The decision in Hannover v HMRC – First- tier Tribunal - regarding the application of the anti-avoidance provision of section 75A FA 2003 has created uncertainty in the property industry.
It has long been a perfectly acceptable business approach for a purchaser to buy the corporate owner of the property (either a purchase of shares or units in a JPUT or GPUT, for example). Older readers may recall that when SDLT was first mooted the Government considered charging SDLT on the purchase of land rich entities but that legislation was not enacted. In Hannover (like numerous other transactions) the basic analysis was that no SDLT would be payable on the purchase of the units and none when the property was hived up into the buyer’s group. Section 75A allows HMRC to ignore the various steps that take place in connection with the transfer of property and in this case deem there to be a transfer of the property to Hannover for the largest amount of consideration that was paid pursuant to the various steps. In 2013 after a flurry of HMRC queries into such arrangements, HMRC expressly confirmed that this type of structure was acceptable; and that section 75A would not be invoked. That approach made sense in light of section 75A which expressly says that, in considering the steps taken in connection with the acquisition of a property, where the first step is a share purchase that may be ignored.
Therein lies the rub.
The judge in Hannover took a very mechanistic approach to section 75A including that the order of the steps to be taken had to be carefully considered and that because the first step was not the unit purchase it would not be ignored. The Judge stated that if the order had been different the SDLT outcome may also have been different.
In essence the Judge concluded that:
- Section 75A does not include words like “avoidance” and “mitigation” – so it is not helpful to try to introduce an anti-avoidance motive test into section 75A ie just look at the strict language;
- HMRC cannot narrow the breadth of section 75A by guidance. This was not surprising given the decision in Project Blue;
- HMRC have no discretion over the application of section 75A;
- the steps (collapse of a partnership, sale of the units, etc) were a pre-ordained series of transaction that were in connection with the transfer of the property and were commercially interdependent and formed an essential part of the overall deal ie they were “scheme transactions”;
As a result the Judge found for HMRC and charged SDLT on the consideration of £138,850,000 which related to the scheme transactions.
In essence this decision gives HMRC the power to use section 75A wherever steps are commercially connected ie if there is anything other than a straightforward V to P sale. Whilst we would hope that the decision will be successfully appealed we recommend that all transactions that involve a number of commercial steps are considered carefully because another important point which this case teaches us is that, when adopting a mechanistic approach, the order of steps can be of more importance than their motivation.
We are aware that before this decision was published HMRC and interested bodies were in discussions over revised guidance for section 75A; that guidance may now have to be encapsulated in legislation or a statutory instrument.
Elizabeth and Heather are partners in our Tax team.