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interpretation of section 75B for which PBL argues. Ratio |
I therefore do not accept that article 14 of the ECHR can support the Procedural challenges Ratio |
(a) The wrong return challenge Ratio |
PBL submits that HMRC are in any event not entitled to pursue their claim for the SDLT because they had no power to amend the SDLT return, lodged on its behalf, relating to the completion of the contract of 5 April 2007 between the MoD and PBL (para 7 above), because it was not a return relating to the notional transac... |
PBL argues that the return, which referred to the section 45(3) disregard, was not strictly necessary but was submitted on its behalf in order to have the purchase of the barracks entered onto the Land Register. ARG |
It submits that HMRC, while entitled to inquire into that return under section 76 of and paragraph 12 of Schedule 10 to the FA 2003 in relation to the sale by the MoD to PBL, had no power to amend the return in order to impose a liability to SDLT on the separate, notional transaction. ARG |
The only avenues which had been open to HMRC to impose a liability to SDLT on the notional transaction, it submits, were to make a determination under paragraph 25 of Schedule 10, because no return had been lodged in respect of the notional transaction, or to make a discovery assessment under paragraph 28 of that Sched... |
As the six-year time limit for either the determination or the assessment had now expired, HMRC could no longer seek payment of any SDLT due on a notional transaction. ARG |
I do not accept that submission. Ratio |
The answer lies in the terms of paragraph 13 of Schedule 10, which sets out the scope of the inquiry which HMRC can make under paragraph 12 of that Schedule, and HMRCs powers on completion of the inquiry under paragraph 23. Ratio |
Paragraph 13 provides so far as relevant: (1) An inquiry extends to anything contained in the return, or required to be contained in the return, that relates - to the question whether tax is chargeable in (a) respect of the transaction, or (b) to the amount of tax so chargeable. Ratio |
The relevant information contained in the return included information about the sale of the barracks by the MoD to PBL. Ratio |
To my mind, the fact that the information in the return was provided to HMRC in relation to a transaction (the MoD-PBL sale), which was to be disregarded under both section 45(3) and section 75A(4), does not limit the scope of the inquiry. Ratio |
HMRC were entitled to inquire into the tax consequences of that sale. Ratio |
The powers of HMRC on completion of the inquiry are set out in paragraph 23 of Schedule 10 which provides: (1) An inquiry under paragraph 12 is completed when [HMRC] by notice (a closure notice) inform the purchaser that they have completed their inquiries and state their conclusions. Ratio |
(2) A closure notice must either - state that in the opinion of [HMRC] no (a) amendment of the return is required, or (b) make the amendments of the return required to give effect to their conclusions. Ratio |
HMRC were entitled to inquire into that sale and, on ascertaining that it was a part of a series of transactions which gave rise to a section 75A charge, to amend the return to reflect the tax due on the notional freehold acquisition under section 75A(5). Ratio |
Any obligation on PBL to submit a return in relation to the notional transaction does not limit the scope of HMRCs power to inquire into the MoD-PBL sale or their power to amend the return under paragraph 23. Ratio |
I therefore reject this procedural challenge. Ratio |
(b) Case management challenges Ratio |
It is not the normal practice of this court to review case management decisions of the FTT which have been upheld by the Upper Tribunal as involving no error of law. Ratio |
Having rejected the argument that HMRC were not entitled to amend PBLs SDLT return in relation to the purchase of the freehold from the MoD, it is not necessary to decide whether the FTT should have granted PBL permission to amend its notice of appeal to put forward that argument. Ratio |
The other procedural challenge is PBLs challenge to the FTTs decision to allow HMRC to amend its case to argue that the chargeable consideration was 1.25 billion and not 959m. Ratio |
It is hard to see how the FTT could have decided otherwise. Ratio |
Under paragraph 22(3) of the Stamp Duty Land Tax (Appeals) Regulations 2004 (SI 2004/1363) the FTT is bound to increase the amounts of tax due if the taxpayer has been undercharged: see (by way of analogy in relation to section 50(7) of the Taxes Management Act 1970) Glaxo Group Ltd v Inland Revenue Comrs [1996] STC 19... |
But, again, having reached the view that PBL has a claim for repayment of overpaid SDLT under section 80, there is no need to address this case management decision. Ratio |
A different approach? Ratio |
Before the hearing, the court drew the attention of counsel to the Observations in Bulletin No 78 to Emmet and Farrand on Title (September 2016). Ratio |
The authors there suggested that the courts might have found a simpler solution to the issues raised in this case if they had had regard to the equitable maxim that The test of a mortgage is in substance, not form. Ratio |
If a transaction is in substance a mortgage, equity will treat it as such, even if it is dressed up in some other guise, as by the documents being cast in the form of an absolute conveyance (Megarry and Wade, The Law of Real Property, 8th ed (2012), para 25.085). Ratio |
The authors suggested that the transfer of the Chelsea barracks to MAR in the Ijara transaction should be viewed in English law as a mortgage, with the result that PBL should have been registered as proprietor of the freehold and have paid SDLT on its purchase and MAR should have been registered as the proprietor of a ... |
Both HMRC and PBL submitted written observations in response to this request. Ratio |
Neither party disputed that Ijara was a method of financing PBLs purchase and development of the Chelsea barracks. Ratio |
Indeed, the Ministry of Defence had accepted that the Ijara was in the nature of a mortgage and this was reflected in the Deed of Clarification entered into between the Secretary of State for Defence, PBL and Qatari Diar Real Estate Investment Co. But the purpose of this clarification was to ensure that the provisions ... |
Neither party accepts that, for this or any other reason, the transactions between PBL and MAR were in substance a mortgage and should be treated as such. Ratio |
They were real transactions, albeit inextricably linked, and intended to take effect in accordance with their terms, and there is no reason for this court to treat them any differently. Ratio |
In particular, there is no need to protect the interests of PBL, as there used to be to protect the interests of mortgagors who might otherwise be prevented from recovering their property. Ratio |
Furthermore, if the effect of treating these linked transactions as a mortgage were that the rental payments made by PBL were to be regarded as interest on money advanced to finance the purchase and development, this would run counter to their whole purpose, which was to comply with the Islamic prohibition of lending m... |
As PBL argues, the issue of the substance of a transaction is a fact sensitive matter and the burden of proving that the substance is other than the form falls upon the party suggesting it. Ratio |
In the Upper Tribunal, Morgan J was alive to the possibility that in some circumstances, a transaction which takes the form of an absolute transfer coupled with an option for the transferor to re-acquire the property from the transferee can be analysed as being in substance a funding transaction under which the transfe... |
But no-one had suggested that before the tribunal and further evidence would have been necessary had they done so. Ratio |
In those circumstances, and where neither party supports the alternative approach, it would be quite unfair of this court to pursue it. Ratio |
In any event, whatever might be the case in other contexts, it is clear from the terms of FA 2003 that Parliament did not intend to confer exemption from SDLT on an Ijara transaction by treating it as the creation of a security interest under section 48, but instead conferred exemptions under section 71A by recognising... |
Thus, it would be contrary to the legislative scheme in FA 2003 to treat MAR as exempt under section 48 on the basis that it had acquired a security interest. Ratio |
That is a sufficient answer to the point. Ratio |
Conclusion RPC |
Stamp Duty Land Tax (SDLT) is a relatively new tax, designed to generate broadly the same revenue stream as its venerable predecessor, Stamp Duty, which had become so easily avoided that it had acquired the unhappy reputation, among those who could afford skilled advice, of being a voluntary tax. Ratio |
Introduced in Part 4 of the Finance Act 2003, SDLT was designed around a wholly new conceptual approach to the identification of the chargeable event in a sale of land. Ratio |
Generally speaking it was no longer the stamping of a conveyance, but rather the completion or substantial performance of a contract for the sale of an interest in land in the UK, which Part 4 calls a land transaction. Ratio |
It was hoped that this new start would close off many of the loopholes through which advisers had previously been able to guide their clients. Ratio |
It is no surprise that, in its infancy, SDLT proved to have its own I would allow the appeal. Ratio |
unintended loopholes. Ratio |
During its first decade it has therefore been the subject of frequent tweaking and revision. Ratio |
Land may be sold and purchased by a chain of contracts, all made before the completion of any of them. Ratio |
This may occur for example in a rising market, where the first buyer B turns the property to a subsequent buyer C, for an immediate profit derived from the higher price payable under the second contract. Ratio |
The second contract is usually called a sub-sale. Ratio |
The first and second contracts may be completed by a transfer by the original seller A to C, or by simultaneous transfers from A to B and from B to C. The second contract may be a separate contract of sale, or an assignment to C of Bs rights under the first contract. Ratio |
The SDLT scheme is designed to avoid double taxation of sub-sales, that is charging the completion of both the AB purchase and the BC purchase or assignment to a full charge to tax. Ratio |
It does so by taxing neither the AB nor the BC purchase separately, but rather by taxing an artificial deemed land transaction, constituted by the notional completion of what is called a secondary contract, which contains elements of both. Ratio |
This treatment of sub-sales appears in section 45. Ratio |
Using the ABC example, section 45(3) tells you that the purchaser under the secondary contract is C, and that the consideration is a combination of the consideration payable under the AB and BC purchases. Ratio |
Subsection (5A) rather enigmatically explains that the identity of the vendor under the deemed land transaction to which the secondary contract gives rise is either A or B, depending on the statutory context in which it matters. Ratio |
It was never the objective of Stamp Duty, and is not the objective of SDLT, that it should tax the financing of the purchase of land. Ratio |
In the UK this is usually done by lending at interest on the security of a mortgage. Ratio |
Mortgages are exempt from SDLT. Ratio |
But an increasing number of the purchasers of land in the UK finance their acquisition by forms of finance which do not offend against the Sharia prohibition of usury (a prohibition once applied in Christendom, but abolished in the UK in the early 19th century). Ratio |
This may be because the purchaser is an individual of the Muslim faith, or (as here) because the purchaser wished to use a finance institution which itself carries on its business in accordance with Sharia principles. Ratio |
Sharia law does not prohibit the taking of security, but it does forbid the payment of interest in connection with the lending of money. Ratio |
Over time a variety of alternative financing structures were developed, in which the commercial return to the finance house was provided by something other than the payment of interest on a loan. Ratio |
In the present case the structure chosen, called Ijara, involved the acquisition of the freehold interest in property by the finance house (the bank), its lease to the finance customer (the customer), and the grant of put and call options which would enable the customer to acquire the freehold reversion from the bank. ... |
The commercial return for the bank lay initially in the rentals payable under the lease, and then (once exercised) in the amount payable under the options, which in effect capitalised the outstanding rental stream under the lease. Ratio |
Originally the lease and the transfer of the freehold under the options were exempted from SDLT by section 72 of the Finance Act 2003, later replaced, for land in England, by section 71A. Ratio |
The acquisition of the freehold by the bank was also exempted by section 71A(2), if but only if the vendor under that transaction was the customer. Ratio |
Thus if the customer had already purchased the property (and paid SDLT on that purchase), or inherited it, but wished to refinance by an Ijara structure, the first relevant finance transaction would be a sale of the property by the customer to the bank. Ratio |
It needed to be exempted from tax if the objective of making Ijara finance free from SDLT was to be achieved. Ratio |
Conversely, if the finance was being provided to fund the purchase, then the first relevant transaction would be the purchase of the property, usually by the bank direct from the third party seller. Ratio |
In that case there was no reason to exempt that purchase from SDLT. Ratio |
Although the bank had to pay the tax, the customer would indemnify the bank under a tax indemnity included in the terms of the Ijara financing. Ratio |
Viewed separately, the provisions for relief from the double taxation of sub- sale chains and for the exemption of alternative Sharia-compliant financing structures broadly achieved their objectives. Ratio |
All the intractable problems in the present case, which have divided the courts below, and divide the members of this court, derive from a structure for the simultaneous purchase of land and its Sharia- compliant financing which also involves a sub-sale. Ratio |
For particular reasons concerned with the nature of the marketing of Chelsea Barracks, and the desire of its seller, the Ministry of Defence (MOD), for a delayed completion, the Sharia compliant finance house (MAR) selected by the buying customer PBL could not make the original purchase from MOD. Ratio |
Instead PBL contracted to purchase from MOD, with MAR as a sub-purchaser. Ratio |
The result of using a sub-sale in connection with Ijara financing was that, for SDLT purposes, the MOD / PBL and the PBL / MAR transactions were both replaced by a secondary contract by reason of section 45(3), the completion of which gave rise to a land transaction which would have been chargeable to SDLT, unless excl... |
That much is common ground. Ratio |
The critical question on this appeal is whether that land transaction was exempted from a charge to SDLT by section 71A(2) of the Finance Act 2003. Ratio |
Lord Hodge thinks that it was exempt, with the result that the series of transactions which began with the transfer by MOD to PBL and ended with the lease by MAR to PBL, coupled with the put and call options, was entirely tax-free, subject only to the effect of section 75A. If that were the effect of section 71A(2) the... |
I also agree with his conclusion that the transactions are not to be treated as giving rise to a loan on mortgage security. Ratio |
In my view however the transfer to MAR was not exempt, because PBL was not the vendor under the relevant land transaction within the combined meaning of sections 45(5A)(b) and 71A(2). Ratio |
The vendor was MOD. Ratio |
Thus the condition in section 71A(2)(a) was not satisfied. Ratio |
MAR was therefore chargeable to SDLT on its purchase of Chelsea Barracks. Ratio |
In that respect I agree with the conclusion of the Court of Appeal, although my reasoning is not the same as theirs. Ratio |
In setting out my own reasons I gratefully adopt Lord Hodges summary of the facts, and do not need to set out again the relevant statutory provisions. Ratio |
The operative parts of section 71A are subsections (2), (3) and (4). Ratio |
Each of them exempts from charge to tax specific land transactions. Ratio |
Each has specific conditions which must be satisfied, even if the conditions of the gateway into section 71A, in subsection (1), are all satisfied, as they were in this case. Ratio |
But the common feature of subsections (2), (3) and (4) is that they apply, if at all, only to land transactions which would otherwise be chargeable under Part 4. Ratio |
In an ordinary Ijara financing which satisfied the gateway conditions in subsection (1), the purchase of the major interest by the institution (called the first transaction in subsection (1)(a)) would itself be a chargeable land transaction, regardless whether the vendor was the person to whom the lease was to be grant... |
It would then be exempted under section 71A(2) only if the vendor was that person. Ratio |
The identity of the vendor would be readily apparent. Ratio |
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