Under the scheme, the sellers of the property entered into a contract to sell the property to a limited company. Subsequently a deed of novation was entered into and the contract between the sellers and the company was novated with the taxpayer, Mr Allchin, taking over the company's obligations. The property was transferred directly from the sellers to Mr Allchin and he argued that only £365,250 of the sums paid to the sellers was subject to SDLT.
The scheme relied on the 'sub-sale' rules for dealing with land transactions where there is an assignment, sub-sale or 'other transaction'. In a typical sub-sale, a person (the original vendor) enters into an agreement with the ‘transferor’ for the sale and purchase of UK land which is to be completed by a conveyance. The transferor then enters into another transaction (the transfer of rights) with another person (the transferee) as a result of which the transferee can call for a conveyance of that land. The transferee pays SDLT on a single land transaction which is an amalgam of the transfer of rights and the ultimate acquisition of the land.
In this case the taxpayer was arguing that the deposit paid by the company to the sellers and the £1,856,250 paid to the sellers were not subject to duty because of the way the sub-sale relief provisions operated.
The Tribunal decided that the sub-sale provisions did not apply where, as in this case, a contract was novated. The Judge said "It is clear that the use of a novation was not clearly thought out from a legal point of view in implementing the tax mitigation scheme. A novation brings the Original Contract to an end. For this reason, there was no transfer of rights as anticipated by the legislation but rather the ending of the Original Contract and the entering into by the Appellant of an entirely new contract with the Vendor."
John Christian, a property tax expert at Pinsent Masons, the law firm behind Out-law.com, said “It is surprising that an SDLT scheme was based on a novation as there was always doubt as to whether the 'transfer of rights' relief on which the scheme was based applied to a novation of a contract. It looks as though the novation was used to support an argument that the wide anti avoidance provision in section 75A could not apply though the effect has been that the structure did not even fall within the basic conditions for the relief."
On the day of completion two payments were made by Mr Allchin's solicitors to the sellers' solicitors. There was some dispute as to the precise order of events and whether, as Mr Allchin alleged, the first payment of £1,856,250 came before the novation agreement, which was followed by a second transfer of funds £356,250 to complete the purchase.
In the absence of any evidence provided by the taxpayer, the Judge found that there was no evidence that the novation took place between the two transfers of money. The scheme would therefore have failed even if a novation had been a transfer of rights.
The judge also dismissed Mr Allchin's claim that HMRC should not have raised a discovery assessment to reclaim the SDLT.
HMRC may give notice of an inquiry into an SDLT return within 9 months of the filing date (the inquiry window). However, if after the close of the inquiry window, or after completion of an inquiry, HMRC discover that the assessment to SDLT is less than the correct amount of tax, they may issue a discovery assessment, as happened in this case.
A discovery assessment may only be made in a case where either the underpayment of tax is due to fraudulent or negligent conduct or at the end of the inquiry window HMRC could not have been reasonably expected, on the basis of the information available to them, to have been aware of the underpayment of tax.
The taxpayer had argued that, within the inquiry window, HMRC should have been alerted by the low purchase price on the SDLT return and should have "gone to the Land Registry and checked the price and realised that there was a tax scheme and more tax had to be paid".
However the Tribunal decided that HMRC was entitled to raise a discovery assessment as the evidence from HMRC showed that "HMRC had very little knowledge at that time that stamp duty schemes were being undertaken for residential properties. This has changed over the years. It seems that the facilities available to HMRC officers for checking stamp duty schemes and prices relating to residential properties were very limited and there were over 3 million conveyances at the time which would have made the task very onerous".
The rules for sub-sales are being reformed, because they have been used in so many SDLT avoidance schemes. The changes are contained in the Finance Bill 2013 and will have effect from the date the bill receives Royal Assent, which will probably be sometime in July.
Under the new rules the transferor will be regarded as making an acquisition for SDLT purposes and will need to make a return. The transferor will be able to claim full relief against any SDLT in "normal cases" where it assigns its rights or enters into a sub-sale transaction "with no SDLT avoidance purpose."
John Christian said that "The revised transfer of rights rules in the Finance Bill now make it clear that a novation is a transfer but it seems without giving the reliefs from double SDLT charges which apply to assignments and sub-sales."
A minimum consideration rule will also be introduced for transactions where the transferor and transferee are connected or act on non-arm’s length terms.
HMRC points out in the response to the consultation on the new sub-sale rules that it does not accept that any of the schemes involving the transfer of rights rules work as claimed. It believes that "they misinterpret the transfer of rights rules" and that existing SDLT anti avoidance rules apply to them.
Although these changes do not come into force until the summer, new changes to the sub-sale rules announced in the Budget will apply from 21 March 2013 until Royal Assent to the Finance Bill "to put beyond doubt that a certain type of SDLT avoidance scheme is ineffective". The scheme in question involves a sub-sale which is not to be completed for a number of years.
The new provisions provide that the original contract will not be disregarded where the sub-sale contract is substantially performed but not completed at the same time as the completion of the original contract if the purchaser under the original contract is in possession of the property after the date of completion and the main purpose or one of the main purposes of the sub-sale contract is the obtaining of a tax advantage by the purchaser under the original contract.