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SDLT avoidance - HMRC victorious regardless of taxpayer 'motive'

26 July 2013. Published by Ben Roberts, Partner

HMRC has scored a resounding victory in the first case[1] to consider in any detail the wide-ranging SDLT anti-avoidance provision (section 75A of Finance Act 2003).

The decision is of particular interest as it comes in the same month that the new UK general anti-abuse rule (GAAR), designed to attack the most "abusive" of tax avoidance arrangements, takes effect. See my blog here for a fuller discussion of the GAAR.

The new GAAR can apply to abusive arrangements designed to avoid SDLT (amongst other taxes). Under the GAAR, not only is a tax "main purpose" required, but the new rule is narrowly focused with a number of important inbuilt taxpayer 'safeguards'.

In light of HMRC's recent victory it will be interesting to see whether HMRC in future uses section 75A, or the new GAAR, to attack SDLT avoidance schemes.


In 2007 an SPV (Project Blue Limited, or PBL) agreed to buy the Chelsea Barracks (Property) from the MoD (at a price of £959m). It was agreed that 20% would be paid on exchange with the balance in equal instalments over 4 years.

To fund the remainder of the purchase price, PBL used a sharia-compliant finance arrangement. This was arranged between exchange and completion. The steps involved are briefly summarised below.

PBL acquired the freehold of the Property from the MoD in January 2008. PBL, pursuant to an agreement negotiated prior to completion of the purchase of the Property, immediately transferred the freehold to a Qatari financial institution specialising in sharia-compliant finance (Bank). The Bank then immediately granted a lease of the Property back to PBL.

The SDLT issue

PBL and the Bank filed SDLT returns in respect of the land transactions. PBL claimed that no SDLT charge arose, relying on the following arguments:

  1. SDLT 'sub-sale', or 'transfer of rights', relief applied as PBL was not the 'ultimate' purchaser of the Property
  2. SDLT 'alternative property finance' relief applied in respect of the sharia-compliant financing
  3. The targeted SDLT anti-avoidance rule (section 75A) was not triggered as all steps were commercial transactions carried out for genuine commercial purposes

HMRC disagreed. It argued that section 75A did apply. As a result, SDLT of £50m was due from PBL as the total amount payable under the steps was in fact £1.25bn (taking into account both the purchase price and the Bank's return for providing the financing). This, of course, exceeded the £38m SDLT that would have been due had PBL simply purchased the Property for £959m.

The Decision

A number of issues were considered including, interestingly, whether application of the SDLT anti-avoidance rule to impose a higher SDLT charge in circumstances where sharia-compliant financing was used (as compared to more 'conventional' financing) could amount to a breach of Article 14 of the European Convention on Human Rights (discrimination on religious grounds).

I want to concentrate however on the interpretation of section 75A.

The Tribunal agreed with HMRC that the SDLT anti-avoidance rule had been triggered. As a result:

  1. a 'notional' land transaction was deemed to have taken place between the MoD and PBL. Any other actual land transactions were ignored for SDLT purposes
  2. the consideration subject to SDLT was actually £1.25bn

This decision was reached even though the Tribunal accepted that section 75A is quite clearly an anti-avoidance rule, and yet recognised that the rule does not include a provision that the taxpayer needs to have a tax avoidance motive.

The Tribunal held that the absence of a motive 'defence' in section 75A, whereby a taxpayer could point to genuine commercial, rather than tax avoidance, motives, is deliberate:

"the omission of a motive defence was hardly accidental. Parliament obviously intended that the provision should apply regardless of motive"

The significance of this is that we now have judicial authority that section 75A can apply even where the steps taken by a taxpayer are taken for commercial reasons.

What this means: section 75A vs GAAR

It may well be the case that PBL appeals this decision.

In the meantime a few points are worth highlighting:

  • whilst the burden of proof under the GAAR rests upon HMRC, under section 75A the Tribunal's view was that it is for the taxpayer to prove it did not have a tax avoidance motive (even though it decided that section 75A does not include a motive test). The Tribunal was clearly rather unimpressed by the failure of PBL's directors to give direct evidence as to its motive
  • the Tribunal noted the existence of a legally privileged "tax structure paper", prepared by PBL's advisors. It can be inferred from the decision that HMRC regarded the taking of tax advice as evidence of a tax avoidance motive (although, again, this was held not to be necessary under section 75A). This can be contrasted with the welcome position under the new GAAR, which explicitly recognises that merely obtaining tax advice is not of itself an indication that obtaining a tax advantage was a main purpose
  • whilst the stated aim of the new GAAR is to counteract only the most "abusive" tax arrangements (and a number of taxpayer 'safeguards' have been included to achieve this narrow focus), section 75A is a 'broad-spectrum" anti-avoidance rule. In the words of the Tribunal, it is a "blunderbuss rather than a sniper's rifle"
  • the GAAR guidance states that some arrangements may be "so blatantly abusive" that HMRC will seek to apply the GAAR without first considering the more targeted, existing anti-avoidance legislation (such as section 75A)
  • however as the Tribunal has now ruled that section 75A can apply even where a taxpayer has no tax avoidance purpose, one wonders how often HMRC will feel the need to resort to the GAAR to attack SDLT schemes?

Further clarification resulting from an appeal of the decision would be welcome.


[1] Project Blue Ltd v HMRC [2013] UKFTT 378 (TC)