Taxation – Stamp duty land tax – Subsale relief – Appellant entering into subsale relief tax avoidance scheme involving options – Respondent commissioners finding scheme ineffective and raising discovery assessment for SDLT – First-tier tribunal dismissing appeal against assessment – Upper Tribunal upholding decision – Appellant appealing – Whether option granted to third party constituting “other transaction” within section 45(1)(b) of Finance Act 2003 – Appeal dismissed
G Ltd, as vendor, and the appellant, as purchaser, entered into an agreement for the purchase and sale of a residential property in Grosvenor Square, London for £5,000,000.
A stamp duty land tax (SDLT) scheme was set up under which the vendor and the appellant entered into a contract for the sale of a chargeable interest in land to be completed by a conveyance. At the same time as the completion of that contract, the appellant granted a company (SL) an option to purchase the property for its market value in consideration of the payment of £100. The appellant occupied the property having paid the full purchase price.
The appellant was the executive chairman of SL and subsequently became its chief executive officer. However, SL was not “connected” with the appellant for any relevant tax purpose. It could not be assumed that SL would exercise the option and its decision would be its own.
In September 2011, a return filed within days of completion of the property purchase reported a nil SDLT liability. It was common ground that, if the option was not executed, the transfer to the appellant would be a land transaction attracting SDLT. However, the appellant considered that the grant of the option reduced the SDLT payable because of the subsale relief provisions in section 45(3) of the Finance Act 2003.
The respondent commissioners found the scheme to be ineffective and raised a discovery assessment for SDLT. The First-tier Tribunal (FTT) dismissed an appeal against that assessment. The Upper Tribunal upheld that decision: [2022] UKUT 21 (TCC); [2022] PLSCS 21. The appellant appealed.
Held: The appeal was dismissed.
(1) Section 44 of the 2003 Act focused on the situation in property transactions where there was a contract that “is to be completed by a conveyance”. The purpose of section 45 was to modify the operation of section 44. It built on and supplemented section 44. It dealt with the situation where there was a contract falling within section 44 but a party to that contract effected an assignment of its rights under the contract, or something similar. Both sections contained deeming provisions.
The extent of the fiction created by a deeming provision was primarily a matter of construction of the statute in which it appeared. For that purpose, the court should ascertain, if it could, the purposes for which and the persons between whom the statutory fiction was to be resorted to, and then apply the deeming provision that far, but not where it would produce effects clearly outside those purposes. But those purposes might be difficult to ascertain, and parliament might not find it easy to prescribe with precision the intended limits of the artificial assumption which the deeming provision required to be made.
A deeming provision should not be applied so far as to produce unjust, absurd or anomalous results, unless the court was compelled to do so by clear language. But the court should not shrink from applying the fiction created by the deeming provision to the consequences which would inevitably flow from the fiction being real: Fowler v HMRC [2020] UKSC 22; [2020] STC 1476 considered.
(2) Section 45(1)(a) envisaged an “original contract” between the vendor (V) and the purchaser (P) which “is to be” completed by a conveyance. Its wording replicated that of section 44(1), that determined what transactions fell within the scope of section 44. Thus, any contract within section 45(1)(a) would also be within the scope of section 44.
Section 45(1)(b) required there to be an “assignment, subsale or other transaction” related to the same land as the contract referred to in section 45(1)(a), as a result of which the further person (T) referred to in section 45(1)(b) “becomes entitled to call for a conveyance” of the land. That further transaction was defined as a “transfer of rights”. Such a transaction would need to be entered into prior to, or at least no later than, substantial performance or completion of the contract between V and P.
(3) The key operative provision was section 45(3). It provided for a deemed contract (the secondary contract) for a land transaction under which T was the purchaser. However, the tailpiece to section 45(3) referred to the “substantial performance or completion of the secondary contract”. That could only refer to an actual event or transaction, rather than to a deemed event. So, it was necessary to determine what would amount to (actual) substantial performance or completion of the deemed contract.
Further, section 45(3) required a determination of what amounted to substantial performance or completion of each of the (actual) contract between V and P, and the deemed contract between P and T. There was no difficulty with the former, and the latter also had to relate to a real-world event: DV3 RS LP v HMRC [2013] EWCA Civ 907; [2013] PLSCS 183; [2013] STC 2150 considered.
(4) A transaction could only fall within section 45(1)(b) if it was one under which T “becomes entitled to call for a conveyance”. Completion of such a contract logically required a conveyance, as contemplated by the contract. Conceptually, two transactions were envisaged to which T was a party, namely: (i) the assignment, subsale or other transaction to which section 45(1)(b) applied (the transfer of rights); and (ii) the conveyance which T became entitled to call for as a result of that transfer of rights. That was also consistent with the fact that the transfer of rights was deemed by section 45(3) to give rise to a “contract for” a land transaction.
A natural interpretation of the statutory language led to the conclusion that the grant of an option did not, without more, answer the statutory description in section 45(1)(b). It was not an “other transaction” as referred to in that provision.
Parliament could not have intended that section 45 should provide a means of avoiding SDLT by the simple mechanic of the grant of an option where it was P and not T who ended up with the enjoyment of the land.
Julian Hickey and Rebecca Sheldon (instructed by Levy & Levy, of Stanmore) appeared for the appellant; Elizabeth Wilson QC and Admas Habteslasie (instructed by the General Counsel and Solicitor for HM Revenue and Customs) appeared for the respondents.
Eileen O’Grady, barrister
Click here to read a transcript of Fanning v Commissioners of HM Revenue and Customs
