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The courts adopt a purposive approach to the interpretation of taxing statutes following the guidance of the House of Lords in Barclays Mercantile Business Finance Ltd v Mawson (Inspector of Taxes) [2005] 1 AC 684. Ratio |
In accordance with that guidance, summarised by Lord Nicholls of Birkenhead at para 32, the court asks itself two questions. Ratio |
First, it must determine the nature of the transaction to which a statutory provision is intended to apply; and secondly it must decide whether the actual transaction answers to the statutory description. Ratio |
If I am correct about the self- contained nature of the provisions of section 71A, the answer to the first question is that the exemption in section 71A(2) applies to the first transaction of the Ijara arrangement in section 71A(1) where the customer sells a major interest in land to the financial institution. Ratio |
The question whether PBLs sale of the barracks to MAR answers that description is answered in the affirmative. Ratio |
A purposive construction will not always operate in favour of HMRC and against the taxpayer as MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311 shows. Ratio |
Similarly, if there are lacunas in a statutory regime which enable tax avoidance, a purposive interpretation may not always remove them as the Court of Appeals judgment in Mayes v Revenue and Customs Comrs [2011] STC 1269 shows. Ratio |
I therefore conclude that, but for section 75A, the combination of the operation of sub-sale relief under section 45(2) and (3) and the exemption under section 71A(2) relieved the sale by the MoD to PBL and exempted the sale by PBL to MAR from a charge to SDLT. Ratio |
An argument against this approach, which has attracted Lord Briggs, is that section 71A(2) must be construed as exempting a transaction which would otherwise be a chargeable transaction under Part 4. ARG |
The only transaction which is so chargeable, so the argument goes, is the completion of the notional secondary contract which section 45(3) creates, and section 45(5A)(b) gives instructions on the identification of the vendor in the notional land transaction. ARG |
Because the identification of the vendor in section 45(5A)(b) depends on the context in which the word is used and that context would give rise to the avoidance of tax if vendor referred to the transferee because the combination of sub-sale relief and section 71A(2) would exempt both transactions, it is argued that the... |
In relation to the first point, the statement that a transaction is exempt from charge, such as that in section 71A(2) referring to the first transaction, is an unqualified statement that a transaction of that description is free from a liability to pay the tax. ARG |
That exclusion of liability is not removed if, for some extraneous reason such as the operation of sub-sale relief under section 45, the transaction in question would not have imposed a liability to SDLT: viz the first of my four reasons (paras 24 and 25 above). ARG |
If that is correct, the second argument does not arise because operation of the exemption does not depend on section 45(5A)(b). Ratio |
In any event, if section 45(5A)(b) were relevant, (a) the context of the use of the word vendor was in relation to real world transactions and (b) the history of the amendment of the FA 2003 in the years before the transactions were carried out on 31 January 2008 suggests that HMRC were struggling to respond to schemes... |
In that context the existence of a loophole in the tax legislation would not militate against the interpretation which I favour. Ratio |
This is not to say that a contextual construction of a statutory provision may not have regard to the consequences of a particular interpretation and lead one to prefer another interpretation, especially when the former interpretation would have absurd or unreasonable results. Ratio |
It is simply to say that in the early years of SDLT Parliament created a patchwork of provisions, which, for a while, allowed a transaction, which combined sub-sale relief and Ijara arrangements, what Lord Briggs correctly calls an unintended tax holiday. Ratio |
I recognise that the exclusion by the Finance (No 2) Act 2005 of the completion or substantial performance of the first contract from the section 45(3) disregard when the secondary contract would give rise to an exempt transaction under section 73(3) suggests that the draftsman in 2005 sought to impose a charge on the ... |
Further, the different treatment in section 45(3) of the similarly-worded exemptions in sections 71A and 73 at the time of the relevant transactions has the result, on Lord Briggs approach which is focussed on avoiding tax loss, that vendor is interpreted differently under sections 71A(2) and 73(2). Ratio |
While section 45(5A)(b) may allow such an interpretation, I find HMRCs explanation of a patchwork of provisions and a lacuna a more persuasive explanation of the relevant provisions as they were then. Ratio |
Because, as a result of the combination of sections 45 and 71A(2), there is no SDLT charge on the sales between the MoD and PBL and between PBL and MAR, it is necessary to consider the correct interpretation and application of section 75A, to which I now turn. Ratio |
Section 75A STA |
(i) Whether and if so how it applies Ratio |
Section 75A is headed Anti-avoidance and provides: (1) This section applies where - (a) one person (V) disposes of a chargeable interest and another person (P) acquires either it or a chargeable interest deriving from it, (b) a number of transactions (including the disposal and acquisition) are involved in connection w... |
a transaction which takes place after the (3) The scheme transactions may include, for example - the acquisition by P of a lease deriving from a a sub-sale to a third person; the grant of a lease to a third person subject to a (a) freehold owned or formerly owned by V; (b) (c) right to terminate; (d) take some other ac... |
(6) The effective date of the notional transaction is - the last date of completion for the scheme (a) transactions, or if earlier, the last date on which a contract in (b) respect of the scheme transactions is substantially performed. STA |
(7) This section does not apply where subsection (1)(c) is satisfied only by reason of - (a) (b) sections 71A to 73, or a provision of Schedule 9. STA |
The breadth of section 75A was implicitly acknowledged by Parliament which in section 75C(11) and (12) empowered the Treasury to make an order, including an order with retrospective effect, which provides that section 75A is not to apply in specified circumstances. Ratio |
PBLs first argument, that section 75A could not apply because it had not been established that the parties entered into the transactions for the purpose of tax avoidance, failed before the FTT, the UT and the Court of Appeal. ARG |
In my view the tribunals and the Court of Appeal reached the correct conclusion. Ratio |
The heading of the section, Anti-avoidance, is the only indication in the section which could support PBLs contention. Ratio |
The heading is relevant to assist an understanding as to the mischief which the provision addresses, but it says nothing as to the motives of the parties to the scheme transactions. Ratio |
There is nothing in the body of the section which expressly or inferentially refers to motivation. Ratio |
The provision was enacted to counter tax avoidance which resulted from the use of a number of transactions to effect the disposal and acquisition of a chargeable interest. Ratio |
It is sufficient for the operation of the section that tax avoidance, in the sense of a reduced liability or no liability to SDLT, resulted from the series of transactions which the parties put in place, whatever their motive for transacting in that manner. Ratio |
This is clear from subsection (1)(c) which compares the amount of SDLT payable in respect of the actual transactions against what would be payable under the notional land transaction in section 75A(4), by which P acquired Vs chargeable interest on its disposal by V. Ratio |
Section 75A does not identify who is V and who is P in relation to the transactions to which the section applies. Ratio |
As there is a number of transactions, it is possible that more than one person may be V and more than one person may be P. But Parliament has not conferred a discretion on HMRC to select whom they wish to treat as V or P. HMRC do not contend otherwise. Ratio |
In Vestey v Inland Revenue Comrs (Nos 1 and 2) [1980] AC 1170, in which the Revenue contended that they had a discretion to select whom among a class of beneficiaries it should assess as liable to tax, Lord Wilberforce identified the following principles as fundamental objections to that contention, at p 1172: Taxes ar... |
A citizen cannot be taxed unless he is designated in clear terms by a taxing Act as a taxpayer and the amount of his liability is clearly defined. PRE |
A proposition that whether a subject is to be taxed or not, or, if he is, the amount of his liability, is to be decided (even though within a limit) by an administrative body represents a radical departure from constitutional principle. PRE |
It is necessary therefore for the courts to analyse the words of a broadly-worded anti- avoidance provision to identify the persons on whom Parliament has imposed this charge to tax. PRE |
The words of section 75A by themselves do not disclose who is V and who is P in a particular case. Ratio |
But the mischief which the provision addresses and the context of the provision within Part 4 of the FA 2003 provide the answer. Ratio |
The court adopts the purposive approach which the House of Lords sanctioned in Barclays Mercantile Business Finance Ltd, to which I have referred in para 34 above. Ratio |
The explanatory notes on clause 70 of the Finance Bill 2007 explained that the provision was introduced to counter avoidance schemes which have been developed to avoid payment of SDLT. Ratio |
It appears to be drafted in deliberately broad terms to catch a wide range of arrangements which result in tax loss. Ratio |
The examples of scheme transactions which are set out in subsection (3), although merely examples, give an indication of some at least of the targets of the provision. Ratio |
The task is to identify where the tax loss has occurred as a result of the adoption of the scheme transactions in relation to the disposal and acquisition of the relevant interest or interests in land. Ratio |
This in turn involves identifying the person on whom the tax charge would have fallen if there had not been the scheme transactions to which subsection (1)(b) refers and which exploited a loophole in the statutory provisions. Ratio |
It is clear from (i) subsection (1)(a), which refers to P acquiring either Vs chargeable interest or a chargeable interest deriving from it, and (ii) subsection (3)(a), which refers to the acquisition by P of a lease deriving from a freehold owned or formerly owned by V (emphasis added), that the section may operate no... |
Thus the section can cover a series of transactions by which V disposes of its chargeable interest which comes to be acquired by another person and P ultimately acquires a chargeable interest derived from it from that other person. Ratio |
Turning to the application of the section to the transactions in this case, it is agreed by the parties that V in subsection (1)(a) is the MoD; its chargeable interest was the freehold in the Chelsea Barracks. Ratio |
I agree. Ratio |
In the course of the scheme transactions, PBL did not acquire a chargeable interest, the freehold, when the contract between the MoD and it was completed on 31 January 2008 because the transaction fell to be disregarded under section 45(3); on the same day MAR acquired a chargeable interest, again the freehold, when it... |
The put and call options were designed to enable PBL to re-acquire the freehold in the barracks, a result which was the ultimate aim of the series of transactions summarised in para 5 above. Ratio |
But those options did not result in the acquisition of a chargeable interest on 31 January 2008. Ratio |
They were nevertheless a scheme transaction within subsection (1)(b) because they were involved in connection with the disposal and acquisition of a chargeable interest and subsection (2)(d) includes within the definition of transaction under subsection (1) a transaction which takes place after P acquires the chargeabl... |
They are part of the context in which the scheme transactions, which led to Ps acquisition of a chargeable interest on 31 January 2008, fall to be analysed as they were the final stage of the transactions by which MAR was to finance PBLs acquisition of the freehold in the barracks. Ratio |
If the court were to confine its attention to subsection (1)(a) alone, either MAR or PBL could be P, the former because it acquired a chargeable interest on its acquisition of the freehold in the barracks and the latter because it acquired the lease of the barracks from MAR. Ratio |
But the court cannot so confine its attention. Ratio |
It must go on to analyse how the scheme transactions gave rise to the loss of tax. Ratio |
In the real world the nature of the transaction is clear: PBL acquired the barracks with the benefit of finance from MAR. Ratio |
The sub-sale to MAR and the lease back to PBL were transactions involved in connection with the disposal by MoD of its chargeable interest, the freehold in the barracks, and the acquisition by PBL of its chargeable interest, the leasehold interest. Ratio |
The loophole which has enabled the avoidance of tax is the combination of sub-sale relief under section 45(3) with the exemption conferred on Ijara financing when the customer of the financial institution sells its freehold interest in land to the institution and then leases back the land. Ratio |
The simple means of removing the loophole, which Parliament eventually identified in 2011, was to exclude from the disregard in the tailpiece of section 45(3) a case where the secondary contract was exempt because of sections 71A to 73. Ratio |
Thus it was PBL which obtained the benefit of the avoidance of tax in relation to the completion of its contract with MoD. Ratio |
I recognise that the method which Parliament subsequently chose to remove the tax loss cannot be decisive. Ratio |
There might have been other ways of removing the tax loss. Ratio |
For example, it might have been possible to amend section 71A(2) to remove the exemption of the sale transaction between the customer and the financial institution if the vendor had benefited from the section 45(3) disregard and thereby impose the burden on the financial institution. Ratio |
But, as Judge Nowlan stated in his impressive judgment (para 137), it is appropriate to have regard to the overall structure of SDLT which seeks to impose the tax on purchasers and not financiers. Ratio |
The amendment of section 45(3) rather than section 71A(2) had the advantage of preserving this structure by keeping intact the exemption of the two paradigms of Ijara financing to which I referred in para 4 above. Ratio |
If the opportunity for tax avoidance were removed by amending section 71A(2), the consequence would be that SDLT would be paid on the price which the financial institution paid its customer in the context of the Ijara financing which, as I have said, might differ significantly from the purchase price of the major inter... |
Thus I conclude, like Judge Nowlan, that the error obviously lay in the failure to disapply the section 45(3) disregard, an error which benefited PBL. Ratio |
Taking a purposive approach to the interpretation of section 75A, therefore, I conclude that PBL is P; and, because the completion of the contract between the MoD and PBL is disregarded under section 45(3), the chargeable interest which PBL acquires in section 75A(1) is the lease which it received from MAR. Ratio |
The parties advanced two alternative approaches to the identification of P, which I comment on briefly to explain why I cannot accept either approach. Ratio |
First, PBL submits that the court should adopt a sequential approach and identify as P the first person who acquires a chargeable interest. ARG |
As the completion of the MoD-PBL contract is disregarded under section 45(3), MAR is that person. ARG |
But there is no justification in the wording of section 75A for the adoption of a sequential approach, when applying the section to the transactions which in fact took place, which stops the search at the first person to acquire a chargeable interest. ARG |
One would thereby remove from consideration the leaseback and the grant of the options which were part of the contractual scheme which the section is designed to address. ARG |
That approach appears to me to be inconsistent with the purpose of section 75A, which is to prevent a tax loss which otherwise would occur because of the totality of the connected transactions which have taken place in the real world. ARG |
Secondly, HMRC submit that MAR could not be P because section 75A(7) disapplies section 75A if subsection (1)(c) is satisfied only by reason of sections 71A to 73. ARG |
HMRC argues that, from MARs perspective, the only reason why MAR did not incur liability to SDLT on its acquisition of the freehold interest in the barracks from PBL was because of the exemption in section 71A. That may be so; but it is irrelevant. ARG |
Subsection (1)(c) does not look at the question from the perspective of a party to one of the transactions. ARG |
It sets up a comparison between the sum of SDLT payable on all of the connected transactions and that payable on the notional transaction. ARG |
Subsection (7) would disapply section 75A in relation to the transactions in para 5 above only if the section 71A exemption were the sole reason why the amounts of SDLT payable on those transactions is less than the amount payable on the notional transaction. ARG |
The first of those transactions was the completion of the MoD-PBL contract and the reason why the sum payable on that transaction was nil was because of the section 45(3) disregard. ARG |
Thus subsection (7) would not disapply section 75A. ARG |
PBL advanced a refinement of this approach in its written case, namely that if one adds up all of the SDLT which would have been charged if there had been no sub-sale relief and no exemption for the Ijara finance, it is only the section 71A exemption which takes the tax due on the scheme transactions below that due on ... |
Subject to its challenge on the quantum of the charge on the notional transaction, which I discuss below, PBL presents the sums payable on the four transactions in para 5 above, if there were no sub-sale relief and no section 71A exemption, as follows: (i) 38.36m in respect of the MoD-PBL transfer; (ii) 50m in respect ... |
I do not accept this approach. ARG |
I consider that the purpose of subsection (7)(a) is to exclude the application of section 75A where the only cause of the tax loss which the section counters is the exemptions available under sections 71A to 73. ARG |
Those alternative property finance provisions involve a series of transactions which otherwise might themselves be scheme transactions under section 75A(1)(b) and it is clearly not the purpose of the section to strike at transactions which go no further than to achieve the intended exemption of alternative property fin... |
Where, as here, the combined effect of section 45(3) and section 71A is to diminish the SDLT payable below that payable on the notional transaction, section 75A must take effect. ARG |
I conclude (i) that PBL is P under section 75A(1)(a), (ii) that the requirements of subsection (1)(b) also are met because the scheme transactions are those listed in para 5(4) above, and (iii) addressing the first side of the balance which subsection (1)(c) mandates, that the sum of SDLT payable in respect of the sche... |
It is then necessary to consider the other side of the subsection (1)(c) balance. Ratio |
It will be recalled that subsection (4) requires that the scheme transactions which are land transactions be disregarded and establishes in their place a notional transaction by which P acquires Vs chargeable interest on its disposal by V. That notional transaction involves PBL acquiring MoDs freehold interest in the b... |
Under subsection (6) the effective date of that notional transaction is 31 January 2008. Ratio |
I turn then to the chargeable consideration on this notional transaction. Ratio |
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