There have been a handful of SDLT cases that have come before the courts relating to the acquisition and collapses of JPUT structures where HMRC sought to impose an SDLT charge on the taxpayer as if the taxpayer acquired the property directly. The majority of these cases did not bring much good news to the taxpayer and the decision in Brindleyplace is therefore a long welcome victory for the industry.
Background
The taxpayer in this case (BP Holdings) was a Luxembourg-incorporated company which was ultimately owed by German pension funds. It wanted to acquire certain properties in Birmingham (the Properties) valued at £130,730,000, which were held by an English partnership (BP ELP). BP ELP's partners were the trustee of a Jersey Property Unit Trust (JPUT), a corporate general partner (GP) and a Scottish limited partnership (Scottish LP).
On 24 March 2015, the taxpayer and its connected companies purchased all of the units in the JPUT, the entire issued capital of the GP and the partnership interest in the Scottish LP for £59,611,019. The taxpayer also paid £71,051,644 in full settlement of a bank debt owed to Barclays by BP ELP, creating an intercompany debt owed by BP ELP to the taxpayer.
On 8 May 2015, the taxpayer subscribed £71,051,644 for the issue of additional units in the JPUT, satisfying the consideration with a promissory note. The JPUT contributed the promissory note to BP ELP as capital, which BP ELP then assigned to BP Holding in discharge of the debt it created in March. Simultaneously, BPPS wound up the JPUT and the ELP.
Also on 8 May 2015:
- the JPUT distributed its interest in BP ELP in specie to the taxpayer as part of the winding up of the JPUT, resulting in the taxpayer and GP being the only partners in the partnership. The taxpayer filed a "nil" return and paid no SDLT on the grounds that it did not consider the transfer a "Type A" transfer.
- BP ELP transferred the Properties to the taxpayer on the winding-up of BP ELP. The taxpayer filed 6 "nil" returns in respect of the Properties transferred and paid no SDLT on the grounds that group relief was considered to be available to relieve the whole liability.
The end result of the series of steps was therefore that the taxpayer directly owned all of the Properties but had not suffered any SDLT liability. Perhaps unsurprisingly, HMRC opened an enquiry into the "nil" returns and subsequently issued closure notices in respect of the distributions in specie, levying £2,842,065 of SDLT in respect of the distribution of the interest in BP ELP and £5,229,200 in respect of the interest in the Properties. The taxpayer then appealed to the FTT and the FTT was tasked with deciding on three specific issues.
1. Was the transfer of the BP ELP interest a "Type A" interest?
The first issue the FTT had to consider was whether or not the transfer of the BP ELP interest to the taxpayer was a "Type A" transfer within the meaning of paragraph 14(3A) of Schedule 15 to the Finance Act 2003. If it was, then there was a market value charge on the proportion of the assets held by the BP ELP represented by the interest transferred (i.e., £130,730,000).
The taxpayer argued that the transfer was not a "Type A" transfer because the test required it to provide consideration for the transfer of the BP ELP interest to it. The taxpayer contended that the £71,051,644 it paid to the trustee was for the issue of additional units in the JPUT, not for the transfer of the partnership interest.
HMRC, on the other hand, argued that the statutory wording did not require that consideration had to be given for the transfer specifically. Instead, all that was required was that the consideration is given under the same arrangements under which the partnership interest is acquired, and by or on behalf of the person acquiring the interest.
The FTT agreed that, if the legislation was read literally, HMRC's interpretation was correct. However, interestingly, the FTT favoured a purposive approach to interpreting the legislation. It referenced the Explanatory Notes to the Finance Bill 2008, which introduced paragraph 14(3A) and stated that for a transaction to be a "Type A" transfer, consideration must be given for the transfer. In the FTT's view, it was clear from this that Parliament's intention was to ensure that where there is a transfer of an interest in a property within an investment partnership [for no consideration?], there will be no charge to SDLT. The FTT ruled in favour of the taxpayer, agreeing that the transfer was not a "Type A" transfer.
Explanatory Notes are typically only referred to by the courts where they consider there is ambiguity in the legislation. The FTT seemed to accept HMRC's position on a literal interpretation but found that a purposive interpretation would be most suitable despite there not necessarily being an ambiguity in the legislation.
2. Was the transfer of the Properties to the taxpayer for bona fide commercial reasons and not part of arrangements with tax avoidance as a main purpose?
The second question the FTT had to consider was whether the transfer of the Properties qualified for SDLT group relief. In this respect, the FTT specifically had to consider whether group relief was restricted because the transfer fell foul of the anti-avoidance provision for group relief because either the transfer was (i) not effected for bona fide commercial reasons; or (ii) part of arrangements where tax avoidance was a main purpose.
The taxpayer contended that the transfer was for bona fide commercial reasons because the structure it acquired was complex and unusual for a German pension fund to hold, and collapsing the structure would make it easier and cheaper to administrate. HMRC argued that the transfer was not for bona fide commercial reasons because the transfer was intra-group with no third-party involvement or business reason (with the only reason being to avoid an income tax leakage of the JPUT).
The FTT accepted that the desire to reduce complexity in a structure and reduce administration costs is a sufficiently commercial reason. It therefore ruled in favour of the taxpayer.
The FTT also considered whether the transfer formed part of arrangements where the main purpose of the transactions was tax avoidance and once again ruled in favour of the taxpayer, finding that the decision to acquire and subsequently liquidate a company is not tax avoidance. The court also opined that choosing to take advantage of a relief expressly provided for by Parliament could not be said to be avoiding tax.
The FTT's decision on anti-avoidance aligns with HMRC's current guidance at SDLTM23040 where HMRC make it clear that a business is able choose to acquire a property-owning company, as opposed to acquiring the property from that company, and subsequently transfer the property out of the company with HMRC not regarding that of itself as tax avoidance. It will be interesting in that respect to see how HMRC deal with future cases where taxpayers rely on this guidance given that they were effectively arguing against their own published guidance in this case.
3. Did section 75A apply?
The third issue was whether section 75A applied to the transactions to ultimately change the outcome of the transaction by substituting a notional transaction which would be subject to SDLT.
Under section 75A, V is the person who disposes the chargeable interest and, in this case, both parties agreed that V could only be the partners of BP ELP. The parties did not however agree as to who the partners of BP ELP were at the date of the notional transaction.
The taxpayer contended that the identity of V should be determined based on who owned the chargeable interest at the effective date of the transaction (in this case, completion of the transfer). The taxpayer argued that the chargeable interest, the Properties, were transferred on 8 May 2015, and at that time, the taxpayer was the sole limited partner in BP ELP, making them the relevant party P. Therefore, according to the taxpayer, the notional transfer was the transfer of the chargeable interest by it to itself. Consequently, there was no increase in the SDLT since the notional transaction under section 75A was the same as the actual transfer, and therefore there was no difference in the amounts payable.
HMRC argued for a broader interpretation of section 75A, contending that V should be identified as the owner of the chargeable interest before any steps in the transaction chain began.
The FTT preferred the taxpayer's interpretation, finding it more consistent with the natural language of section 75A and logically coherent. It concluded that the relevant date for identifying V and determining the application of section 75A was the date of the actual transfer of the chargeable interest, which was 8 May 2015.
Based on this interpretation, the FTT found that Section 75A did not apply at all to the transactions in question, as the actual transfer did not result in a lower SDLT liability than would have been the case under a notional transaction envisaged by section 75A.
The FTT cited Hannover Leasing, but considered that Hannover "turns on its own facts". The facts of Hannover were similar but not identical to Brindleyplace. In Hannover, the taxpayer (Hannover) acquired units in a Guernsey property unit trust (GPUT). The GPUT held an interest in an English limited partnership which held the interest in the property. The seller undertook a complex restructuring prior to its (virtually SDLT-free) sale to the taxpayer and, as part of this, collapsed the GPUT structure. The court found that the restructuring steps, combined with the SDLT-free sale of the unit trust, were within the scope of section 75A. The FTT also held that, for the purposes of a section 75A notional transaction, the English limited partnership was V because it was the owner of the property immediately prior to the series of steps that took place as part of the restructuring and the taxpayer was P as it was always intended to be the final 'destination' of the property. The decision in Brindleyplace is therefore a significant departure from Hannover. Had the FTT taken a similar approach to Hannover then it would seem that V would be the trustee of the JPUT (as the limited partner of BP ELP).
Comment
Where does this leave the taxpayer? Well, whilst it is helpful and welcome to see a taxpayer victory in a case involving complex SDLT points, the decision does not set a precedent and an appeal by HMRC is probably only a matter of time.
The decision by the FTT to read in drafting into para 14(3A)(b) and to conclude that consideration given must be given in return for the partnership interest transferred assumes there is an ambiguity in the drafting because HMRC and the taxpayer disagree on its interpretation. We could see a differently constituted Upper Tribunal taking a more restricted view on whether it is able to narrow the natural meaning of the drafting in that way.
The FTT also did not offer much commentary on why they considered the decision in Hannover could be contrasted in its consideration of section 75A. It is difficult to understand how, in reaching its decision on that issue, the court could accept that certain transactions undertaken should be disregarded but the prior indirect ownership of the unit trust is then not taken into account in determining V. It is likely going to be difficult for the taxpayer to argue this point on appeal as Hannover is considered good law and we would expect a similar decision from a higher court on appeal.
