HMRC vs DV3 RS Limited Partnership [2013] EWCA Civ 907

This Court of Appeal case heard in 2013 is a key Stamp Duty Land Tax (SDLT) case addressing a particular method of SDLT tax planning attempted in the 2000s.

The Purchase

On 24 October 2006 DV3 Regent Street Ltd ('the company') purchased a property on Regent St for £65m, agreeing to settle on 5 December 2006.

Prior to settlement of that sale, the company agreed to sell the same property, at the same price and on the same date to the DV3 RS Limited Partnership ('the partnership').

The Legislation

SDLT is charged on the acquisition of 'chargable interests', as per s.43(1) of the Finance Act 2003.  A chargable interest is defined as any estate, interest, right or power in or over land in the United Kingdom (s.48(1)).

The legislation specifically caters for situations where the right to purchase a property is subsold to another entity.  At the relevant time section 45(1)(b) of the Finance Act 2003 provided that if:

"there is an assignment, subsale or other transaction (relating to the whole or part of the subject-matter of the original contract) as a result of which a person other than the original purchaser becomes entitled to call for a conveyance to him."

Then s.45(3) applied providing that:

"The substantial performance or completion of the original contract...shall be disregarded"

... And lastly provides that the last entity in the chain, actually receiving the property, becomes the 'purchaser' for SDLT purposes.¹  In this case the last entity is the DV3 partnership which had acquired a chargable interest and was thus liable to pay the SDLT - as opposed to the DV3 company which is then treated as a middle-man.

DV3 contended that this was not the end of it.  The DV3 company was a 98% stakeholder in the DV3 partnership, along with some other minor stakeholders comprising of a few companies and a unit trust.  Schedule 15 to the Finance Act 2003 provided that where a 'chargeable interest' was transferred from a partner into a partnership, the 'chargable consideration' was equal to:

The property value x (1- the 'sum of lower proportions')

As the ownership structure didn't change upon the transfer of property into the partnership, the sum of lower proportions was effectively equal to 1 (100%) - reducing the right-hand side of the equation to nil - and thus the 'chargable consideration' was nil.  Provisions of Sch 15 which require corporate partnerships to use (quite simply) a property's value as the chargable consideration were not activated in the present case because a small stakeholder of the partnership happened to be a unit trust.  The net result of DV3s application of the Finance Act was to produce nil SDLT payable.

The HMRC disagreed with this interpretation.  A fundamental concept of SDLT is that to each transaction there is a 'vendor' and a 'purchaser'.  In its view the DV3 company never transferred a 'chargable interest' into the partnership because it was never a 'vendor'.  In the HMRCs view, while s.45 requires the eventual transferee under the 'second contract' to become the 'purchaser', the section could not require the intermediate company to become the 'vendor', a term which is defined in s.43(4) as:

"the person disposing of the subject-matter of the transaction."

The Decision

The Court of Appeal ruled in favour of the HMRC, providing that:

"It is at this point that I respectfully part company with the Upper Tribunal. First, section 45 does not provide for the Company to be regarded as the "vendor". The "vendor" is a defined term which means a person disposing of a chargeable interest... If it were entitled to a chargeable interest one would have to ask: when did it acquire that chargeable interest? Not on entering into the contract...  because that is negated by section 44 (2). In ordinary circumstances it would have acquired a chargeable interest on completion of that contract. But on the facts of this case (having ascertained in the real world that completion took place between the same parties and in substantial conformity with the contract) section 45 (3) tells us to disregard that completion. There is, therefore, no point at which the Company can be said to have acquired a chargeable interest."²

"Paragraph 10 of Schedule 15 only applies if a partner transfers a chargeable interest to a partnership. Since, for the purposes of SDLT, the Company did not acquire a chargeable interest, that paragraph cannot apply. It follows, therefore that the Partnership is not entitled to rely on the exemption. It follows, therefore that the Partnership is liable to pay SDLT on the consideration which it gave for its own acquisition, as prescribed by section 50 and Schedule 4 paragraph 1. 

In its essentials this is the analysis put forward by HMRC. The Upper Tribunal described it as simple, logically attractive, and productive of a sensible result on the facts. I agree. In accordance with the modern approach to construction we should adopt it. I would allow the appeal." ³

Current Law

The Finance Act 2003 has undergone many changes since the 2006 income year in which the transaction subject to this case took place.  The specific provisions in relation to partnerships are now clearer and more specific.  In short, the exemptions in Sch 15 in relation to partnerships exist to exempt adjustments in partnership stakeholdings from SDLT.

Notes

Case [2013] EWCA Civ 907:  http://www.bailii.org/ew/cases/EWCA/Civ/2013/907.html

1.  s.45(2-3)
2.  p29
3.  p37-38

Legislation

Finance Act 2003