The Stamp Duty Land Tax (Variation of the Finance Act 2003) Regulations 2006: interim guidance on section 75A Finance Act 2003

1. This article provides guidance on new section 75A Finance Act 2003, inserted by paragraph 1 of the Schedule to The Stamp Duty Land Tax (Variation of the Finance Act 2003) Regulations 2006 (2006 SI No 3237). It supplements the Technical Note issued by HM Revenue & Customs on 6 December 2006.

2. The guidance in this article has been produced in response to enquiries and representations, as an interim measure to assist taxpayers and their advisers. It should not be taken as representing HM Revenue & Customs’ settled view, nor as being of general application. The guidance has effect only for transactions to which the Regulations apply and not for transactions to which any provisions of Finance Act 2007 will apply. Revised guidance will be published for transactions to which any similar provisions of Finance Act 2007 might apply.

3. HM Revenue & Customs will accept that the 2006 Regulations may be applied subject to the following guidance:

A construction contract is not a scheme transaction in relation to a land transaction where the circumstances are such that, by virtue of the decision in Prudential Assurance Co Ltd v IRC [1992] STC 863 (see SDLTM04015), the consideration properly attributable to the construction contract is not part of the chargeable consideration for the land transaction
The carrying out of works of construction, improvement or repair of a building or other works to enhance the value of land is not a scheme transaction in relation to the purchase of the land provided that the works are not carried out by the vendor or a person connected with the vendor.
The purchase of assets other than land is not a scheme transaction in relation to a land transaction where the provisions of paragraph 4 of Schedule 4 Finance Act 2003 apply to the apportionment of consideration between the purchase of assets and the land transaction.
A transfer of shares in a company or units in a unit trust which is not preceded by any land transaction in relation to which it might be a scheme transaction is not a scheme transaction in relation to any subsequent land transaction.
A loan from a person who is not a party to, or connected with a party to, any other scheme transaction to fund the purchase of property is not a scheme transaction in relation to the purchase of the property.
Where a land transaction qualifies for reconstruction relief or acquisition relief the issue of shares under paragraph 7(2) or 8(2) of Schedule 7 Finance Act 2003 is not a scheme transaction in relation to that land transaction.
Where the only transactions are the transfer of a number of properties into a partnership by partners none of the transfers is a scheme transaction in relation to any of the other transfers.
Where the only transactions are the purchase of land and a lease (or leases) of all or part of the land to a person not connected with the purchaser of the land the purchase is not a scheme transaction in relation to the lease(s) and vice versa.
Land transactions involving separate parcels of land are not scheme transactions in relation to each other

We have been asked about the availability of group relief in relation to transactions carried out in preparation for an acquisition to which section 75 Finance Act 1986 (acquisition relief) will apply. In particular concern has been expressed that because the transactions are carried out in preparation for the acquisition there may be ‘arrangements’ which deny the availability of group relief under paragraph 2 of Schedule 7 Finance Act 2006.

There are two relevant types of arrangements:

Arrangements whereby someone could obtain control of the transferee but not of the transferor (‘control’ arrangements) (paragraph 2(1) of schedule 7)
Arrangements whereby transferor and transferee will cease to be members of the same group by reason of the transferee ceasing to be a 75% subsidiary of the transferor or of a third company’ (‘de-grouping’ arrangements) (paragraph 2(2)(b) of Schedule 7)

In many acquisitions to which section 75 Finance Act 1986 will apply both a change of control and a de-grouping will occur.

Paragraph 2(1) ends with a proviso to the effect that arrangements entered into with a view to an acquisition to which section 75 Finance Act 1986 applies are not ‘control’ arrangements denying group relief. Paragraph 2(2)(b) does not include a similar proviso. However in our view paragraph 2 must be read as a whole and the proviso must apply also to paragraph 2(2)(b), otherwise it would in practice be of no effect. In other words we accept that arrangements entered into with a view to an acquisition to which section 75 Finance Act 1986 applies are not ‘de-grouping’ arrangements denying group relief.

This guidance will be incorporated in the SDLT Manual in due course.

Group Relief ‘Arrangements’

There are two relevant types of arrangements:

Arrangements whereby someone could obtain control of the transferee but not of the transferor (‘control’ arrangements) (paragraph 2(1) of schedule 7)
Arrangements whereby transferor and transferee will cease to be members of the same group by reason of the transferee ceasing to be a 75% subsidiary of the transferor or of a third company’ (‘de-grouping’ arrangements) (paragraph 2(2)(b) of Schedule 7)

In many acquisitions to which section 75 Finance Act 1986 will apply both a change of control and a de-grouping will occur.

Stamp Duty Land Tax: Finality and 'Discovery'

1. After a land transaction return has been filed or amended HM Revenue & Customs (HMRC) may decide to open an enquiry into the return so that we can be satisfied that the correct amount of SDLT has been paid. Such an enquiry must be opened within a certain time period. For example, where a return is filed on time and no later amendment is made HMRC must open an enquiry within nine months of the filing date (the filing date is the date by which the return must be filed to avoid a penalty and in normal circumstances is 30 days after the effective date of the transaction). At the conclusion of the enquiry HMRC will decide whether the right amount of SDLT has (in our opinion) been paid. If we think the right amount of SDLT has not been paid we can amend the return in order to assess the right amount of tax. There is the right of appeal to an independent tax tribunal.

2. However in some circumstances HMRC can make an assessment even where an enquiry has not been opened during the nine-month period. Such as assessment is referred to as a ‘discovery’ assessment (because we ‘discover’ that not enough SDLT has been paid). In most cases a discovery assessment is made because we consider that tax has been underpaid because of the fraudulent or negligent conduct of the purchaser, a person acting on behalf of the purchaser or a business partner of the purchaser. This article is not concerned with fraudulent or negligent conduct and nothing in this article affects our approach where we consider there has been fraudulent or negligent conduct.

3. But a discovery assessment can also be made where, at the time the nine-month enquiry period came to an end or (if later) the time HMRC completed their enquiries, we could not reasonably have been expected, on the basis of the information available to us before that time, to have been aware that insufficient tax had been paid.

4. This provision is similar to an income tax provision, which was considered by the Court of Appeal in the case of Langham v Veltema [2004] STC 544. This case gave rise to some uncertainty among taxpayers, first, as regards the lack of finality for the taxpayer at the close of the enquiry window and second, as regards the inherent difficulty of complying with the law as expounded in the Court of Appeal.

5. For this reason we issued a Statement of Practice, SP1/06, in 2006 (Statements of Practice explain how we intend to apply the law in cases of uncertainty). This explained what taxpayers had to do to guard against the possibility of a subsequent discovery assessment. Please see the text of the Statement of Practice (PDF 35K).

6. We intend to apply the Statement of Practice to SDLT. However it would be very unusual for purchasers to have to make a disclosure in ordinary residential or small commercial transactions. For example it is very common in such transactions to apportion part of the purchase price to chattels. There is no need to disclose to us that you have done so. Similarly, on the sale of a business, there is no need to provide us with any information additional to that in box 1 of form SDLT4.

7. If purchasers or their advisers do feel that they need to protect themselves from discovery by making a disclosure in relation to a land transaction they should do so by writing to Birmingham Stamp Office, quoting the UTRN, at or before the time they submit the land transaction return for that land transaction. Information disclosed in this way will be treated, for the purposes of paragraph 30(4)(a) of Schedule 10 Finance Act 2003, as if it had been contained in the land transaction return for that land transaction. Please do not send disclosures to the Rapid Data Capture Centre at Netherton, or put them in the same envelope as land transaction returns, as this causes difficulty for the automated processing system.