Project Blue Limited v Commissioners for Her Majesty’s Revenue and Customs

This appeal concerned whether Stamp Duty Land Tax (SDLT) was payable in respect of a complex chain of transactions by which Project Blue Limited (PBL) purchased Chelsea Barracks and immediately sub-sold it to a Shari’a-compliant financier (MAR) who leased it back to PBL under an Ijara structure. The key statutory provisions were section 45 (sub-sale relief), section 71A (exemptions for alternative property finance / Ijara) and section 75A (broad anti-avoidance rule) of the Finance Act 2003 as in force on 31 January 2008.

The Supreme Court held that, read purposively, section 71A describes "real world" Ijara transactions and, absent section 75A, the combination of sub-sale relief under section 45(3) and the section 71A(2) exemption would have resulted in no SDLT charge on either the sale to PBL or the sub-sale to MAR. The court nevertheless concluded that section 75A applied to the connected series of transactions and required the creation of a notional land transaction by which PBL (as P) acquired the Ministry of Defence's (MoD's) freehold (V's chargeable interest). Under section 75A(5) the chargeable consideration for that notional transaction was the largest amount given by any one person in the scheme transactions (here, HMRC's figure of US$2,467,875,000 or £1.25 billion), and therefore SDLT of £50m was chargeable subject to any subsequent adjustment or repayment under section 80 where parts of that consideration were never paid.

The court also rejected procedural and human rights challenges: HMRC were entitled to amend the land transaction return in the inquiry under Schedule 10; and any indirect discrimination argument based on Shari’a finance was either objectively justified or not established on the facts, with any overpayment recoverable under section 80.

Background and facts:

• PBL purchased Chelsea Barracks by contract dated 5 April 2007 for £959m, with completion postponed to 31 January 2008. PBL then entered a sub-sale to MAR (29 January 2008) and MAR leased the property back to PBL with options for PBL to repurchase (Ijara financing).
• PBL claimed sub-sale relief under section 45(3) for its purchase from the MoD and MAR claimed the section 71A(2) exemption for its purchase from PBL; both also claimed exemption for the lease under section 71A(3).
• HMRC opened an inquiry and amended PBL’s return to assert SDLT liability. HMRC ultimately advanced a notional transaction approach under section 75A and sought SDLT on a chargeable consideration of US$2,467,875,000 (sterling equivalent stated at £1.25 billion), producing an asserted liability of £50m.

Procedural posture:

• PBL appealed HMRC's amendment to the First-tier Tribunal; the Upper Tribunal and Court of Appeal gave differing answers on the interaction of sections 45 and 71A and on the application of section 75A. The matter reached the Supreme Court on HMRC’s appeal from the Court of Appeal ([2016] EWCA Civ 485).

Issues for decision:

1. Whether, for the purposes of section 71A(2), the vendor of the "first transaction" was PBL or the MoD when the sub-sale disregard in section 45(3) applied; in short, whether section 71A should be applied by reference to the "real world" sale or the statutory notional (secondary) contract.
2. If section 71A did not prevent charge, whether the anti-avoidance rule in section 75A applied to create a notional land transaction and, if so, how to calculate the chargeable consideration under section 75A(5) and whether section 75B permitted exclusion of finance incidental to the transfer.
3. Procedural challenges to HMRC’s power to amend PBL’s return and challenges under the Human Rights Act/ECHR (article 14 read with article 9 and Article 1 of Protocol 1).

Court’s reasoning (concise):

• The Supreme Court adopted a purposive approach. It held that section 71A is a self-contained regime describing "real world" Ijara transactions; thus, if taken alone the combination of section 45(3) and section 71A(2) could exempt both the MoD→PBL and PBL→MAR transfers.
• However, the court concluded that the legislative mischief (a loophole combining sub-sale relief and alternative finance exemptions) was addressed by the later-introduced but applicable section 75A. Applying section 75A purposively, PBL was the person (P) who ultimately obtained the tax benefit, and the notional transaction required by section 75A(4) was the acquisition by PBL of the MoD’s freehold.
• Under section 75A(5) the chargeable consideration for that notional transaction is the largest amount given by any one person in the scheme transactions; the court accepted HMRC’s position that the relevant figure was the £1.25 billion contracted by MAR, subject to the taxpayer’s rights under section 80 to recover amounts not actually paid.
• The court rejected PBL's arguments that section 75A required proof of anti-avoidance motive, that HMRC could not amend the return in inquiry, and that section 75B or human rights principles obliged a different apportionment or interpretation; it held that the statutory mechanisms (including section 80) and the breadth of section 75A justified HMRC’s approach.

Relief sought and disposition:

• HMRC’s appeal was allowed. The Supreme Court restored the view that, applying section 75A, SDLT was chargeable on the notional transaction on a chargeable consideration reflecting the largest amount in the scheme transactions (HMRC’s £1.25 billion figure), subject to any repayment claims under section 80.

Appeal allowed. The Supreme Court held that section 71A describes "real world" Ijara transactions and that, although the combination of section 45(3) and section 71A(2) could in principle exempt the sales, the broad anti-avoidance provision in section 75A applied to the connected scheme. PBL was the relevant "P" under section 75A, a notional land transaction was to be treated as occurring on 31 January 2008, and the chargeable consideration for that notional transaction was the largest amount given by any one person in the scheme transactions (HMRC’s £1.25 billion figure), subject to any adjustment or repayment under section 80. Procedural and ECHR challenges were rejected.

On appeal from the Court of Appeal ([2016] EWCA Civ 485). The Upper Tribunal (Morgan J and Judge Nowlan) heard the case on earlier appeals; the FTT also heard the original appeal. The Supreme Court allowed HMRC's appeal.