HM Revenue and Customs (HMRC) said that the outcome of the case would affect 24 similar commercial cases and around 900 mass market residential cases, with a combined £135 million of tax in dispute. The developer, Project Blue Ltd, now faces a bigger tax bill than it would have done had it not entered into the arrangement, it said.
"The fact that the tribunal agreed with HMRC that more SDLT was payable than if the scheme had not been used shows that HMRC means business when it comes to tax avoidance and wants to use cases like this to deter others from using schemes. It is clear that the tax tribunal is not going to take a sympathetic line if entering into a tax scheme increases your tax bill," said tax expert Catherine Robins of Pinsent Masons, the law firm behind Out-Law.com.
"When the anti-avoidance provisions were introduced HMRC saw it as the answer to the 'cat and mouse' game they were playing to block SDLT avoidance schemes. They must have been disappointed at the number of schemes which advisers claimed were still effective despite section 75A. This is the first case to come before the courts on section 75A and HMRC clearly had a lot riding on it," she said.
The Ministry of Defence (MoD) sold the property in January 2008 to Project Blue, a then-joint venture between CPC Group and the Qatari Government. The company is now solely owned by the Qatari Government. Project Blue set up a Shari'a-compliant financing arrangement to fund its purchase by way of a sale and lease-back. It claimed that the transaction should be exempt from SDLT as a result of the effect of sub-sale relief and through the use of rules intended to remove tax obstacles to alternative property finance transactions, such as Islamic finance structures .
In its ruling, the First-tier Tribunal said that an anti-avoidance provision set out in section 75A of the 2003 Finance Act had been triggered by the chain of transactions. This provision 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. In addition, SDLT was payable not on the amount paid to the MoD, but on the larger figure paid by the financial institution that funded the transaction, the tribunal said.
In his judgment, Tribunal Judge Guy Brannan dismissed arguments by Project Blue that its actions were "wholly commercial" and "happened to lead to a particular tax result which was favourable", rather than being tax avoidance.
"Whilst it is clear that the purpose of section 75A is to counteract the avoidance of SDLT, the provision contains no requirement that the taxpayer should have a tax avoidance motive or purpose as a precondition or defence to the application of the provision," he said.
"There is no 'motive defence', often found in other forms of anti-avoidance legislation, by means of which a taxpayer can escape the charge to tax if it can, for example prove that the relevant tax advantage was not one of the main benefits of the transaction and the transaction was carried out to commercial purposes ... Parliament obviously intended that the provision should apply regardless of motive," he said.
Regardless, Project Blue had failed to put forward any evidence to prove the absence of a tax avoidance motive, he said. In addition, its financial advisers Clifford Chance had disclosed the arrangements used by the developer to HMRC in February 2008 under its disclosure of tax avoidance schemes (DOTAS) rules, he said. DOTAS only applies if the main benefit or one of the main benefits of a transaction is the avoidance of tax.
"The fact that a transaction may be carried out for commercial reasons does not mean that it does not also have a tax avoidance motive," said the judge. "In our experience, there can often be many different ways of structuring the same overall commercial transaction, some of which have more beneficial tax consequences than others."
Tax expert John Christian of Pinsent Masons said that the case set out some "significant guidance" on how the anti-avoidance rules should be applied, but said that further guidance on how HMRC would apply section 75A following the outcome of the decision was "essential".
"The view that a tax avoidance motive is not a pre-condition emphasises that commercial transactions will be caught by the provisions," he said.
"The comments by the tribunal that HMRC has no discretion in applying section 75A means that commercial structures will need a section 75A 'health-check' and casts into doubt the status of HMRC's 'white list' guidance on the provisions. This is particularly the case where reliefs are relied on where, as this case shows, section 75A can override the application of the reliefs," he said.
The rules for sub-sales are being reformed because they have been used in so many SDLT avoidance schemes. The changes are contained in this year's Finance Bill and will take effect from the date the Bill receives Royal Assent, which will probably be sometime this week.
Under the new rules, the party acquiring the property from the seller will be regarded as making an acquisition for SDLT purposes and will need to make a return. This party 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". 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.