And he taketh away...

Two strategic issues emerge from the Pre-Budget Report:

• a new concept of 'tax avoidance'; and
• future drafting style.

IRC v Willoughby [1997] 1WLR 1071 decided that where a choice of routes producing the same economic result was available, a decision based upon the perceived better post-tax result was not tax avoidance: see Sherdley v Sherdley [1987] 2 All ER. The new objective test of 'tax avoidance' of a lower tax charge than other routes including a hypothetical transaction kills this principle. Given that third parties frequently become liable for another's tax, the due diligence and indemnity changes will be obvious.

HM Revenue & Customs (HMRC) believed that its plain English, one-size-fits-all drafting '“ such as applying the same principles to fundamentally different concepts like assignments, subsales, novations and agreements for lease '“ replaces entirely the need for technical understanding of the context of the legislation. There is a complete failure to comprehend the obvious problems of the piecemeal introduction of 'plain English tax' into a complex area of legislation and practice developed on the basis of totally different drafting conventions producing crucial problems for the interface between the two regimes where the tax must prevail over other difficulties: see HMRC v D'Arcy [2007] EWHC 163. A former senior member of the Stamp Office was delighted to discover that the earlier legislation which he introduced produced multiple charges to tax because it overlooked land law requirements. He was scathing when referred to the comments of Megarry J in Sargaison v Roberts [1969] 45 TC 612 that a reasonable tax regime should recognise and not exploit longstanding property law requirements. Unfortunately the official attitude continues into stamp duty land tax to create land exchanges out of routine transactions including problems with 'exceptions and reservations' which operate by way of regrant (s 47 Finance Act 2003; s 62, Law of Property Act 1925).

Plain English drafting requires an understanding of plain English by the draftsman and HMRC Stamp Taxes which has consistently misinterpreted its own legislation. When challenged, it has resorted to amending legislation rather than mounting a technical challenge, producing unnecessary and frequently inappropriate 'clarifications', ie, retrospective 'restatements' of what they thought the original legislation achieved. Inevitably, this misconstruction of their legislation means they have been unable to produce effective amendments to their own self-created problems, as producing a solution to a problem that does not exist without producing other problems is not easy.

This new section provision may represent the end of plain English drafting and a move towards purposive drafting, ie, setting out a broad principle with illustrations of how it is intended to operate while leaving detailed development to persons who are not democratically accountable or drafting or 'working to the leader'.

Legality

HMRC introduced s 75A of FA 2003 (Stamp Duty Land Tax (Variation of the Finance Act 2003) Regulations 2006 (SI no 3237)) '“ a widely drafted general anti-avoidance provision indicating that HMRC Stamp Taxes, by promising a list of 'safe' transactions, is adopting the abusive system of taxing by legislation and untaxing by concession where the consequences are manifestly unreasonable. This was severely criticised by Walton J in Vestey v IRC [1980] AC 1148 and held to be potentially unlawful in R (Wilkinson) v IRC [2005] UKHL 30. The need for a safe list casts doubts on the basic meaning of the legislation. Moreover, a similar list produced for intra-group relief is useless in practice as most of the 'safe' transactions were not tax avoidance and there were two extremely wide restricting conditions making the list worthless, particularly where intra-group leases were involved. The need for a safe list merely casts doubts on the scope of s 75A.

Background

Two basic techniques for the mitigation of stamp duty land tax existed:

(i) Subsales

This is where:

• A sells to H for £100; and
• H sells to W for £15.

H escaped tax and W paid on £15 (s 45, FA 2003). Variations existed involving unlimited companies making distributions to avoid the connected company charge.

(ii) Leases with break clauses

Lord Millett's decision that break clauses differed from options (Barrett v Morgan [2000] 2 AC 264) facilitated arrangements whereby:

• A granted a lease with a break clause with compensation to N;
• A sold the reversion to B; and
• B served the notice to quit.

No charge was thought to arise because a termination by notice to quit was not an 'acquisition' as it was not a surrender or release (s 43, FA 2003).

These schemes operated successfully, notwithstanding technical and frequent implementation defects such as mortgaging, whether the secondary contract required actual consideration and could not apply to dividends and when such dividends were effected, because HMRC Stamp Taxes took not the technical challenges, but bizarre views of its own legislation. It produced amendments that actually removed such problems for the taxpayer such as its reaction to the issue of 'secondary contract'. The break clause schemes did not always give full consideration to the impact of the Land Registration Act 2002 upon registerable leases and the giving of notices (Brown and Root Technology Ltd v Sun Life and London Assurance Ltd [1996] EWCA Civ 1261).

Constitutional provisions

Section 75A has to be re-enacted in the Finance Act 2007, giving HMRC Stamp Taxes time to gauge the response to the provision and produce another Schedule amending the amendment tightening the noose.

Section 75A

This requires:

A disposal by V and an acquisition by P. It need not be a direct transaction between V and P since it applies where P acquires only part of the chargeable interest disposed of by V. It does not require a subjective causal link. Many transactions of a genuine commercial nature such as enfranchising flats, options, land exchanges, relocation schemes where prices fall, or subsales of part are exposed to taxation upon a potentially high hypothetical consideration.

There must be a number of transactions ('scheme transactions') involved with the disposal and the acquisition. Section 75A will, therefore, not apply where there is only one transaction; a conditional contract is not necessarily on, risk options are. Scheme transactions need not be land transactions and include agreements, offers or undertakings not to take specified action such as an agreement not to take up an option as well as any kind of arrangement which could not be described as a transaction such as a side letter.

• 'In connection with'. Scheme transactions must be 'in connection with' the disposal, which are words of the widest application (Clarke Chapman John Thompson Ltd v IRC [1975] STC 567, but the numerous parties need not be connected. Anything that in a broad business sense could be said to be related to the transaction is connected with it, even where the precise details were not in contemplation at the outset or involve a change of plan. It is debatable whether V has to know P's planning. Almost everything between V's decision to dispose and P's actual acquisition will be connected, even though they may never communicate. Transactions after P's acquisition from V can be connected. A sale by A to B followed by a sale by B to C, although separately but simultaneously completed, are unlikely to be regarded as two unconnected transactions. In Escoigne Properties v IRC [1958] AC 549, a delay of five years between the first sale and the ultimate transfer and the death of the vendor with whom the ultimate purchaser never dealt did not prevent the transactions being
• connected.
• 'And'. It is a question of whether 'and' means 'and' or 'or', ie, whether all of the scheme transactions must be connected with both the disposal and the acquisition, or whether it is sufficient that the transactions are connected only with either of them and V and P need not both be involved. However, since there is no definition of 'V', any step in the chain can initiate a disposal so that any intermediate step may commence an offending arrangement. It seems that 'and' requires both disposal and acquisition to be connected; but HMRC Stamp Taxes is likely to take a contrary view. Where the arrangements require the co-operation of the vendor, such as deleting from standard conditions provisions prohibiting subsales or fragmenting interests, it will be difficult to produce evidence of 'no connection'.

There must be a tax saving. Tax avoidance motives are not required; merely that the aggregate of the stamp duty land tax payable in respect of the scheme transactions has to be less than would be payable on a notional land transaction between V and P. The test is the tax payable upon a notional outright transfer by V of V's entire interest to P even where P acquires only part of V's chargeable interest; doubtless designed for situations where V's interest is fragmented initially and not reunited by P.

Consequences

Section 75A produces a notional acquisition by P from V for a chargeable consideration equal to the largest amount or aggregate amount given or received by or on behalf of any one person (not necessarily V or P) in respect of the scheme transactions notwithstanding that it is paid to or received by several other participants. 'Amounts' given or received apparently need not be either 'consideration' or 'chargeable consideration'; but it suggests a major limit on the provision. 'Amounts' implies a cash payment so that certain types of consideration in kind such as services and works may be excluded and 'amount' may not include market values or deemed consideration such as the connected company charge or special partnership transactions or land exchanges. However, 'amounts' will have to be included in the aggregate amount, even where the scheme transaction in question is exempt or the legislation exempts such consideration or treats it as nil.

This has produced some optimistic professional advice suggesting that the two schemes still work because it only 'may' apply to certain situations; but 'may' may not bear the weight being placed upon it. Other optimistic advice is that s 75A applies only to the above two schemes, notwithstanding that these are referred to only as 'examples' (note Oughtred v IRC [1960] AC 206 on non-exhaustive definitions). It can on its wording apply to other planning arrangements although currently (temporarily) HMRC Stamp Taxes is in practice taking a cautious line. It has confirmed, possibly unlawfully, that properly implemented split sales/leases and building contracts are not within s 75A.

Any SDLT1 prepared on the basis that s 75A does not apply is potentially exposed to a 21-year discovery for negligence, and suggestions of 'non-disclosure' could be regarded as fraud or 'knowing' participation in an incorrect return (ss 95 and 96, FA 2003). Since these refer to 'assistance', liability does not require the person concerned to be a signatory of the return.

Exemptions

Ironically, HMRC has not understood that the best aid for tax avoidance is anti-avoidance legislation (as in Fitzwilliam v IRC [1993] 1 WLR 1189); s 75A may open more doors than it closes. The notional transaction is eligible for any relief available to P on a direct acquisition. Scheme transactions are non-chargeable; opportunities may exist even where the acquisition by P is
also exempt. This seems to remove the restrictions on intra-group or reconstructions reliefs and probably cancels the clawback charges where shares are sold. This offers new techniques for mitigating stamp duty land tax previously blocked by other legislation.

Transition

Section 75A applies only where all of the scheme transactions occur on or after 6 December 2006. It also does not apply to steps pursuant to a contract (including a conditional agreement) entered into before that date provided that it is not amended or varied.