Retrospective tax legislation blocking an SDLT loophole cannot be challenged by judicial review, says Court

Various taxpayers had entered into a stamp duty land tax (SDLT) avoidance scheme known as the 'Blackfriars scheme'. This relied on the SDLT 'subsale relief' or 'transfer of rights' rules and involved an agreement to grant an option to the ultimate purchaser.

Shortly after the scheme was notified to HM Revenue & Customs (HMRC) under the Disclosure of Tax Avoidance Schemes (DOTAS) rules, the government announced on 4 June 2013 that it was introducing an amendment to the Finance Bill 2013 to add a clause making a retrospective amendment with effect from 21 March 2012 to make it clear that SDLT would be payable by the purchaser if the transaction was structured in accordance with the Blackfriars scheme.

Tax expert John Christian of Pinsent Masons, the law firm behind Out-Law.com, said that the court's conclusions were "not surprising, given in particular the Chancellor's warning in the 2012 Budget to close down residential SDLT avoidance with retrospective effect".

"Although the facts were very weak here, the case does reinforce the high threshold required before a court may be prepared to strike down retrospective tax legislation aimed at blocking tax avoidance and find that prejudice to taxpayers has arisen which outweighs the public policy benefits," he said.

The transfer of rights rules are designed to prevent a double charge to SDLT where A contracts to sell land to B and, prior to completion of the deal, there is a sub-sale, assignment or other transaction which results in another party, C, becoming entitled to acquire the land at completion. However, the rules have been exploited in a number of SDLT avoidance schemes.

The 2012 Finance Bill had already blocked a scheme which was similar to the Blackfriars scheme. In the 2012 Budget the Chancellor said "Let me make this absolutely clear to people. If you buy a property in Britain that is used for residential purposes, we will expect stamp duty to be paid. This is the clear intention of parliament, and I will not hesitate to move swiftly without notice and retrospectively if inappropriate ways around these new rules are found. People have been warned."

The taxpayers claimed that the 2012 change did not catch the Blackfriars scheme because that change was to make it clear that the grant or assignment of an option could not satisfy the requirements of the SDLT subsale rule, whereas the Blackfriars scheme involved an agreement to grant an option rather than the grant of an option itself.  HMRC said that the scheme did not work and the change in legislation was only to make this clear.

The taxpayers asked for permission to bring a judicial review of the retrospective change claiming it was unlawful under Article 1 of Protocol 1 of the European Convention on Human Rights (ECHR) which provides, that "Every natural or legal person is entitled to the peaceful enjoyment of his possessions."  They also argued that it breached the right to "a fair and public hearing" granted by Article 6 of the ECHR because the change in law had deprived them of the chance of establishing that the scheme worked before the Tax Tribunal.

The taxpayers argued that the retrospective change breached a government protocol on unscheduled announcements of changes in tax law which had been published in 2011. This said that retrospective changes to tax law would normally only be announced other than at a Budget where "there would otherwise be a significant risk to the Exchequer". The taxpayers said that the approximately £7 million of tax lost to the Exchequer by the use of the Blackfriars scheme was too small to justify the use of retrospective legislation to close it down.

Refusing permission for a judicial review to be brought Mrs Justice Andrews said "It was…within the permissible area of discretionary judgment of parliament to legislate, with retrospective effect, to prevent taxpayers from using, by wholly artificial arrangements, s.45 of the FA 2003 so as to produce an outcome which was the very opposite of what parliament had intended."

She said "In the wake of what was said by the chancellor at the time of the 2012 budget, any person who was well advised and who gave even cursory consideration to the issue must have appreciated that it was highly likely that once HMRC became aware of a variant on an existing tax avoidance scheme based on the transfer of rights rules in the FA 2003 which had been rendered ineffective as from the 2012 budget, it would take swift action to put an end to the variant as from the same date."

Dismissing arguments that the amount of tax at stake was relevant she said "The amount of tax likely to be avoided by each particular scheme was irrelevant to the objective that [the government] was seeking to attain, which was to put paid to all such schemes, and ensure that the transfer of rights rules achieved the outcome for which they were originally intended."

Commenting on the argument that the change breached the government's protocol, Mrs Justice Andrews said that "any claimed lack of compliance with the terms of the Protocol does not in truth affect either the clarity or foreseeability of the legislation or the justification for Parliament's decision to make it retrospective."