Property Focus | Stamp Duty Land Tax savings schemes and the tribunals

Following the introduction of Stamp Duty Land Tax (SDLT) in 2003, SDLT avoidance schemes enjoyed several seasons in the sun. Schemes and their promoters flourished. The volume of land transactions (in boom property times), the very mechanical way in which land transaction returns are processed, the lack of resource devoted by HM Revenue and Customs (HMRC) to enquiring into land transaction returns and an apparent perception by HMRC, somewhat of the unsinkable Titanic variety, that SDLT was a tax which, in contrast to stamp duty, did not lend itself to avoidance, all contributed to an avoidance friendly environment.

The climate has now changed substantially. This is manifested by the changing legislative framework, most recently with the retrospective legislation, to be found in the current Finance Bill, attacking certain types of "resting in contract" sub-sale schemes, the alteration to the SDLT sub-sale rules and also the forthcoming general anti-avoidance rule. It is also to be found with the much more resolute approach taken by HMRC in both litigating SDLT avoidance schemes and also waging a propaganda campaign against such arrangements.

Many SDLT avoidance schemes, including all those which, to date, have been litigated and where a tribunal decision has been handed down, discussed below, made use of the SDLT sub-sale legislation in section 45 of the Finance Act 2003 (FA 2003). The SDLT sub-sale legislation applying at the time was designed to avoid a double charge to SDLT in certain cases. Its operation can best, if slightly simplistically be illustrated where A contracts to sell to B who then transfers the right to buy, whether by assignment, sub-sale or another transaction, to C. If A to B to C arrangements fall within section 45 FA 2003 then SDLT is charged only be reference to the B to C transaction: the A to B transaction, if it has not been completed or substantially performed, is ignored for SDLT purposes.

SDLT avoidance schemes using section 45 FA 2003 were generally structured so that the consideration, whether actual or deemed for SDLT purposes, for the B to C transaction was low, if not negligible. A would receive either all or most of the consideration from B (but in such a way that the A to B contract is not substantially performed). On the basis that the consideration for the B to C transaction was low or negligible, then the SDLT chargeable here was either negligible or nil.

The variations on this theme included:'¨ï® distributions from a company (B) to its shareholders (C) (see Vardy Properties);

 transfer from 99 per cent member of a partnership (B) to the partnership (C) (see DV3 ) ; and

 the novation of the A to B contract by '¨B to C (see Allchin).

The three cases which have reached the tribunals are:

 DV3RS Ltd Partnership v Revenue and Customs Commissioners [2012] UKUT 399 (TCC);

 Vardy Properties Limited and Vardy Properties (Teesside) Limited v HMRC [2012] UKFTT 564 (TC); and

 Edward Allchin v HMRC [2013] UKFTT 199 (TC).

Each of those cases exhibited the different ways in which taxpayers, and their advisers, structured matters with the aim that the consideration for SDLT purposes for the B to C limb was substantially reduced or eliminated.

In DV3, the B to C limb took the form of a transfer of the property from B to a British Virgin Islands limited partnership (C) in which B had a direct and indirect interest in all of the partnership. The particular rules applying to transfers of land to partnerships by members meant that SDLT was calculated by reference to 0 per cent of the market value of the property transferred i.e. no SDLT arose.

In Vardy Properties the B to C limb took the form of a distribution in specie of the property from B to C so that, it was asserted, there was no consideration, for the transfer of the property from B to C.

In Allchin B novated the A to B contract to C, after B had already paid C 86 per cent of the consideration (just short of the 90 per cent which would have amounted to substantial performance) leaving the consideration payable by C as 14 per cent of the total on which it was asserted the SDLT was chargeable.

In terms of results it is two to one to HMRC with HMRC winning in the Vardy Properties and Allchin cases in the First Tier Tribunal and the taxpayer winning over two legs (First Tier and Upper Tribunal) in DV3. Last September it was difficult to escape the media coverage HMRCs' success in the Vardy Properties case. Likewise, with Allchin, HMRC used its victory in that case to issue a further spotlight on avoidance on 23 April.

Yet, the HMRC victories in the First Tier Tribunal, despite the rather simplistic assertions to the contrary, do not represent courts and tribunals striking down SDLT avoidance because these are by their very nature abusive or repugnant. The factor that does link the HMRC successes in both Vardy Properties and Allchin is that in both cases, the scheme, or planning, was either improperly implemented or the tribunal took a different view as to the technical legal effect of the way in which the B to C transaction was characterised. In each of these cases victory was achieved not so much through a stunning HMRC strike, more through a taxpayer own goal.

In Vardy Properties, HMRC won in that case principally because the technical company law formalities required for the scheme to work, that is, for there to be a valid distribution in specie of the property from B to C, were not properly dealt with. In that case the tribunal also held that the capitalisation of the companies involved in the arrangement (which funding was to allow B to pay A the consideration for the property) amounted to the provision of indirect consideration for the property; a rather more questionable proposition. While HMRC will be seeking to close a large number of enquiries which used this planning, the position is at the very least interesting for those who correctly effected the distribution whether B was UK or non-UK incorporated company.

In Allchin the tribunal held that the SDLT subsale legislation in section 45 FA 2003 required both the A to B and B to C contracts to be in existence at the time that the B to C contract completed. The tribunal further held that the effect of the novation of the A to B contract from B to C was to bring that original contract to an end so that the requirement of both contracts being in existence was not met. Allchin does not, for example, provide any guidance on the position where the A to B contract is assigned, as opposed to being novated.

In contrast, in DV3 (involving the Dickins and Jones' store) all of the formalities of the acquisition of the property by B from and then the contribution of the property by B to the partnership of which it was a 98 per cent member (C) were properly dealt with. In both First Tier and Upper Tribunals this case was decided in favour of the tax payer, yet attracted hardly any press attention at all. In a way reminiscent of the home crowd's reaction when the unfancied away team nicks a last minute winner, the Upper Tribunal's decision in favour of the taxpayer was mostly greeted with silence on the part of HMRC.

DV3 involved what was a quite obvious tax scheme. In addition the amount of SDLT at stake here (the transaction value was in the order of £65m) was far greater than the amounts in either Vardy Properties or Allchin.

As indicated above, what these three cases appear to show is that Tribunals are not striking down SDLT planning just because it is tax avoidance driven. In DV3 the tribunal accepted that, absent any other considerations, the effect of the interaction of the SDLT sub-sale and partnership provisions was that the SDLT could be eliminated in the present case, notwithstanding the avoidance motive. The judge concentrated on the "proper construction of the relevant statutory provisions" and arrived at his conclusion even if it was one "which parliament would not consciously have intended". That is, the judge's interpretation of the SDLT legislation was not coloured by the avoidance purpose. In neither Vardy Properties nor Allchin were the case law derived anti-avoidance Ramsay/Furniss v Dawson principles any part of the decisions.

It should be noted that the transactions in both DV3 and Vardy Properties took place before the coming into effect of the SDLT anti-avoidance legislation in section 75A FA 2003. Section 75A was in effect at the time of the Allchin transaction but as the planning fell down on the novation question, the tribunal judge declined an opportunity to make tax jurisprudential history by opining on section 75A. Interestingly, the judge in the Upper Tribunal in DV3 did, at the end of his judgement, remark in passing that the DV3 arrangements were such as in all likelihood to be caught by section 75A but, at the moment this is probably no more than judicial rumination.

These cases do have significance for the large number of outstanding enquiries into SDLT avoidance cases in that they are reinforcement for the commonplace but nonetheless crucial statement that the devil really is in the detail. While HMRC tried to inflate Vardy Properties and Allchin into cases of crucial importance in showing that tax avoidance does not work, what they really demonstrated is that, in contrast to DV3, imperfectly conceived or executed tax avoidance does not work.

More constitutionally satisfactorily, it is legislative change which will see the ultimate demise of the pre-packaged SDLT avoidance scheme. From Royal Assent, the General Anti-Avoidance rule (GAAR) will be introduced. Any similar type of scheme to the DV3 planning would almost certainly fall within the scope of the GAAR and be fiscally ineffective.
In addition, also from Royal Assent, the amended, and much inflated SDLT subsale provisions in the Finance Bill will also see the end of subsale planning. Is it really all over now for SDLT planning? The game has certainly changed from one size fits all schemes to bespoke structuring which is GAAR compliant.