SDLT group relief and tax avoidance

The Upper Tribunal has held that arrangements involving an inserted step to obtain a corporation tax advantage had a main purpose of avoidance of tax such that SDLT group relief was not available in relation to the transfer of a property as part of those arrangements: The Tower One St George Wharf Ltd v HMRC [2024] UKUT 373. The UT held that neither the fact that the arrangements failed to achieve the hoped for corporation tax advantage nor the fact that the ultimate aim of the transaction had a commercial motive prevented the application of the anti-avoidance provision in this case.

Background

The case concerns arrangements to transfer of property to a new SPV to ring-fence risks and potential liabilities associated with a development and provide greater financial flexibility by opening up the prospect of securitised borrowings from a wider group of lenders. The group concerned approached PwC for advice on this proposal and PwC suggested that a tax advantage might be obtained by entering into arrangements involving an intermediate intra-group transfer to achieve a tax free step-up in the base cost of the property. The value of the property was £200m and its book value on £30m at the time and the arrangements involved the grant of a lease to a group entity (B64), the sale of the shares in that entity intra-group and an eventual transfer of the lease to the intended SPV. (It was accepted that, ultimately, these arrangement failed to achieve the intended step-up in base cost.) These steps were carried out and the taxpayer claimed SDLT group relief on the transfer of the property by the intermediate group entity to the SPV. HMRC rejected that claim on the basis that FA 2003 Schedule paragraph 2(4A) denies group relief where “a transaction forms part of arrangements of which the main purpose, or one of the main purposes, is the avoidance of liability to tax”, including corporation tax.

The taxpayer appealed, but the FTT upheld HMRC’s decision.

Upper Tribunal decision

The taxpayer advanced a number of arguments against the application of para 2(4A) in this case. Firstly, the fact that the arrangements ultimately failed to achieve the step-up in base cost meant that the arrangements could not be regarded as tax avoidance arrangements. Secondly, the taxpayer argued that since the intended tax advantage depended on a future sale of the property, it could not be said that the purpose of the arrangements was tax avoidance. In addition, the FTT had confused the intended effect of the arrangements with its purpose and, in any event, any tax avoidance motive was not a main purpose.

The taxpayer pointed out that the legislation would act in a penal way to punish attempts to avoid tax if interpreted in the way contended by HMRC and it applied irrespective of whether the arrangements did in fact achieve any tax advantage. The UT agreed, but considered this was indeed the way that the legislation applied in this case. In contrast to other anti-avoidance provisions which sought, for example, to simply deny a tax advantage, the legislation in this case clearly denied SDLT group relief for arrangements that had a tax avoidance main purpose. The anti-avoidance provision applies where the relevant purpose exists and whether or not any tax is actually avoided is irrelevant.

The UT also rejected the argument that the legislation did not apply to contingent or future avoidance. Firstly, there was no basis for reading into the legislation a qualification as regards whether the liability to tax sought to be avoided is a present or future one. A purpose of avoiding a liability to tax in the future, or which may not arise at all, can still be a purpose. Secondly, the UT rejected as inaccurate the description of the intended avoidance in this case as only arising in the future or contingent. The step-up in base cost without any tax attaching to the profit (£170m) that would arise on the sale was a part of the arrangements, amounted to an avoidance of a liability to tax and was not a result of or dependent on future or contingent events such as an onward sale.

As regards the argument that the FTT had confused purpose with the effect, the UT quoted widely from Falk LJ in BlackRock, a case concerning the unallowable purpose rules. Whilst recognising that the effect of arrangements are not the same as purpose, and even unavoidable effects are not necessarily the same as purposes, the FTT had made no error of law in concluding that one of the purposes of the arrangements, viewed as a whole, was to achieve the envisaged corporation tax advantage and this became one of the main purposes of the arrangements. This was, essentially, a matter for the FTT to decide on a consideration of all the relevant evidence and proper inferences to be drawn from that evidence. The FTT had concluded that this was not simply a case involving two ways to achieve the commercial aim of transferring the property to the SPV with the taxpayer choosing the one with the lowest tax cost. The step-up base cost plan indicated that the intended effect was to obtain a very substantial positive financial gain for the group.

Finally, the UT rejected the contention that the FTT had been wrong to find that the tax benefit was a main advantage. In particular, the UT agreed with the FTT that “purpose B” can be a main purpose of the arrangements even if the arrangements would not have been entered into at all but for the need to achieve “purpose A”. “Even if purpose A is the sole reason for entering into arrangements in the first place, once the decision to enter into the arrangements has been taken, an additional purpose can become an additional main purpose of the arrangements. Whether this is the case will be a question of fact, depending on the individual case. The question is whether a purpose is one of the main purposes, not whether it is the most important purpose, and not whether the arrangements would be proceeded with in the absence of any of the other purposes”.

Market valuation

The taxpayer also argued that, if it failed on the intra-group relief arguments, the transfer of the property from B64 to the connected SPV (which was made at book value of £30m) was not subject to the SDLT market value rule in FA 2003 s.53. This is subject to an exceptions in s.54 and the taxpayer relied on one of these exceptions relating to a distribution of assets. However, s.54(4)(b) provides that this exception does not apply where the property has “within the three years of the effective date of the transaction” been the subject of a transaction in respect of which group relief was claimed. HMRC contended that this exclusion applied since B64 had applied for group relief.

The taxpayer countered that the exclusion did not apply since (a) the application by B64 for SDLT group relief was made on the same day as the transfer to the SPV and (b) HMRC had concluded that the group relief claim made by B64 did not need to be considered because they considered sub-sale relief to be available.

The UT considered the terms of the legislation taking into account a purposive approach. As regards the argument that the words “within the period of three years immediately preceding the effective date of the transaction” could not apply to a transaction on the same date, the UT considered that Parliament must not have intended to leave a “gap” in the legislation for transactions carried out before the distribution but on the same day. The UT also held that the legislation should be read strictly as applying where a claim for group relief was made even if it were unsuccessful. “It was open to Parliament to use different language, eg “a valid claim was made for group relief” or the prior transaction “was exempt from charge by virtue of s62”. This would have made it clear that the application of the Case 3 Exception needed to be determined by reference not only to the fact of a group relief claim having been made but also to the outcome of such claim. We are wary of adopting an interpretation which involves reading such additional requirements into the statutory language which has been used where such statutory language does not result in absurdity.” Ultimately, the UT considered that, viewed realistically, the facts were that B64 made a claim for group relief and has not paid SDLT on the grant of the lease and this was within the class of facts intended to be captured by the proviso.

Comment

It is instructive to contrast this decision with the recent decision in Wilkinson where the FTT held that arrangements to transfer shares within a family prior to a third party sale of a company, together with the use of loan notes as consideration for the sale, in order to benefit from entrepreneurs' relief did not mean that the whole exchange had a main tax avoidance purpose so as to be excluded from roll-over treatment under section 135.

These cases highlight the importance of having regard to the actual words of the legislation being construed. In Wilkinson the "exchange" was necessarily the exchange of all the shares involved (and could not be restricted to a subsection of the shares), such that the scheme or arrangement was necessarily the whole of the deal. In that context, a comparatively small tax saving by reference to non-essential tax planning arrangements built into the wider arrangements could not be said to amount to a main purpose of the whole deal. However, in the context of the SDLT group relief provisions, the question was simply whether the transfer formed part of arrangements of which one of the main purposes was the avoidance of tax. In that context, the insertion of non-essential tax planning arrangements did taint the wider commercial transaction so as to deny SDLT group relief.