Patrick Cannon

Introduction

Visitors to this page will know that a statutory general anti-avoidance rule for SDLT was introduced with effect from 6th December, 2006 by regulations in the form of FA 2003, s 75A (SI 2006/3237).  This provision has been replaced retrospectively by FA 2003, new s 75A, s 75B and s 75C with effect from the same date by FA 2007, s 71.  The rule is intended to block both existing and new SDLT avoidance schemes as they emerge without the need for HMRC to continually enact targeted anti-avoidance provisions. Unfortunately the drafting of the rule is problematic and leaves open many important questions about the scope and effect of the rule. 

It is important to note that the provision is a rule and not a principle which means that individual transactions must be judged objectively as either within the terms of the rule or not rather than asking whether they fall within the spirit but not the letter of the provision.

Summary of the rule

Essentially, the rule is intended to operate whenever there are a number of transactions involved in connection with the disposal and acquisition of a chargeable interest and the total SDLT chargeable is less than HMRC would normally have intended.  The rule applies where –

(a) one person (called ‘V’) disposes of a chargeable interest and another person (called ‘P’) acquires the interest or an interest deriving from it;

(b) a number of transactions (which we are told includes the actual disposal and acquisition) are involved in connection with the disposal and acquisition (those are collectively referred to as “the scheme transaction”); and

(c) the sum of the amounts of SDLT payable in respect of the scheme transactions is less than the amount that would be payable on a notional land transaction effecting the acquisition of V’s chargeable interest by P on its disposal by V.

When the rule applies the scheme transactions which are land transactions are disregarded for SDLT purposes and in their place is a notional land transaction.  The chargeable consideration for the notional land transaction is the largest amount (or aggregate amount) either:

(1) given by or on behalf of any one person by way of consideration for the scheme transactions, or

(2) received by or on behalf of V (or someone connected with V) by way of consideration for the scheme transactions (FA 2003, s 75A).

Any consideration for transactions which are merely ‘incidental’ to the transfer of the chargeable interest from V to P is ignored (FA 2003, s 75B). A number of exclusions also apply (FA 2003, s 75C). 

The ‘scheme transactions’ can include a non-land transaction, an agreement offer or undertaking not to take a specified action, any kind of arrangement and a transaction taking place after the acquisition of the chargeable interest.  Therefore consideration paid for a non-land transaction can be taxed as if it were consideration for a notional land transaction.

Targetted Schemes

There were five main SDLT mitigation schemes in use at the time the rule was introduced and HMRC’s official guidance issued on 6th December 2006 illustrates how the rule is intended to operate in the context of these schemes.  Two of the schemes concerned (which both involve sub-sales) are set out below but it is by no means clear that the rule does operate successfully to block these schemes.

Example 1

V agrees to sell property to N for £10 million.  N agrees to sub-sell the property to P for £5.  Both transactions are completed at the same time (Under FA 2003, s 45 the chargeable consideration is £5).  The notional land transaction is the acquisition of the property by P and the chargeable consideration is £10 million (the largest amount received by any person in respect of the scheme transaction).

Example 2

V agrees to sell property to N Ltd for £10 million.  N Ltd declares a dividend in favour of P, its sole shareholder, the dividend to consist of the property and to be paid at the same time as completion of the V–N Ltd contract.  The contract is completed and the property transferred to P (Under s 45 FA 2003 the chargeable consideration is nil). The notional land transaction is the acquisition of the property by P and the chargeable consideration is £10 million (the largest amount received by any person in respect of the scheme transactions). 

Problems with Section 75A

There are many issues surrounding the interpretation and application of the new rule including the following.

(1) What does “involved in connection with” mean?

This is the key phase in the rule and appears in FA 2003, s 75A(1)(b).  It is intended to draw a line between transactions that are caught and those that are not caught by the rule.  While HMRC have indicated that mere linkage of transactions through conveyancing succession is not sufficient to fall within the rule, one suspects that the phrase has been chosen because it is vague and therefore flexible in its application.  The case law authorities on the meaning of the phrase “in connection with” suggest the following possible meanings:

(a) “having to do with”: Somerville LJ in Johnson v. Johnson [1952] 1 All ER 250 at 251-252;

(b)   “a less definite causal link” (when contrasted with the causal link required by “whereby”), per Nourse LJ in Emery v. IRC [1981] STC 150 at 171;

(c) the phrase could describe a wide range of links and the court must look closely at the surrounding words and the context of the legislative scheme: per Arden LJ in Barclays Bank Plc v. CIR [2007] EWCA Civ 442; and

(d) “One of the very generally accepted meanings of “connexion” is “relation between things one of which is bound up with or involved in another”; or again, “having to do with”.  The words include matters occurring prior to as well as subsequent to or consequent upon so long as they are related to the principal thing.  The phrase “having to do with” perhaps gives as good a suggestion of the meaning as could be had.’’: per McFarlane J in Re Nanaimo Community Hotel Ltd [1944] 4 DLR 638 at 639 (cited with approval by Sommerville LJ in (a) and by Nourse J in (b) above).

It is interesting to note that in the decision of the Court of Appeal referred to in (c) above, Arden LJ also held that in an appeal from the Commissioners, the question of the meaning of the expression and whether the facts as found by the Commissioners were capable of satisfying the meaning were questions of law not fact and were thus appealable: see [2007] EWCA Civ 332 at para 31.

(2) In a sub-sale has FA 2003, s 45 been ‘switched-off’?

FA 2003, s 75A does not amend FA 2003, s 45.  If on a sub-sale one therefore takes the secondary contract postulated by FA 2003, s 45(3) and disregards the completion of the original contract as required where the original and secondary contract complete at the same time, there will only be a single deemed land transaction with the consideration specified by FA 2003, s 45(3)(b).  If this is correct then FA 2003, s 75A appears to have limited application to sub-sales.

(3) How will FA 2003, s 75A operate if there is more than one notional land transaction?  Which transaction will be chosen as the relevant one for the purpose of the rule?

Another way of looking at this is to ask where there is more than one potential P due to multiple purchasers how will P be chosen?  In a sub-sale to multiple parties the wording of FA 2003, s 75A can be read is requiring each purchaser to pay full SDLT on the highest amount of consideration given.  This arises due to the use of the word “its” in FA 2003, s 75A(1)(c) and 4(b). Even in a simple sub-sale of one property from A to B to C, it appears that both B and C can be P leaving each party liable for tax on the highest consideration paid. There appears to be no solution to this dilemma on the wording of the rule and that HMRC will simply ignore any inconvenient result while applying the wording in any case where they decide that the ‘proper’ amount of SDLT has not been paid.

(4) Do V and P have to be dealing direct with each other?

HMRC say no to this proposition but in the absence of express wording in the rule permitting V and P to be separated by an intermediate sale, the natural interpretation of FA 2003, s 75A(1)(a) suggests that V must dispose of a chargeable interest to P direct.

(5) There is no requirement in the rule that to be caught a transaction must be motivated by tax avoidance.

In practice and out of necessity HMRC use a vague and informal bona fide commercial and tax avoidance purpose test in deciding whether a series of transactions falls within the rule.  However, this leaves taxpayers at the mercy of HMRC discretion.

(6) Code of Practice 10 Procedure (“COP 10”)

A related issue to (5) above is that although HMRC intend to extend the availability of the COP 10 procedure indefinitely, all that COP 10 offers is non-binding guidance.   COP 10 is not a proper clearance procedure offering certainty that a transaction cannot subsequently be attacked by HMRC (assuming full disclosure has been given to them).  In addition COP 10 applications tend to be dealt with by HMRC in a legalistic and heavily caveated manner often leaving the taxpayer with less comfort than he was seeking.  COP 10 cannot effectively disapply the rule and leaves the taxpayer open to subsequent HMRC enquiry and a possible reassessment by HMRC of the “guidance” given at the time of the transaction concerned.

(7) Absence of a time limit between the disposal by V and the acquisition by P. 

The absence of such a time limit suggests that once the test of a transaction being “involved in connection with” the disposal by V is met, the actual time between the disposal and the acquisition by the person alleged by HMRC to be P is irrelevant and in principle, unlimited.

Conclusion

The statutory general anti-avoidance rule for SDLT represents a departure by HMRC from the general principle that tax legislation should be clearly drafted and capable of objective interpretation and application. It creates a de facto power of discretionary taxation through the deliberate use vague and imprecise wording and is intended to exist in terrorem ie in order to frighten, taxpayers. It creates the possibility of a subsequent re-assessment of the SDLT liability of someone whose transaction was ‘involved in connection with’ a disposal and acquisition of land together with interest and penalties. The purpose of the rule is to deter anyone from utilising the SDLT provisions in a way in which HMRC could decide gives them an unfair tax advantage. It will be interesting to see how the Commissioners and the Courts interpret and apply the rule. It will also be interesting to see which cases HMRC decide to take to appeal and which ones they decide not to fight.

Article Added Wednesday, 01 August 2007 | 3650 Hits

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