Retrospective legislation and SDLT – a taxpayer’s nightmare
HMRC have recently published Spotlight 25, advising any taxpayer who has used a SDLT avoidance scheme to contact them. This follows a recent decision of the Court of Appeal to refuse an application for judicial review against SDLT retrospective legislation – R (on the application of APVCO 19 Ltd) v R & C Commrs [2015] BTC 26.
The APVCO decision
The issue in this case was whether retrospective tax legislation should be declared to be incompatible with the appellants’ rights under the European Convention on Human Rights (the “ECHR”). The rights in question were those relating to the protection of property under article 1 of protocol 1 (“A1P1”) and to a fair trial under article 6 (“article 6”) of the ECHR. The appellants sought to take advantage of an ‘aggressive’ tax avoidance schemes esigned to allow them to escape the payment of Stamp Duty Land Tax (“SDLT”) on their purchases of (mostly) residential property for their own use. The appellants’ schemes were designed and marketed by Blackfriars Tax Solutions LLP (“Blackfriars”).
Up to 2012, a common attempted tax avoidance scheme involved a normal contract for sale at full market value, where, on completion, the buyer executed a deed granting a connected third party a call option in 35 years’ time for a sum lower than the SDLT threshold (which was never intended to be exercised) (the “option scheme”). The simultaneous grant of the call option was said to be a qualifying “transfer of rights” within section 45(1)(b) of the Finance Act 2003.
A theme of the Chancellor of the Exchequer’s 2012 budget was the reduction of aggressive tax avoidance, which he described as “morally repugnant”. Legislation was introduced by the Finance Act 2012 by adding a new section 45(1A) of the Finance Act 2003 providing that the reference in section 45(1)(b) to “an assignment, subsale or other transaction” did not include the grant or assignment of an option. The budget announcement of the same date said that the Government would “take action to close down future SDLT avoidance schemes, with effect from 21 March 2012 where appropriate”.
The appellants’ scheme was adopted by them around the time of 2012 legislation. It was similar to the option scheme, save that, after exchange of the original contracts, the buyer entered into an agreement with a connected third party to grant that person an option to purchase the property on the date the original contract completed. The agreement was expressly stated not to be specifically enforceable, but upon the original contract completing, an option exercisable long into the future at a price just over the SDLT threshold was indeed granted to the third party, thus allegedly “substantially completing” the option agreement. The 2013 budget announced specific retrospective provisions to outlaw two similar, but not identical, “deferred completion” schemes with effect from 21st March 2012.
Human rights
A1P1 provides as follows:-
“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary … to secure the payment of taxes …”
The appellants argued that looked at as a whole, these provisions interfered with their appellants’ possessions and that they were arbitrary in that the justifications relied on by the respondents applied equally to many other tax avoidance arrangements in the employment and SDLT contexts. The situation that gave rise to the legislative changes was not “wholly exceptional”, and the tax loss was small and did not involve significant loss to the Exchequer. The legislative changes were also disproportionate.
The Court of Appeal’s decision
The Court had no difficulty in dismissing the appellants’ argument. Firstly, the Court decided that the appellants had not been deprived of their possessions. The Court said:-
‘As the judge in this case and Mummery LJ in Huitson CA made clear, a possession must either exist or be a claim in respect of which an individual has a legitimate expectation that it will be realised, and such a legitimate expectation cannot be based on just an arguable claim. Here, Mr Woolf (Counsel for the taxpayer) seeks to avoid the consequences of accepting that the appellants had just an arguable claim to avoid paying tax on the original transfer of the properties to them, by focusing on the money that would be used by those appellants to pay the tax (if due) in due course…
If it were an answer in a tax case to say that legislation closing a tax avoidance loophole was an interference with the money that the taxpayer would in due course use to pay the tax, that would be applicable in many, if not most, cases, since taxpayers rarely pay tax first and dispute their liability later…‘
….In every case, where there is an argument as to whether tax is payable, and legislation is changed to make clear that it is, the potential taxpayer can say that he has been deprived of the tax…The appellants have been deprived, as the judge said, of an argument that they were not liable to pay the tax. That is the primary effect of the legislative changes.
The Court was also clear that the legislative changes were lawful and said:-
‘The ECtHR has also repeatedly made it clear that, in the sphere of tax, the well-established position is that states may be afforded some degree of additional deference and latitude in the exercise of their fiscal functions under the lawfulness test…..
In my judgment…it cannot be automatically unlawful or inimical to the rule of law to close a tax loophole retrospectively, just because there are other tax loopholes which are left open. If that were right, then it would never be possible for the government to close one loophole without being sure it had closed them all…The legislative changes were not arbitrary in any of these senses, just because there were other existing tax avoidance schemes that the government did not immediately tackle. Objective aspects of the appellants’ scheme, namely that it had attempted to get round the 2012 legislation, justified it being singled out.’
Finally, the Court held that the legislative changes were proportionate. The Court said:-
‘Was the judge right to hold that the legislative changes were proportionate? In Huitson CA, the “fair balance” principle was described as follows at paragraphs 29 and 57: in securing the payment of taxes a national authority must strike a fair balance between the general interests of the community and the protection of the individual’s fundamental rights, including the right to possessions in A1P1. In that balancing exercise the national authority has a margin of appreciation under the ECHR and a discretionary area of judgment under domestic law. The area of appreciation and judgment is wide in matters of social and economic policy. The judge correctly reflected these principles at paragraph 60 of her judgment.
Levy and Levy conclusion
The decision in APVCO is perhaps unsurprising but certainly disappointing for taxpayers who have entered in SDLT schemes. HMRC are already equipped with a nuclear arsenal of tax avoidance weapons and using retrospective legislation to strike out a tax scheme acknowledged by the taxpayers themselves not to work seems both wasteful of Parliamentary time and disproportionate. That said, retrospective tax legislation is clearly here to stay.
Levy and Levy – the tax investigations and resolution specialists in London and Tunbridge Wells.