SDLT: Vardy and the effect of sub-sales

Graham Chase, Tax Partner, CMS

It must be unusual for a case on SDLT to make the front page of the FT but the decision in Vardy has achieved this distinction.

Prior to the introduction of the general anti-avoidance rule (to be found at section 75A Finance Act 2003) SDLT avoidance was seen to be widespread. The fact that the commercial property market was booming can only have helped to fuel demand for such structures.

This is the test case for sub-sales involving distributions of property. Essentially, “A” agrees to sell to “B”, an unlimited company. B, which is a subsidiary of “C”, reduces it share capital so as to create a reserve which may be distributed as a matter of company law. This reserve is available for the purposes of B declaring a distribution in specie of the property. The property goes from A to B for the agreed price, then from B to C for nil. Both B and C claim that section 45 FA 2003 applies, with C claiming that there is no chargeable consideration.

The aggregate SDLT at stake was referred to as in the order of £100 million, but the amount at stake in the specific case was only £290,000.

In addition to arguments as to the scope of sub-sale relief HMRC raised an argument concerning the lawfulness of the dividend (from B to C).

Deloitte acted for the taxpayer. SDLT returns were submitted together with a covering letter back in 2006.

The Tribunal accepted that the declaration of a dividend could be a transaction falling within section 45(1)(b). Also, the Tribunal accepted that the declaration gave C an entitlement to a conveyance.

However, HMRC argued that no entitlement here arose on the basis that the dividend was unlawful – there had been a failure to produce accounts, so the dividend was prohibited by the Companies Act. The Tribunal agreed, no entitlement in favour of C existed and hence the sub-sale rule was not engaged. With the result that B was liable to SDLT but C was not (as no consideration had been given).

But in case the Tribunal was wrong about the company law position they went on to consider the position in the event that the sub-sale rule did apply, in other words if C was in fact entitled to a conveyance. The Tribunal concluded that the money given by C by way of share subscription and used by B to pay A for the property was money given indirectly by C within section 45(3)(b)(i). Direct payment of consideration for one thing (the shares subscribed for) also amounted to the indirect provision of consideration for another (namely the property purchase price as between A and B). So even if there was no company law problem the scheme would have failed – with C picking up the SDLT bill. This may be a significant distinction in practice as it will be C who has the property and presumably the Stamp Office would rather seek to recover as against C than B (who may have nothing).

Footnote: 21 September – it is understood that the taxpayer will not appeal.

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