Tower One is an interesting case for anyone with a passing interest in tax planning. While the decision itself concerns SDLT, it is of relevance across a wide range of taxes. The judgement is in some ways surprising (more below) but also carries a powerful cautionary message: beware of mission creep!
Key Points
- SDLT group relief is (along with a number of other tax saving provisions) blocked from applying to a transaction where the transaction forms part of arrangements of which the main purpose, or one of the main purposes, is the avoidance of liability to tax. This is a targeted anti avoidance rule, or TAAR.
- The taxpayer in Tower One was found not to qualify for SDLT group relief on the acquisition of a development site from a group company because of this rule. The original purpose of the transfer was to ring fence the risks of a novel development in an SPV (the taxpayer company). This is a perfectly commercial and bona fide reason for transferring land to an SPV.
- Unfortunately, the taxpayer's group had consulted with their tax advisors who advised that if the land was transferred using a complex series of steps, the taxpayer could get a tax free step up in the land's base cost from £30m to c. £200m. This would result in some £44m in corporation tax savings when the land was eventually sold. The group therefore adopted a complex transaction structure with the aim of securing the uplift in base cost. It undertook detailed planning to achieve this result, and carefully exercised the various steps in the structure. The steps included the grant of a 999 year lease of the land to a third company and a subsequent transfer from that third company to the taxpayer.
- HMRC disputed this outcome and eventually, with the agreement of the taxpayer, blocked the uplift in base cost. So the mooted tax advantage didn’t actually happen.
- Thanks to this mission creep (adding in additional steps purely to gain a step up in base cost) HMRC and the First Tier Tribunal also found transfer of land to the taxpayer (the last step in the transaction structure) did not qualify for SDLT group relief. The transfer originally had an accepted commercial purpose, however, the tax planning exercise created an additional purpose which activated the TAAR. They found that £8m of SDLT was payable (a 4% flat rate on assumed consideration of £200m).
Why is this decision interesting?
For a number of reasons. Here are five, in order of ascending nerdiness.
First, the taxpayer didn’t actually achieve the tax advantage that was mooted. But success in tax avoidance wasn't relevant; what matters is motive. So as a result of the failed tax planning the taxpayer was ultimately in a worse position – at least £8m worse - than they would have been had they simply stuck to their original objectives of ring fencing the commercial risks.
Second, it highlights the danger of inserting steps purely to achieve a tax advantage when structuring transactions. This is not the same – and the FTT explicitly acknowledged this – as trying to achieve a bone fide commercial outcome in a tax efficient way. The difference is between wanting to achieve a commercial result with a minimum tax cost (tax efficiency) and undertaking transactions specifically to achieve a tax advantage one wouldn't otherwise have (tax avoidance).
Third, there is some telling discussion around the words "forms part of arrangements". "Arrangements" is one of those words; intentionally broad. When discussing the TAAR, the FTT described the TAAR like this:
[it is] not confined to circumstances were the specific transaction on which SDLT would be chargeable itself has the effect of avoiding tax. If that specific transaction is part of a broader scheme, agreement or understanding it is enough that other transactions within the scheme, agreement or understanding have the effect of avoiding tax… It may well be true that in such a case, the transaction on which SDLT is said to be chargeable plays no role in the avoidance of tax…nevertheless… the specific transaction on which SDLT is chargeable may still form part of the same scheme, agreement or understanding, one of the main purposes of which was the avoidance of tax.
Not only does guilt not depend on success, it is also a matter of association.
…transactions entered into by different parties at different points in time will in practice almost inevitably be part of the same "arrangements" if they are effected pursuant to a single plan formulated before they are effected , and if the parties to each of the transactions are aware of that plan and are acting with the intention of giving effect to it.
This is useful as a way of establishing when a transaction does form part of a series of arrangements. Less so for when they don't.
Fourth, the FTT ruled that SDLT was payable on £200m, which was the value of the land at the time of transfer, and not on £30m, which is the consideration the taxpayer paid for it.
In some ways this is uncontroversial; transactions between group companies are treated as occurring at the higher of: (i) actual consideration; and (ii) market value. However, the SDLT rules (and the Scottish LBTT and Welsh LTT rules) contain some carve outs to this market value provision. Where these apply the SDLT (LBTT or LTT) charge is restricted to actual consideration.
The taxpayers had sought to rely on one of these carve outs if group relief was denied. The FTT refused it on the basis that the carve out is not available in respect of a transaction where the seller of the property had claimed group relief on its own acquisition of the property. In this case the seller had claimed group relief (as part of a prior step) and that group relief claim was disallowed on separate grounds.
As with the tax avoidance motive test, the FTT held that it wasn't necessary for group relief to have been validly claimed by the seller, or even that the seller was entitled to claim it. The mere fact of having claimed it was enough to prevent the market value rule being switched off. In other words, as part of the transaction structure a separate company which wasn't entitled to claim group relief (indeed that company wasn't even required to file an SDLT return) made a claim for the relief and didn't get it. Because of that erroneous claim, the value on which the taxpayers' SDLT was assessed jumped from £30m to £200m. Ouch.
In the context of the TAAR, this line of reasoning seems fair. It is after all an anti-avoidance rule. In the context of market value charges, the fairness is less evident. What is the mischief being prevented?
Fifth, there is some relevance to LBTT and LTT here. SDLT cases can be informative when considering the devolved taxes. The discussions around "arrangements" are very relevant, and similar conditions apply to the market value rules.
But… the TAARs are subtly different.
In SDLT the TAAR applies to avoidance of "tax", which is defined to mean "stamp duty, income tax, corporation tax, capital gains tax and {SDLT]". It was a corporation tax avoidance scheme which ultimately caused group relief to fail.
In LBTT the equivalent Scottish TAAR applies to avoidance of "the tax" which is defined as just LBTT.
In LTT there is, to the best of my knowledge, no TAAR within the group relief rules.
Both Scotland and Wales have General Anti Avoidance Rules (GAARs). Perhaps they could provide the same result? In each case the operation of the Scottish and Welsh GAARs are restricted to "devolved taxes" – i.e., to taxes legislated for by the devolved administrations and collected by the devolved tax authorities (Revenue Scotland and the Welsh Revenue Authority). There is also a UK wide general anti abuse rule (the UK GAAR). Suffice to say that the UK GAAR does not apply to devolved taxes, such as LBTT and LTT.
This leaves the tantalising question – would the same result have been reached had the land been in Scotland or Wales? Possibly not.
