |
Thus section 45(5A) was inserted into the FA 2003 by section 296 of and paragraph 5 of Schedule 39 to the Finance Act 2004. STA |
It provided: In relation to a land transaction treated as taking place by virtue of subsection (3) - (a) references in Schedule 7 (group relief) to the vendor shall be read as references to the vendor under the original contract; (b) other references in this Part to the vendor shall be read, where the context permits, ... |
This provision would not have needed to define the vendor for the purpose of group relief in para (a) as it did if, consistently with the Court of Appeals reasoning, the disregard in the tailpiece to section 45(3) operated already to make the vendor a reference to the vendor under the original contract. STA |
Similarly, the insertion by the Finance (No 2) Act 2005 into the tailpiece of section 45(3) of the words of exception (ie except in a case where the secondary contract gives rise to a transaction that is exempt from charge by virtue of subsection (3) of section 73 (alternative property finance: land sold to financial i... |
If the Court of Appeal were correct in holding that the vendor in section 71A(2) had to have a chargeable interest and that the tailpiece of section 45(3) prevented it from having such an interest, sections 72(2), 72A(2) and 73(2), which are similarly worded, would operate in the same way in the context of a sub-sale s... |
The parties have not explained to the court what prompted each of the various amendments, but Parliament may have been responding to particular schemes which had the effect of avoiding SDLT. Ratio |
HMRC explained in their written case that section 75A, which the Stamp Duty Land Tax (Variation of the Finance Act 2003) Regulations 2006 (SI 2006/3237) and section 71 of the Finance Act 2007 inserted into the FA 2003, was a response to the formulation of tax avoidance schemes which combined reliefs (including sub-sale... |
As will be clear when I turn to section 75A, it has a very broad ambit. Ratio |
The problem of tax avoidance by combining sub-sale relief and the exemptions for the various forms alternative property finance was capable of a more focussed resolution. Ratio |
While subsequent amendments are not a legitimate tool in ascertaining prior parliamentary intention, it is relevant to note that the problem of the combination of the sub-sale relief and those exemptions was eventually resolved by a simple expedient. Ratio |
In section 82 of and paragraph 2 of Schedule 21 to the Finance Act 2011 Parliament amended the exception in the tailpiece of section 45(3) to read: except in a case where the secondary contract gives rise to a transaction that is exempt from charge by virtue of any of sections 71A to 73 (which relate to alternative pro... |
This amendment, like those referred to in para 32, would not have been needed to create a charge to SDLT if the interpretation which the Court of Appeal favoured were correct. Ratio |
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