The Supreme Court held, by a majority, that Project Blue Limited was liable for £50 million in stamp duty land tax on a notional transaction arising from its purchase of Chelsea Barracks. Sub-sale relief and an exemption for Shari’a-compliant Ijara finance would otherwise have produced no tax charge, but their combination engaged the anti-avoidance rule in section 75A of the Finance Act 2003. Tax was due on the £1.25 billion which the financier contracted to pay, subject to a repayment claim for consideration that was never paid.
The purchase and the financing
In April 2007 Project Blue Limited contracted to buy the former Chelsea Barracks from the Ministry of Defence for £959 million, with completion postponed to 31 January 2008. PBL financed the purchase through an Ijara arrangement with Masraf al Rayan, a structure designed to avoid the payment of interest. Shortly before completion PBL agreed to sell the freehold to the bank for a sterling sum of £1.25 billion, equivalent to a specified US dollar amount. The bank agreed to lease the property back to PBL, and the parties granted put and call options for PBL to reacquire the freehold. On 31 January 2008 the Ministry conveyed the freehold to PBL, PBL conveyed it to the bank, and the bank granted the lease.
Law Teacher writing support
Writing a law essay?
We choose a writer who is an expert in your area of law and qualified to at least the academic level you select. Most of our writers hold a master’s degree or PhD, have teaching experience, or both.
Send us your question and, if you wish, any marking criteria. We’ll write an essay to your instructions.
Returns were filed claiming that sub-sale relief under section 45(3) of the Finance Act 2003 eliminated any charge on the sale by the Ministry, and that section 71A exempted the bank’s purchase and the lease as alternative property finance. No tax was said to be due. HMRC amended PBL’s return so as to charge £50 million.
Sections 45 and 71A
Section 45 modifies the SDLT rules for sub-sales so that completion of the original contract is disregarded, except in limited cases, and tax is addressed through a notional secondary contract. Section 71A exempts the purchase by a financial institution, the lease back and the later retransfer where the arrangements take a prescribed Ijara form. The exemption for the institution’s purchase applies if the vendor is the institution’s customer.
Lord Hodge, with whom Lady Hale, Lord Hughes and Lord Lloyd-Jones agreed, held that section 71A uses the language of real-world transactions and asks simply who sold the interest to the institution. PBL was that vendor, so the exemption applied. The section was intended to equate Ijara finance with conventional lending, in which the security interest is exempt and tax falls on the purchaser of the land rather than on the amount of finance provided. The disregard under section 45 did not change the identity of the vendor for this purpose. The majority accepted that Parliament had not initially catered for the combination of sub-sale relief and the section 71A exemption, leaving a gap that was closed only in 2011. But for section 75A, neither sale would have been chargeable.
Lord Briggs disagreed. In his view the only chargeable transaction, once section 45 applied, was the notional land transaction arising from the secondary contract. Section 45(5A) required the vendor of that transaction to be identified according to context, and the context pointed to the Ministry of Defence. The section 71A(2) condition was therefore not satisfied. An interpretation that exempted the entire purchase would have created an unintended tax holiday and was not permitted.
Section 75A
Section 75A charges tax on a notional land transaction where a series of connected transactions produces less SDLT than would have been payable on a direct acquisition of the disponer’s interest. It does not depend on the parties’ motive. The comparison in the section is enough. The Ministry was the disponor. PBL was the person who acquired a chargeable interest deriving from the freehold, namely the lease, and it was PBL that obtained the benefit of the tax loss created by combining the two reliefs. The options formed part of the scheme transactions even though they did not themselves transfer a chargeable interest on the completion date.
The largest amount given by any one person for the scheme transactions was the £1.25 billion which the bank contracted to pay. Tax at the rate of 4 per cent was £50 million. Although the fourth tranche was never paid, section 51 treats contingent consideration as payable. Section 80 allows the taxpayer, but does not require HMRC, to seek an adjustment and repayment once it is clear that the contingency will not occur. The court held that this statutory mechanism excluded any general principle of preferring known facts to the statutory assumption. PBL’s repayment claim, and HMRC’s inquiry into it, remained outstanding. The court did not decide the sterling value of the sums actually paid.
Section 75B did not permit the £1.25 billion to be apportioned or treated as partly incidental. A sub-sale is expressly not incidental. An argument that the provisions discriminated, contrary to the European Convention on Human Rights, against persons using religiously compliant finance was rejected. The broad drafting of the anti-avoidance rule was objectively justified, paradigm Ijara transactions are protected, and the particular combination could not recur after 2011. If the repayment claim succeeded and the tax fell to be calculated on £959 million, PBL would in any event have paid no more than under conventional finance and would not be a victim.
Procedure and an alternative analysis
HMRC were entitled to amend the return relating to the sale by the Ministry. An inquiry into that return could examine the tax consequences of the sale, including the section 75A charge on the notional transaction, and the closure notice could amend the return accordingly. The court did not need to revisit the First-tier Tribunal’s case-management decisions.
The court also declined an invitation to recharacterise the Ijara arrangements as a mortgage. Neither party supported that analysis. The transactions were intended to take effect according to their terms, and the Finance Act 2003 exempts Ijara finance through section 71A rather than by treating the institution’s interest as an exempt security interest under section 48.
Verdict: By four votes to one, the Court allowed HMRC’s appeal. Section 75A imposed £50 million in stamp duty land tax on Project Blue on the notional transaction. The separate claim for repayment in respect of contingent consideration that was never paid remained outstanding.
Source: Project Blue Limited v Commissioners for Her Majesty’s Revenue and Customs [2018] UKSC 30
