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Steven Sieff, consultant in the tax team at CMS, offers a preview of the decision awaited in Project Blue Ltd v Commissioners for Her Majesty’s Revenue and Customs
After initially being heard by the First-tier Tribunal in 2013 and most recently by the Court of Appeal in 2016, the Project Blue SDLT case finally reached the Supreme Court of the United Kingdom on 28 February 2018. The case has attracted attention on its journey through the courts for a number of reasons.
First, the amount of tax at stake is massive, especially in SDLT terms. The question of exactly how much is one of the disputed issues in the case, but it could be as much as £50,000,000 SDLT. £50,000,000 is a lot of money by anyone’s standards but in SDLT terms it is simply enormous. We understand that a number of other cases may be waiting for the outcome of Project Blue so the amounts of tax resting on the outcome could be substantially higher.
Secondly, the parties and plot of land are high profile. The site of the former Chelsea Barracks in London being sold by the Ministry of Defence to the sovereign wealth fund of the State of Qatar with the involvement of a Quatari bank. So big money and big players.
Finally, the case centres on the effectiveness of an SDLT avoidance scheme involving Sharia financing which was widely touted as being effective to save SDLT at the time. The legislation has changed since the scheme was effected but the case still has the potential to shed some light on the court’s attitude to existing SDLT anti-avoidance legislation (Finance Act 2003, s 75A) which has barely been tested to date. HMRC consider s75A to be a vitally important piece of their armoury against SDLT tax avoidance so any comments on the legislation by the UK Supreme Court will be closely scrutinised.
The Court of Appeal decision
The Court of Appeal held that the scheme as effected by the parties did NOT work. Using reasoning drawn from a previous case on the SDLT subsale provisions (HMRC v DV3 RS LP [2013] EWCA Civ 907), the court determined that the presence of the subsale meant that the SDLT exemption for Sharia transactions could not apply. Many questioned the interpretation of the legislation in DV3 and specifically the explanation of whether the intermediate purchaser acquired a chargeable interest for SDLT. DV3 was a decision by the Court of Appeal so the Supreme Court has the opportunity to ‘correct’ it, but having refused permission to appeal in that case for the lack of “an arguable point of law of general public importance” it seems unlikely that the court will change that view now or that counsel for HMRC (the same counsel who represented HMRC in DV3) would argue it differently this time.
On the face of it, a conclusion that the scheme did not work appears to constitute a victory for HMRC and in other circumstances it might have done. Unfortunately for HMRC, in this case they had surprisingly accepted that the scheme WAS effective and had closed their enquiry into the taxpayer’s return relating to the claiming of the SDLT relief. That precluded them from recovering the tax which the court determined would have been due. It also meant that their perceived ‘nuclear’ weapon, the Finance Act 2003, s 75A SDLT anti-avoidance legislation, was not available because there was no working scheme to attack. Notwithstanding the decision that s75A was not relevant to this case, the Court of Appeal still went on to make some interesting obiter dicta comments on how those provisions might have been applied to the facts of this case.
What to look out for in the forthcoming UK Supreme Court judgment?
HMRC are appealing on three grounds. First, there is the question of whether the taxpayer should actually have been allowed to argue as it did regarding the workings of the scheme in the Court of Appeal. This is likely to be a procedural argument specific to the facts and the filings made in this case. As such it may be of less general interest than the substantive arguments which would follow, but that is not to decry its importance. It would not be the first time a high profile case has come down to a point of procedure.
The second question appealed is the identity of the ‘vendor’ for the purposes of the SDLT exemption on Sharia financing. It matters to HMRC because the Court of Appeal decided that the exemption can only apply if the financing bank purchases the chargeable interest from their client (Project Blue Limited in this case), and not from the original vendor (the Ministry of Defence). If HMRC can establish that the vendor was Project Blue Limited then the exemption would apply and then potentially Finance Act 2003, s 75A would be brought into action. So we have the odd situation of HMRC arguing that a tax planning scheme IS technically effective to save tax in order that they can use anti-avoidance legislation to defeat it! In Royal & Sun Alliance Insurance Group plc v Customs and Excise Commissioners [2001] EWCA Civ 1476 we had Lord Justice Sedley describing the world of VAT as “a kind of fiscal theme park in which factual and legal realities are suspended or inverted”. In this case we had an extensive discussion in the Court of Appeal on the differences between the “SDLT world” and the “non-SDLT world”. It is hard to avoid the conclusion that tax law has become increasingly divorced from reality.
Last but by no means least comes HMRC’s smoking gun. Does Finance Act 2003, s 75A apply and if so how much should be taxed? This question has some relevance to almost every example of SDLT planning which involves multiple steps. And it may clarify whether HMRC have any discretion in applying Finance Act 2003, s 75A or whether they are obliged to do so even for transactions with no avoidance motive. Even if the UK Supreme Court only makes obiter dicta comments on this issue, they will be keenly followed by tax advisers.
