Tax decision a reminder of wide exclusion from SDLT group relief

It follows a significant ruling (33 pages / 420 KB) in which the Upper Tribunal dismissed an appeal by The Tower One St George Wharf Ltd against HM Revenue and Customs (HMRC).

Steven Porter, tax disputes expert at Pinsent Masons, said: “The exclusion applies to any arrangements that have a main purpose of avoiding a number of taxes, including corporation tax, not just SDLT, or where the transaction does not have any commercial purposes. It does not only capture egregious tax schemes, it is used in a non-pejorative sense and captures what many taxpayers might consider ‘vanilla’ commercial arrangements.”

The case focused on the SDLT treatment of the transfer of a 999-year lease of a 50-storey tower block between two members of the same corporate group. The taxpayer was a special purpose vehicle (SPV) that had been established to acquire the lease intra-group as part of a much wider group reorganisation that involved the establishment of a number of SPVs.

The taxpayer group had considered that the transfer of the lease would achieve a tax-free ‘step up’ in the base cost of the lease for corporation tax purposes. However, it subsequently transpired that this corporation tax advantage was not available.

HMRC assessed the taxpayer to SDLT on the market value of the lease, arguing that group relief was not available because the transfer was part of arrangements with a main purpose of avoiding corporation tax.

The First-tier Tribunal (FTT) had previously found that the transfer had a commercial purpose and benefits, including ring-fencing risk and liabilities with the developments and opening up borrowing opportunities. The FTT also found that the transfer had a tax avoidance purpose of achieving the corporation tax advantage, even though the tax advantage was not ultimately achieved.

The FTT found that the tax avoidance purpose did not become more important than the commercial purpose, but in any event was a “main purpose” of the arrangements and therefore the SDLT group relief was not available. The FTT concluded that the taxpayer was required to pay SDLT on the transfer of the lease on the basis of its market value not the actual consideration - £200million instead of £30million - which turned on the question of whether the land had been the subject of a group relief claim in the previous three years.

The taxpayer appealed against both points. HMRC maintained their position that, even if the taxpayer was successful on those two grounds, SDLT would be required to be paid at the higher amount due to wider anti-avoidance provisions in the SDLT legislation (‘the SDLT GAAR’).

The Upper Tribunal (UT) upheld the FTT’s conclusion that the taxpayer had a main purpose of obtaining a tax advantage and was therefore not entitled to relief. The purpose of the arrangements must be tested at the time of the land transaction and therefore the fact that the tax planning failed, and no corporation tax was avoided is irrelevant. The UT found that the fact the tax advantage was sought was contingent on future events, for instance the subsequent sale of the tower, does not alter the conclusion on the purpose. Nothing in the legislation requires the tax advantage to be a current one and, in any event, the UT did not accept that it was only a future benefit because the increase in base cost was intended to occur immediately, even if the cash benefit – of paying less tax on the disposal – would only arise in the future.

The UT stated that the FTT had not erred in law by confusing the “intended effect” of the arrangements with their “purpose”. The FTT had also not erred in law regarding whether the tax avoidance purpose was a “main purpose”. The UT concluded that the FTT had found two purposes and reached the conclusion that the tax avoidance purpose was a main one based on the evidence presented. The fact that the transaction would have gone ahead even in the absence of the tax advantage, does not necessarily mean that the tax advantage was not a main purpose.

Steven Porter said: “The Upper Tribunal have had no hesitation in applying the reasoning of the Court of Appeal in two recent cases on the unallowable purpose rule in the loan relationships regime.  We should expect to see this reasoning applied across many purpose tests in the coming years.”

The UT also upheld the FTT’s decision on the deemed market value rule. It found that the transaction had been the subject of a group relief claim within the statutory three-year period prior to the effective date of the transaction. It did so on the basis that the validity of the claim for group relief is not relevant – it is only necessary for the claim for group relief to be made - and that the “period of three years immediately preceding the effective date of the transaction” includes the period earlier in the same day as the transaction.

Jamie Robson, corporate tax expert at Pinsent Masons, said: “Corporate groups who are claiming group relief on their intra-group reorganisations, need to be aware that the phrase ‘before the effective date’ has now been confirmed to include matters ‘earlier on the effective date’ in the context of the market value rule.”