By Jivaan Bennett
This appeal concerned financing arrangements compliant with Sharia law (Ijara arrangement). Under an Ijara arrangement, a financial institution buys an asset which its customer wishes to own and leases it back to him. The rent is calculated so that the financial institution will receive a return on its investment. The customer will also have an option to purchase the asset. On 31 January 2008, the Ministry of Defence sold the Chelsea Barracks to Project Blue Limited (“PBL”) for a sum of £959m (“Transaction 1”). However, pursuant to an Ijara arrangement, PBL completed a sale to Masraf al Rayan (“MAR”), a Qatari bank on the same day for a sum of £1.25b (“Transaction 2”). MAR simultaneously granted a 999 year lease to PBL along with various put and call options.
PBL sought to rely on ss. 45(3) and 71A of Finance Act 2003 which, it argued, granted a “double exemption” from SDLT on Transaction 1 and Transaction 2. Section 45 operates such that the disposal from MoD to PBL is disregarded because it occurred at the same time as, and in connection with the completion of the notional secondary contract. Parallel to this, PBL argued that it was entitled to s. 71A exemption from SDLT. Section 71A serves to relieve refinancing/alternative financing arrangements such that, where property belongs to the customer of a financial institution, neither a sale to the financial institution nor a subsequent lease-back of the property attracts SDLT. HMRC was willing to accept PBL’s argument but countered that, if accurate, it could rightly invoke the anti-avoidance provision, s. 75A so as to charge SDLT on the sum paid by MAR, £1.25b.
Unravelling the issues, the Court found that while Transaction 1 fell to be disregarded (s. 45), s. 71A was not intended to create an exemption for the acquisition by MAR. To enable this would create a huge gap through which arrangements (such as the Ijara arrangement) would attract no SDLT at all. Overall, the transaction was to be viewed as an acquisition from MoD by MAR (at a sum of £1.25b). Accordingly, the appeal was to be dismissed as the party responsible for the SDLT was MAR (and not PBL). On the basis that the chargeable consideration was £1.25b, reliance on s. 75A proved futile as the condition in s. 75A(1)(c) would not be satisfied.
This article appears in the JHA June 2016 Tax Newsletter, which also features:
