Project Blue Ltd v Revenue and Customs [2018] UKSC 30

Project Blue Ltd purchased Chelsea Barracks for £959m from the MoD, using Shari'a-compliant Ijara financing from a Qatari bank. The Supreme Court held that anti-avoidance provisions in section 75A of the Finance Act 2003 applied, making PBL liable for £50m SDLT.

Facts

Project Blue Ltd (PBL), principally owned by Qatari Diar Real Estate Investment Company, contracted on 5 April 2007 to purchase the former Chelsea Barracks from the Ministry of Defence (MoD) for £959m. Completion was deferred until 31 January 2008 to enable the MoD to re-house troops. PBL financed the purchase using Shari’a-compliant Ijara financing provided by Masraf al Rayan (MAR), a Qatari bank.

On 31 January 2008, the following occurred in connected steps: the MoD conveyed the freehold to PBL; PBL conveyed it to MAR for a stated consideration of £1.25 billion; MAR leased the barracks back to PBL; and put and call options were granted enabling PBL to repurchase the freehold. PBL claimed sub-sale relief under section 45(3) of the Finance Act 2003 (FA 2003) on the MoD-PBL transaction, and MAR claimed alternative property finance relief under section 71A(2) on the PBL-MAR transaction. The result was that no SDLT was payable on any transaction. HMRC amended PBL’s land transaction return to impose SDLT, ultimately claiming £50m under the anti-avoidance provisions in section 75A. The Ijara arrangement was terminated on 1 March 2010 before the fourth tranche of consideration was paid.

Issues

Two principal issues arose:

1. The relationship between section 45 (sub-sale relief) and section 71A (exemption for alternative property finance): specifically, whether, given the disregard in the tailpiece of section 45(3), PBL could be “the vendor” under section 71A(2) so as to exempt MAR’s purchase from SDLT.
2. The correct interpretation and application of the anti-avoidance provisions in section 75A, including who was “P” (purchaser) and “V” (vendor), the quantum of chargeable consideration on the notional transaction, and whether section 75B operated to reduce that consideration.

Subsidiary issues included a human rights challenge (indirect discrimination against Islamic finance contrary to Article 14 ECHR read with Article 9 and A1P1), and procedural challenges concerning HMRC’s power to amend PBL’s return.

Arguments

PBL’s submissions

PBL argued that, following the disregard in section 45(3), PBL had no chargeable interest to transfer to MAR, so MAR was not exempt under section 71A(2); the “vendor” was the MoD. HMRC had missed the six-year window to assess MAR. PBL further argued section 75A required a tax-avoidance motive; that MAR, not PBL, was “P”; that the consideration was less than £1.25 billion as the Ijara was terminated; that section 75B reduced chargeable consideration; that section 75B as interpreted indirectly discriminated against Muslims; and that HMRC amended the wrong return.

HMRC’s submissions

HMRC argued that section 71A employs “real world” language and operates as a self-contained regime; PBL was the vendor, so MAR’s purchase was exempt. However, section 75A applied to impose SDLT of £50m on PBL as P, with the MoD as V, based on the £1.25 billion consideration MAR provided.

Judgment

Section 45 and section 71A

Lord Hodge (with whom Lady Hale, Lord Hughes and Lord Lloyd-Jones agreed) held that section 71A is a self-contained statutory regime using “real world” language, in contrast to the “land transaction” and “chargeable interest” terminology of sections 42-45. The question posed by section 71A(2) is simply: “who sold the major interest in land to the financial institution?” The answer was PBL. The disregard in section 45(3) had no bearing on the operation of section 71A(2). This interpretation aligned with the purpose of equating Ijara financing with conventional lending, placing the tax burden on purchasers rather than financiers. Accordingly, MAR’s purchase was exempt under section 71A(2), and combined with section 45(3) sub-sale relief, no SDLT was payable but for section 75A.

Section 75A

Section 75A does not require a tax-avoidance motive; it applies where the sum of SDLT payable on scheme transactions is less than that on a notional transaction. Applying a purposive approach consistent with Barclays Mercantile Business Finance Ltd v Mawson, the court identified V as the MoD and P as PBL. PBL obtained the benefit of the tax loophole arising from combining sub-sale relief with Ijara exemption. The chargeable consideration on the notional transaction was £1.25 billion, giving rise to £50m SDLT. Section 75A(7) did not disapply section 75A because the tax loss was not caused solely by sections 71A-73 but also by the section 45(3) disregard.

Section 75B and human rights

Section 75B did not reduce the chargeable consideration because the sub-sale was of a kind specified in section 75A(3) and thus not “incidental” per section 75B(2)(c). The human rights challenge failed: any discriminatory effect was objectively justified given the broad anti-avoidance purpose and the safety valve in section 75C(11)-(12); further, PBL was not a victim because it could claim repayment under section 80 for consideration never paid after the Ijara was terminated.

Procedural and alternative approaches

HMRC was entitled under paragraph 13 of Schedule 10 FA 2003 to inquire into the PBL return and amend it to reflect section 75A liability. The court declined to treat the Ijara as a mortgage in substance, since neither party advanced that argument and the legislative scheme in FA 2003 deliberately recognised Ijara transactions as separate real transactions.

Dissent

Lord Briggs dissented, holding that in the sub-sale context, the vendor under section 71A(2), read with section 45(5A)(b), was the MoD not PBL, so MAR was liable to SDLT directly (although HMRC were time-barred). He would have dismissed the appeal.

Implications

The decision confirms that section 75A operates as a broad, mechanical anti-avoidance provision not dependent on any motive of tax avoidance; it is engaged whenever a series of connected transactions results in less SDLT than would be due on a notional direct transaction. The court’s approach shows that where statutory exemptions and reliefs combine to produce unintended tax holidays, section 75A will typically fill the gap. The identification of V and P is determined purposively by reference to where the tax loss occurs and who benefits.

The case illustrates the court’s willingness to treat section 71A as a self-contained regime operating in the “real world”, exempting transactions based on substance irrespective of the SDLT-world disregard in section 45(3). However, following the 2011 amendment to section 45(3), the specific loophole is now closed, so the decision’s practical significance largely concerns transactions completed before 24 March 2011 and the construction of section 75A more generally.

For practitioners, the judgment provides authority on: (i) the absence of a motive requirement in section 75A; (ii) the method of identifying V and P; (iii) the non-application of section 75A(7) where exemption combines with other reliefs; (iv) the limited scope of section 75B incidental transactions; and (v) the treatment of contingent consideration under sections 51 and 80, including the taxpayer’s burden to claim repayment. The human rights analysis shows the courts’ reluctance to find unjustified discrimination where broadly framed anti-avoidance rules have incidental effects on Shari’a-compliant structures, particularly where the taxpayer can obtain repayment equivalent to conventional treatment.

Verdict: Appeal allowed. The Supreme Court held that PBL was liable to SDLT of £50m under section 75A of the Finance Act 2003, subject to PBL’s right to claim repayment under section 80 for consideration which was never paid following termination of the Ijara arrangement.

Source: Project Blue Ltd v Revenue and Customs [2018] UKSC 30