UT (Tax & Chancery) UT/2022/0092 - [2024] UKUT 00373 (TCC)

We have set out above the decision of the FTT and the alternative bases on which Tower One submitted that the FTT had made an error of law.

This ground of appeal turns on the interpretation of the Case 3 Exception and its application to the facts as found by the FTT. As we put to the parties at the hearing, there is an apparent tension or inconsistency between the alternative submissions for Tower One on this ground (and indeed in HMRC’s responses thereto) – on the one hand, the submissions as to the grant of the lease to B64 not being within the specified period involve a narrow approach to the statutory language, whereas those as to whether group relief was claimed involved looking at what was said to be the overall substance of the position rather than simply looking at the relevant SDLT1. We have kept this in mind when considering the correct approach.

We start by reminding ourselves of the relevant general principles, in particular the purposive approach to statutory interpretation which has most recently been confirmed by the Supreme Court in Rossendale. That case involved schemes which (it was common ground) had no business or other “real world” purpose, and their sole purpose was to avoid liability to pay business rates on unoccupied business premises (liability for which falls on the “owner” of the premises) by leasing the premises to an SPV controlled by the landlord, with the intended result that the SPV would be the “owner” of the premises but as the SPV had no assets it would not be able either to occupy the premises or to pay the rates on the unoccupied premises.

In a joint judgment, Lord Briggs and Lord Leggatt (with whom Lord Reed, Lord Hodge and Lord Kitchin agreed) set out the approach as follows:

“10.

There are numerous authoritative statements in modern case law which emphasise the central importance in interpreting any legislation of identifying its purpose. Two examples will suffice. In R (Quintavalle) v Secretary of State for Health [2003] UKHL 13; [2003] 2 AC 687, para 8, Lord Bingham of Cornhill said:

“Every statute other than a pure consolidating statute is, after all, enacted to make some change, or address some problem, or remove some blemish, or effect some improvement in the national life. The court’s task, within the permissible bounds of interpretation, is to give effect to Parliament’s purpose. So the controversial provisions should be read in the context of the statute as a whole, and the statute as a whole should be read in the historical context of the situation which led to its enactment.”

In Bloomsbury International Ltd v Department for the Environment, Food and Rural Affairs (Sea Fish Industry Authority intervening) [2011] UKSC 25; [2011] 1 WLR 1546, para 10, Lord Mance stated:

“In matters of statutory construction, the statutory purpose and the general scheme by which it is to be put into effect are of central importance … In this area, as in the area of contractual construction, ‘the notion of words having a natural meaning’ is not always very helpful (Charter Reinsurance Co Ltd v Fagan [1997] AC 313, 391C, per Lord Hoffmann), and certainly not as a starting point, before identifying the legislative purpose and scheme.”

…

11.

The result of applying the purposive approach to fiscal legislation has often been to disregard transactions or elements of transactions which have no business purpose and have as their sole aim the avoidance of tax. This is not because of any principle that a transaction otherwise effective to achieve a tax advantage should be treated as ineffective to do so if it is undertaken for the purpose of tax avoidance. It is because it is not generally to be expected that Parliament intends to exempt from tax a transaction which has no purpose other than tax avoidance….

12.

Another aspect of the Ramsay approach is that, where a scheme aimed at avoiding tax involves a series of steps planned in advance, it is both permissible and necessary not just to consider the particular steps individually but to consider the scheme as a whole. Again, this is no more than an application of general principle. Although a statute must be applied to a state of affairs which exists, or to transaction which occurs, at a particular point in time, the question whether the state of affairs or the transaction was part of a preconceived plan which included further steps may well be relevant to whether the state of affairs or transaction falls within the statutory description, construed in the light of its purpose….

13.

The decision of the House of Lords in the Barclays Mercantile case made it clear beyond dispute that the approach for which the Ramsay line of cases is authority is an application of general principles of statutory interpretation. Lord Nicholls of Birkenhead, delivering the joint opinion of the appellate committee (which also comprised Lord Steyn, Lord Hoffmann, Lord Hope of Craighead and Lord Walker of Gestingthorpe), identified the “essence” of the approach (at para 32) as being:

“to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description.”

Lord Nicholls also quoted with approval (at para 36) the statement of Ribeiro PJ in Arrowtown, para 35, that:

“the driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically.””

Their Lordships then described the approach to take as follows:

“15.

In the task of ascertaining whether a particular statutory provision imposes a charge, or grants an exemption from a charge, the Ramsay approach is generally described - as it is in the statements quoted above - as involving two components or stages. The first is to ascertain the class of facts (which may or may not be transactions) intended to be affected by the charge or exemption. This is a process of interpretation of the statutory provision in the light of its purpose. The second is to discover whether the relevant facts fall within that class, in the sense that they “answer to the statutory description” (Barclays Mercantile at para 32). This may be described as a process of application of the statutory provision to the facts. It is useful to distinguish these processes, although there is no rigid demarcation between them and an iterative approach may be required.

16.

Both interpretation and application share the need to avoid tunnel vision. The particular charging or exempting provision must be construed in the context of the whole statutory scheme within which it is contained. The identification of its purpose may require an even wider review, extending to the history of the statutory provision or scheme and its political or social objective, to the extent that this can reliably be ascertained from admissible material.

17.

Likewise, the facts must be also be looked at in the round…”

Lord Briggs and Lord Leggatt then referred to the historical background to the levying of rates, the common law rules relating to whether property was occupied, provisions for levying rates on unoccupied property, and the exceptions from liability. Their Lordships set out the facts of the schemes which were in issue, and applied the legislation to the alleged facts.

Following this approach, we focus on the language of s54(4) itself, in its statutory context, in order to determine the nature of the transaction, or class of facts, to which the Case 3 Exception is intended to apply and whether the actual transaction in this case answers to that description.

We have outlined the statutory scheme of SDLT at [19] to [27] above.

SDLT is charged on the “chargeable consideration” for the transaction, which is generally the actual consideration given for the subject-matter of the transaction. Where the land transaction is between connected companies, s53(1A) requires that the chargeable consideration is taken to be not less than the market value of the subject-matter of the transaction.

There are then three exceptions to the deemed market value rule, of which the Case 3 Exception is one. The conditions that must be satisfied for its application are in s54(4), and there are two components:

In written submissions following the hearing (which are reflected in our summary of the parties’ submissions above) both parties addressed what they submitted was the purpose of the Case 3 Exception. Mr Jones submitted that, subject to the meaning of the word “claimed”, it appeared that there is actually not much disagreement between the parties as to the purpose of the proviso. We consider that to be a somewhat optimistic view of the parties’ submissions. Tower One’s submissions emphasised that this was an anti-avoidance provision to prevent abuse of group relief in circumstances where the subject-matter of the group transaction was then transferred out of the group by way of distribution. HMRC’s submissions on purpose largely paraphrased the language of the proviso itself, but referring to the three year period for the lookback as being the three years prior to the distribution transaction in question, rather than making any reference to the effective date.

Mr Jones did refer us to the Explanatory Notes to this part of the Finance Bill 2003 which stated:

“Subsection (4) provides an exception where the vendor is a company, and the transaction relates to the distribution of assets, including a distribution made in connection with the winding up of a company. It does not apply if the vendor has claimed group relief for the land on a transaction that has taken place in the three years prior to the transaction.” (underlining added)

We recognise that Explanatory Notes such as these can only play a secondary role in statutory interpretation. This is a principle which has been repeatedly emphasised, including recently in R (on the application of O (a minor, by her litigation friend AO)) v Secretary of State for the Home Department [2022] UKSC 3 where Lord Hodge (with whom Lord Briggs, Lord Stephens and Lady Rose agreed) said that in the process of statutory interpretation:

“30.

External aids to interpretation therefore must play a secondary role. Explanatory notes, prepared under the authority of Parliament, may cast light on the meaning of particular statutory provisions….But none of these external aids displace the meanings conveyed by the words of a statute that, after consideration of that context, are clear and unambiguous and which do not produce absurdity.”

Addressing first the nature of the transactions to which the Case 3 Exception is intended to apply, this is an exception to the deemed market value rule that applies where the purchaser and vendor are connected. Whilst this exception may operate as an anti-avoidance provision, its terms do not include a main purpose or main benefit test (or any other express reference to the avoidance of either tax generally or SDLT specifically), nor is there any carve-out or exception to the proviso that applies where the end result of a series of transactions does not involve the subject-matter leaving the group.

Having set out the condition that the later transaction is, or part of, a distribution of the assets of the vendor company, the proviso requires that the subject-matter of the transaction has not been the subject of a transaction in respect of which group relief was claimed by the vendor.

As a starting-point, we consider it is self-evident that it is essential that the relevant vendor has made a claim for group relief on the SDLT1 which it filed in respect of the prior transaction. Neither party made any submissions to the contrary. The parties differed as to whether that is sufficient.

We do accept that if no regard is to be had to subsequent events then, as Ms Shaw pointed out, this would mean that the Case 3 Exception is unavailable both where a vendor has claimed group relief to which it was entitled (or at least which has not been the subject of a challenge by HMRC) and has thus been exempted from SDLT on the prior transaction and where a vendor claims group relief on the SDLT1 but ultimately does not benefit from such relief (whether as a result of withdrawal of the claim or following a successful HMRC challenge or otherwise).

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. We recognise that there may be other factual situations where the question whether “group relief was claimed” needs to be considered further (eg if group relief is stated to be claimed on an SDLT1 but that return is amended the following day to withdraw such claim for the reason that the necessary group relationship does not exist). We do not consider that the possibility of such a situation arising required the insertion of an implied condition into the statutory language such as “valid”.

The proviso also specifies the period within which the relevant prior transaction is to have taken place, as “within the period of three years immediately preceding the effective date of the transaction”. Ms Shaw submitted that such period does not include any transactions entered into earlier in the day of the later transaction. This submission is based on the reference to “preceding the effective date of the transaction”, as s119 provides that the “effective date” of a land transaction is the date of completion. Mr Jones submitted that the legislation should not be read as creating any such gap.

We recognise that the language “within the period of three years immediately preceding the effective date of the transaction” could be construed as Ms Shaw submits and thus capture only transactions which had occurred in a period which ended on the day before the date that was the effective date of the later transaction. However, we agree with Mr Jones that there appears to be no policy reason why a transaction which had occurred earlier on the same day as the distribution transaction should not be caught, in contrast to one which had taken place a week earlier or two years beforehand.

As acknowledged by both parties, there can be no doubt that HMRC’s position would be correct if s54(4)(b) referred only to the period of three years immediately preceding the transaction, or if it referred to the period of three years immediately preceding and including the effective date of the transaction.

In terms of ascertaining the nature of the transactions to which this part of the proviso was intended to apply, we have regard to the apparent absurdity in policy terms of leaving what Mr Jones described as an “uncovered gap” in the form of transactions which occurred earlier on the effective date, and we place considerable weight on the use of the phrase “immediately preceding” in the legislation. This phrase shows that transactions immediately before the distribution transaction were intended to be within the specified period, and we consider that we should be slow to adopt an interpretation which would mean that those transactions which had occurred the most immediately beforehand (ie that same day) were not within the prescribed period. Such an approach is supported by the Explanatory Notes which, as set out above, state that the exception does not apply if “the vendor has claimed group relief for the land on a transaction that has taken place in the three years prior to the transaction”. This explanation focuses on the occurrence of the transactions themselves, which is consistent with SDLT being a tax on transactions.

This means that we consider that the relevant period for lookback should be interpreted as the three years prior to the transaction itself.

For completeness, we would add that we do not accept Mr Jones’ submissions that “the effective date” should be read as a reference to the particular point in time at which an event occurred. We consider that such an approach is contrary to the way in which that defined term is generally used throughout FA 2003.

When we look at the facts in the round, SGSL, B64 and Tower One are connected companies. SGSL granted the Tower Lease to B64, which then transferred the Tower Lease to Tower One later that same day. B64 submitted a SDLT1 claiming group relief on the grant of the Tower Lease and has not paid SDLT on that grant.

Whilst Ms Shaw submitted that it is factually incorrect to say that the claim for group relief was made and, in practice, succeeded, drawing attention to HMRC’s conclusion that group relief was not available to Tower One on the subsequent transaction, and that HMRC had proceeded on the basis that sub-sale relief was instead available to B64, we consider that viewed realistically the facts were that B64 made a claim for group relief and has not paid SDLT on the grant of the Tower Lease and that this is within the class of facts intended to be captured by the proviso to the Case 3 Exception.

The question is then whether the timing of this grant was within the period specified by the proviso. The grant was on the same date as the subsequent transfer of the Tower Lease from B64 to Tower One. On the basis of our conclusions as to the nature of the transactions to which the Case 3 Exception applies, the grant was within the required period as it has occurred within three years of the transfer of the Tower Lease, and it should not be treated as having been outside the relevant class of facts simply because it occurred earlier on the day of the Transaction.

For these reasons, we conclude that the Transaction, ie the transfer from B64 to Tower One, was not within the Case 3 Exception to the deemed market value rule. The Tower Lease had, “within the period of three years immediately preceding the effective date of the [Transaction], been the subject of a transaction in respect of which group relief was claimed by [B64]”.

Therefore, the FTT did not make an error of law in concluding that the Case 3 Exception did not apply to the Transaction and Ground 2 of Tower One’s appeal is dismissed.

In view of our conclusions reached above, it is unnecessary for us to determine HMRC’s alternative argument that s75A applied and we do not do so.

Tower One’s appeal against the Decision is dismissed.