Finance Act 2010 - Comments On The Stamp Tax Provisions
23 April 2010
The Finance Act 2010 contains five sections dealing with stamp taxes. Slightly oddly, these are grouped in three areas of the Act. Sections 6 and 7 deal with SDLT, sections 54 and 55 with SDRT on introduction of securities into clearance systems etc, and SDLT on partnerships, whilst section 65 deals with stamp taxes affecting clearing house. An unhelpful way of grouping things if someone is simply flicking through to see what has been enacted this year.
Of these, four appear to be reasonably effectively and uncontroversially drafted to achieve the aims sets out in the Finance Bill explanatory notes. The odd man out is section 55, more of which later.
Equally importantly, are the changes to the DOTAS regime for SDLT (effective from 1 April 2010), and the draft legislation which affects tax agents. More on this, too, below.
So, to take the simple things first; sections 6 and 7 deal with SDLT on the acquisition of residential property. Section 6 introduces an exemption for first time buyers on the acquisition of a major interest in land where the relevant consideration is between £125k and £250k. The acquisition must be by a first time buyer (but must be someone who has not previously ever purchased a major interest in land) grants or assignments of leases for less than 21 years are disregarded, and the buyer has to intend to occupy the property as his only or main residence. The legislation is tortuous (as regards definition of "first time buyer") but tolerably penetrable. The same is true of section 7 which introduces the 5% rate of SDLT for residential properties where the relevant consideration is more than £1m. This, however, will only apply where the effective date of the land transaction is on or after 6 April 2011. I take a somewhat perverse pleasure in this provision, since I had always been a bit of a lone voice in the wilderness regarding rate increases once SDLT has settled down. My view was that rate increases would come in as soon as the tax was established, but this is the first such increase since 2003.
The SDRT provisions in section 54 are an anti avoidance provision following HMRC's view of the "adverse" ECJ decision in the HSBC Holdings Case. Following that decision, securities introduced into an EU clearance system or deposited receipt scheme do not attract the higher (1.5%) rate of SDRT. Transfers within a "1.5%" system are then disregarded for SDRT purposes. Transfers from one 1.5% system to another (for example a non EU system) are disregarded to ensure no double charge. HMRC have seen schemes where securities are being introduced into EU systems, transferred into non-EU systems, and SDRT avoided. Section 54 removes the exemptions that otherwise apply to transfers of securities from an EU 1.5% system to a non EU 1.5% system where, broadly speaking, there are arrangements in place for the security to be transferred out of the EU system to a non EU system from the start.
Section 65 is an enabling section which ensures that members of clearing houses and nominees are explicitly included in enabling legislation but permits regulations to be made by the Treasury, removing additional charges to the stamp duty and SDRT when shared trades are cleared through a central counterparty.
So far so simple. The final provision of the Act, section 55, is where the draughtsman has let himself down badly. Section 55 amends section 75C FA2003. 75C supplements the anti avoidance section in 75A. This applies where there are a number of transactions involved in a land transaction and the amount of SDLT payable is less than would have been paid had there been a notional transfer from the original owner to the new owner; and the statutory disregards in 75B and 75C do not apply. One of these disregards, in 75C(8B), was heavily relied on when property was introduced into or extracted from a partnership. The establishment of a partnership can be regarded as a scheme transaction, so 75A is engaged. However, 75C(8B) then says that the normal rules which apply to the introduction or extraction of property in part 3 of Schedule 15 FA2003, also apply to the notional transaction. So, to the extent that there is continuity of ownership before and after (judged on income profits), there may be no charge, even if actual consideration is paid. It is this disregard of actual consideration which has formed the basis of many aggressive avoidance schemes.
These have now been countered by the omission of 75C(8B), and its replacement with 75C(8A) which provides "Nothing in part 3 of Schedule 15 applies to the notional transaction under 75A"; and that's an end to it. No suggestion as to how the section is then intended to work if property is introduced into a partnership. If there are corporate partners, does this mean that section 53 bites if there is a market value transaction in circumstances where no planning is intended, no actual consideration passes, and there is continuity of ownership. Also, where does this leave part 1 of Schedule 15 which (paraphrased) says that a chargeable interest held by a partnership is held by the partners and not by the partnership as such. This transparency has largely been ignored because of the application of part 3 which treats the partner and the partnership as separate entities. Take out part 3, and are you back to transparency? Part 3 also contains the provision which identifies ownership of property, within a partnership, with the partners right to income. Take this out, and are you back to the common sense position of identifying a partners' interest in a partnership with his ownership of capital?
HMRC recognise that the provision bites far more widely than was originally intended, but given that they are in purdah pending the election, it is unlikely that any clarity will emerge. Indeed even if it does, as Patrick Cannon mentioned in his article of 5 April, can HMRC guidance their way out of an obligation to collect tax in accordance with the statutory provision? Since the implications of the amendment are so uncertain, they may be able to. The recent decision on legitimate expectation in Oxfam -v- R&C Commissions [2009 EWHC 3078] may also assist.
Finally, on DOTAS and tax agents. I talked to some conveyancers in my firm the other day and they were bewildered by the provisions of both. They couldn't understand why, if HMRC want to really hit schemes that they don't think work (for example sub-sale schemes); these schemes are grandfathered. Aggressive promoters would have used these schemes before and there will be no obligation to pass on the SRN to the user, so HMRC will be in no materially better position to challenge the use of the scheme than it is currently. On tax agents, it is clear that most conveyancers are involved in the conveyancing process, and are responsible for completing an SDLT return. They are tax agents. They will clearly be engaged in "deliberate wrongdoing" if they claim, for example, group or charities relief on the SDLT form, and thus render themselves liable to penalties up to £50,000 per calendar year. Their cup of happiness was completed when I mentioned that the firm would not be indemnifying them!