The Court decided that an anti-avoidance provision did not apply to impose a charge to stamp duty on PBL, overturning previous decisions by the First-tier Tribunal and the Upper Tribunal. According to the court, section 75A of the 2003 Finance Act did not apply because the acquisition of the land by a bank as part of a Shari'a compliant financing arrangement should have been subject to SDLT, even though HM Revenue and Customs (HMRC) could no longer collect the SDLT from the bank.
"This appeal has been keenly awaited as the earlier decisions arrived at some controversial views on how the provisions of the anti-avoidance provisions in section 75A operate," said tax expert John Christian of Pinsent Masons, the law firm behind Out-Law.com. "In the event, HMRC will be bitterly disappointed in the decision that SDLT was held to be payable – but by a person who cannot be assessed due to closure of the enquiry into its returns."
PBL, a company owned by the Qatari sovereign wealth fund, agreed to purchase the Chelsea Barracks site from the Ministry of Defence (MoD) in 2008 for £959 million. In order to finance the purchase and development of the site in a way which was compliant with Shari’a law, PBL contracted to sell the site to Qatari bank, Masraf al Rayan (MAR). MAR immediately granted PBL a lease of the site for a term of 999 years. The contract with MAR was completed at the same time as the completion of PBL’s contract with the MoD.
This method of financing is called ijara and respects the Islamic prohibition on usury by providing for the property to be acquired by the financial institution as its property and then leased to the person seeking the finance in exchange for agreed rental payments which give the financial institution a return on its money.
PBL agreed to sell the property to MAR for £1.25 billion. This sum exceeded the cost of the property because it included an additional amount to fund the development works.
PBL had originally argued that the transactions should be exempt from SDLT altogether. It argued that its agreement to purchase the land from the MoD should be disregarded as result of the effect of sub-sale relief and the acquisition of the land by MAR was exempt as a result of section 71A, which was designed to remove tax obstacles to Islamic finance structures.
The First-tier Tribunal decided that section 71A applied to the acquisition of the land by MAR, but PBL was subject to SDLT on the £1.25bn paid by MAR as a result of the operation of section 75A, an anti avoidance provision. Section 75A applies where a number of transactions are involved and the SDLT payable is less than if the purchaser had just acquired the property directly from the seller.
The Upper Tribunal decided PBL was subject to SDLT as a result of the operation of section 75A, but on the £959m paid to the Ministry of Defence.
In the Court of Appeal PBL argued that it was not subject to duty, because MAR should have been subject to SDLT on the £1.25bn it paid.
Lord Justice Patten said that section 71A, the relief for Islamic finance structures, did not apply to MAR's acquisition of the property, as the relief was combined with sub-sale relief.
"The scheme of s.71A seems to have been to limit SDLT in all cases to a single charge on the acquisition of the property from the third party vendor whether by the financial institution or its customer," he said. "It therefore seems strange that parliament should, in the case of a sub-sale or similar arrangement to which s.45(3) applies, have decided that both the acquisition of the property by the customer and its later acquisition by the financial institution should be SDLT free."
"The much more obvious construction of s.71A, and one which I think respects the operation of the section I have described, is that cases falling within s.45(3) were intended to be treated as direct acquisitions by the financial institution from the third party vendor in terms of their tax consequences. MAR was therefore liable for SDLT on completion of the secondary contract under s.45(3) and was not entitled to claim s.71A relief," he said.
The judge said that anti-avoidance provision section 75A could not apply to PBL because SDLT on the £1.25bn was "payable" by MAR, even though the enquiry into its land transaction return was closed so that it did not have to pay the tax.
Lord Justice Patten made some further observations on the application of section 75A saying that it could apply in the absence of a tax avoidance motive.
"Mr Thomas [PBL's barrister] was wrong in my view in his submission that s.75A has no operation unless it can be shown that the object of the relevant scheme transactions was the avoidance of tax," he said. "Although, as the side-note to s.75A makes clear, the provisions were clearly introduced to combat the avoidance of SDLT, they operate according to their terms and nowhere in s.75A is there any reference to the purpose of the scheme transactions being tax avoidance or any requirement to establish the existence of such a purpose or objective as a pre-condition to the operation of the section."
If section 75A applies, SDLT is charged as if there is a notional land transaction "effecting the acquisition of V's chargeable interest by P on its disposal by V". Much of the discussion in the First-tier Tribunal and the Upper Tribunal centred around who was 'P' for these purposes.
The judge said that as the transfer to PBL from the MoD should be disregarded under the sub sale relief provisions, the transaction to be taken into account was the transfer of the land to MAR. MAR was therefore 'P'.
He said that if he was wrong about section 71A relief not being available to MAR, he would deny the appeal on the basis that MAR was 'P' under section 75A and the consideration to be charged to SDLT was the £1.25bn it paid.
"As the case was decided without needing to consider section 75A, there still remains a lot of uncertainty about the principles to be applied in looking at that provision in commercial situations," said tax expert John Christian of Pinsent Masons.
"The comments that were made were if anything unhelpful in that they supported the view that section 75A must be applied on its terms irrespective of there being no avoidance motive, and that the counter-intuitive result that SDLT could be paid on more than the seller received was permitted by section 75A," he said.