Defeat for the taxpayer on Project Blue

The Supreme Court have now released their eagerly awaited decision on Project Blue Limited (Respondent) v Commissioners for Her Majesty’s Revenue and Customs (Appellant) [2018] UKSC 30.


The facts

In 2007 the Respondent (“PBL”) purchased the former Chelsea Barracks in London from the Ministry of Defence (“MoD”) for £959m. In order make the purchase, PBL obtained finance from a Qatari Bank, Masraf al Rayan (“MAR”), which specialises in Islamic finance. Islamic finance complies with Shari’a law, which forbids the payment of interest in connection with the lending of money. In this respect, the Shari’a- compliant funding model used is known as Ijara finance.

On 5 April 2007, PBL and the MoD entered into a contract to purchase the barracks. On 29 January 2008, PBL contracted to sub-sell the freehold to MAR.  Also on 29 January 2008, MAR agreed to lease the barracks back to PBL. Upon completion, on 31 January 2008, the following occurred: (a) MAR and PBL entered into put and call options respectively requiring or entitling PBL to repurchase the freehold in the barracks; (b) the MoD conveyed the freehold in the barracks to PBL; (c) PBL conveyed the freehold in the barracks to MAR, and (d) immediately after that, MAR leased the barracks back to PBL.

On 22 February 2008, PBL lodged a tax return in relation to the contract between it and MoD and claimed that there was no liability to Stamp Duty Land Tax (“SDLT”) because of the “sub-sale relief” provision in s45(3) of the Finance Act 2003 (“FA 2003”). A return lodged by MAR relating to the sale agreement between PBL and MAR claimed “alternative property finance relief” under s71A of FA 2003. Section 71A relief was also claimed in relation to the lease by MAR to PBL on 31 January 2008. Consequently, the parties to the scheme transactions claimed that nobody incurred a liability to SDLT.


HMRC challenge the arrangements

HMRC challenged the return made by PBL and in the FTT argued that the correct amount of SDLT should be £50m (based on the total consideration which MAR agreed to provide PBL). Upon appeal to the Upper Tribunal (“UT”), PBL changed its position and argued that MAR was not entitled to s71A relief because, on a proper understanding of the related provisions of the FA 2003, MoD was the “vendor” of the barracks in terms of s71A(2). However, the UT concluded that PBL was the “vendor.”

The Court of Appeal (“CoA”) found, amongst other things, that the “vendor” was MoD, and not PBL, with the result that s71A(2) did not exempt MAR from charge. The CoA found that PBL could not be the “vendor” due to s45(3), which disregarded the contract between MoD and PBL for the purchase of the barracks. As a result of this disregard, PBL had no chargeable interest so as to be regarded as entering into the sub-sale contract with MAR. The result was a rare success for the taxpayer.  Unsurprisingly, HMRC appeal.


Before the Supreme Court (“SC”)

The principal question in the appeal to the SC was whether PBL was due to pay SDLT of £50m arising out of its purchase from the MoD.  The SC found that it was.

In the Court’s view, the UT correctly concluded that PBL was the “vendor” under s71A(2) and therefore that MAR’s purchase of the barracks from PBL was exempt from SDLT.  The Court pointed to the fact that there was nothing within s71A which suggested that the exemption in s71A(2) will not apply when the sale by the customer to the financial institution is a sub-sale which takes place contemporaneously and in connection with the customer’s purchase of the major interest in land The disregard in the tailpiece of s45(3) has no bearing on the operation of s71A(2)[30].  In this case, but for s75A FA 2003 the combination of the sub-sale relief under s45(2) and s45(3) and the exemption under s71A(2) relieved the sale by the MoD to PBL and exempted the sale by PBL to MAR from a charge to SDLT.

The Court stated that it was unsurprising that s75A was only introduced over one year after the combination of s45 and s71A could operate in this way. S75A was enacted by Parliament to close such lacunas.  In this case, the party referred to as “V” in s75A is the MoD. Looking at s75 as a whole, and taking a purposive approach to interpretation, “P” as referred to in s75A was PBL.  PBL did not obtain a chargeable interest on 31 January 2008, because the contract between it and the MoD fell to be disregarded under s45(3). PBL acquired its chargeable interest, a leasehold interest, following the sub-sale to MAR and the lease back to PBL. These transactions were transactions “involved in connection with” the disposal by MoD of its chargeable interest (s75A(1)(b)). S75A(1)(c) required that the sum of the amounts of SDLT payable in respect of the scheme transactions (which in this case is £nil) were less than the amount that would be payable on a notional land transaction effecting the acquisition of V’s chargeable interest by P on its disposal by V. In this case, the relevant notional land transaction involved PBL acquiring MoD’s interest in the barracks. S75A(5) provided that the chargeable consideration on the notional transaction was the largest amount (or aggregate amount) given by any one person for the scheme transactions. HMRC correctly asserted that the relevant sum was £1.25bn (the purchase price which MAR contracted to pay to PBL). SDLT due thereon was £50m (although this  subject to PBL’s right to make a claim under s80 of FA 2003).

An addition argument raised by PBL to the effect that s75A(5) and s75B read together indirectly discriminates against those of Islamic faith (who may be expected to adopt Shari’a financing techniques) contrary to the European Convention on Human Rights was also dismissed.



In the authors’ view, this is pretty much ‘game set and match’ for SDLT avoidance arrangements and a ‘political’ decison by the SC not to allow tax revenue to be impeded by such ‘schemes.’   The  anti-avoidance provision of s.75A has been shown to have teeth; indeed it might truly be described as ‘broad spectrum antibiotic’ for SDLT tax avoidance as it was once hoped (by HMRC) that the ‘Ramsay’  doctrine would be, but never was.