Friday, 11 October 2013
Thursday, 27 September 2012
The Vardy SDLT Case a victory for HMRC - Or is it?
Most advisers working in the field of SDLT advice now have something to say about Vardy Properties (1) Vardy Properties (Teeside) Limited v Revenue & Customs [2012] UKFTT 564 (TC). Here is my view.
Background
Vardy Properties (Teeside ) Limited (VPTL) - were advised that they could structure the acquisition of a property without incurring an SDLT bill.
An unlimited company Vardy Properties (VP) was set up for the purposes of contracting to acquire the property. Unlimited companies can reduce their share capital without the (then) difficulties and costs associated with obtaining court approval to do so. VPTL subscribed for shares in the unlimited company and VP used the proceeds of the share capital injection to enter into a contract to purchase the property.
VP then passed a resolution to reduce its share capital creating a reserve which could be repaid to the shareholder VPTL. Before it resolved to repay the capital VP completed the purchase of the property and its was then resolved to transfer the property to VPTL by way of a distribution in specie.
VP claimed it had no SDLT liability because it could claim the benefit of sub sale relief under section 45 Finance Act 2003 and VPTL claimed it had no liability because receiving a property as a shareholder by way of distribution is exempt from SDLT unless actual consideration has been provided.
The Tribunal upheld HMRCs contention to the opposite on the basis that the distribution was unlawful due to the failure to comply with the requirement to prepare accounts under section s270 Companies Act 1985.
Obiter they said that if they were wrong on this point VPTL was liable to SDLT because it had provided actual consideration for the distribution (i.e. the second subsale leg) by way of the injection of share capital.
HMRC are shouting for the rooftops and are clearly delighted with the result! However it is my view that they should only be delighted with the fact that VPTL have, presumably to reduce the impact of any negative publicity, decided not to appeal - and this is why.
The main ratio behind the decision is that the distribution was unlawful and therefore there was no subsale and VP are liable for the SDLT.
Section 270 of the Companies Act only applies to distributions within the definition of section 263 of that same act.
Section 263(2) - states
In this Part, " distribution " means every description of distribution of a company's assets to its members, whether in cash or otherwise, except distribution by way of—
(a) an issue of shares as fully or partly paid bonus shares,
(b) the redemption or purchase of any of the company's own shares out of capital (including the proceeds of any fresh issue of shares) or out of unrealised profits in accordance with Chapter VII of Part V,
(c) the reduction of share capital by extinguishing or reducing the liability of any of the members on any of the company's shares in respect of share capital not paid up, or by paying off paid up share capital, and
(d) a distribution of assets to members of the company on its winding up.
Background
Vardy Properties (Teeside ) Limited (VPTL) - were advised that they could structure the acquisition of a property without incurring an SDLT bill.
An unlimited company Vardy Properties (VP) was set up for the purposes of contracting to acquire the property. Unlimited companies can reduce their share capital without the (then) difficulties and costs associated with obtaining court approval to do so. VPTL subscribed for shares in the unlimited company and VP used the proceeds of the share capital injection to enter into a contract to purchase the property.
VP then passed a resolution to reduce its share capital creating a reserve which could be repaid to the shareholder VPTL. Before it resolved to repay the capital VP completed the purchase of the property and its was then resolved to transfer the property to VPTL by way of a distribution in specie.
VP claimed it had no SDLT liability because it could claim the benefit of sub sale relief under section 45 Finance Act 2003 and VPTL claimed it had no liability because receiving a property as a shareholder by way of distribution is exempt from SDLT unless actual consideration has been provided.
The Tribunal upheld HMRCs contention to the opposite on the basis that the distribution was unlawful due to the failure to comply with the requirement to prepare accounts under section s270 Companies Act 1985.
Obiter they said that if they were wrong on this point VPTL was liable to SDLT because it had provided actual consideration for the distribution (i.e. the second subsale leg) by way of the injection of share capital.
HMRC are shouting for the rooftops and are clearly delighted with the result! However it is my view that they should only be delighted with the fact that VPTL have, presumably to reduce the impact of any negative publicity, decided not to appeal - and this is why.
The main ratio behind the decision is that the distribution was unlawful and therefore there was no subsale and VP are liable for the SDLT.
Section 270 of the Companies Act only applies to distributions within the definition of section 263 of that same act.
Section 263(2) - states
In this Part, " distribution " means every description of distribution of a company's assets to its members, whether in cash or otherwise, except distribution by way of—
(a) an issue of shares as fully or partly paid bonus shares,
(b) the redemption or purchase of any of the company's own shares out of capital (including the proceeds of any fresh issue of shares) or out of unrealised profits in accordance with Chapter VII of Part V,
(c) the reduction of share capital by extinguishing or reducing the liability of any of the members on any of the company's shares in respect of share capital not paid up, or by paying off paid up share capital, and
(d) a distribution of assets to members of the company on its winding up.
I have highlighted the last two because these are excepted from the ensuing rules about distributions because in actual fact they are not really dividends in the same way as a "normal" dividend would be because neither are really dependent on the company's actual profits. This doesn't detract from the SDLT treatment though. Distributions on a winding up are specifically referred to as exempt in the relevant SDLT provisions and the "or otherwise" references therein ought to cover "distributions" contemplated under subsection (c) too.
c) is the point in case here - the second leg of the subsale was a distribution pursuant to the rights to claim a return of capital after a reduction in share capital.
Accordingly it seems that that section 270 didn't need to be complied with and the tribunal was in fact incorrect on this point.
The tribunal said that if they were wrong then sub sale relief did in fact apply to "relieve" VP from SDLT but due to a "purposive approach" to the application of section 45 (3)(i) (the relevant sub sale taxing provision which governs the amount of consideration deemed to have been given in this case by VPTL) then VPTL through the share subscription had given consideration for their acquisition of the property and thus were chargeable to SDLT.
This bit is the really interesting point. Can section 45(3)(i) be construed in this way?
What section 45 (3)(i) says (and I am paraphrasing here for brevity) is that the consideration deemed to have been given by the person acquiring on the second leg of a sub-sale includes (i) " so much of the consideration under the original contract as is .... to be given directly or indirectly by the transferee" (VPTL).
The tribunal (obiter which means it is not actually part of the judgment) said that the provision of funds through the share subscription could have a dual purpose 1) consideration for the acquisition of the shares but 2) in the context of a scheme where there is an understanding that the property will be onwardly conveyed as consideration indirectly provided for the purchase of the property.
I on the other hand do not think it can be simplified that easily.
When VPTL provided the funds it did so before VP entered into the contract to buy the property and before VP had resolved to reduce its share capital and make a repayment back to the VPTL in specie.
This means if the share capital subscription was consideration, it was paid before any contract existed in favour of itself. This is commonly known in contract law as past consideration. Past consideration is not in law consideration at all.
In a business context however past consideration can be "consideration" for these purposes.
In the case of Pao On v Lau Yiu Long (1980) Lord Scarman said
" An act done before the giving of a promise to make a payment or to confer some other benefit can sometimes be consideration for the promise. The act must have been done at the promisors' request: the parties must have understood that the act was to be remunerated either by a payment or the conferment of some other benefit: and payment, or the conferment of a benefit, must have been legally enforceable had it been promised in advance."
So - when VPTL subscribed for the shares it is probable that there was an understanding (due to the nature of management and control between the parties) that VPTL expected that a reduction in share capital and distribution of the property would be effected.
Was the act (the provision of funds) done at the Promisor's (VP) request - as stated by Lord Scarman must be the case? No it was done at the request of the Promisee (VPTL).
Was the conferment of the benefits, i.e. (a) the reduction in share capital and (b) the transfer of the property - legally enforceable as a promise made in advance. Neither were (a) because a resolution had to have been passed and b) because an agreement to convey title to land has to be in writing under the Law of Property Act or it is unenforceable.
It therefore seems arguable that the funds provided by VPTL through the share subscription could not be deemed to be consideration for anything other than the acquisition and issue of shares in VP.
Given that this aspect of the judgment is obiter and was not in fact fully explored and for the reasons I have stated I cannot see that there is any victory here for HMRC which would not have good grounds for an appeal by VP or VPTL.
Shame that VPTL aren't going to pick up and run with the gauntlet. They may have their commercial reasons for not doing so but I have to say it is only through a proper examination of these principles that we can end up with good and clear tax law. If the law doesn't work and that results in unexpected Tax savings then it should be changed properly.
It may be that it is through these avoidance schemes that clearer tax law is achieved and that has to be for the benefit of everyone. So for anyone else who has done this scheme - have courage, tackle HMRC for their inefficient law drafting and be part of the process of creating clear and workable SDLT law.
Tuesday, 27 March 2012
The coming annual charge for companies owning UK Residential Property
Residential properties held within certain corporate bodies will be subject to an annual charge as per the table below. This will be introduced from April 2013.
Property Value Annual Charge
£2m to £5m £15,000
£5m to £10m £35,000
£10m to £20m £70,000
Greater than £20m £140,000
The tax base for the annual charge is the value of the stock of residential property valued at over £2 million owned by such corporate bodies.
What is not yet clear is whether the charge applies per property over £2 million, whether you just look at the total stock of properties which individually have a value of over £2 million and ignore lower value properties or whether it will apply in respect of the total value of all residential property held. If the latter applies then this will be truly concerning as it could have a real negative impact for residential investors with an increasing portfolio.
Property Value Annual Charge
£2m to £5m £15,000
£5m to £10m £35,000
£10m to £20m £70,000
Greater than £20m £140,000
The tax base for the annual charge is the value of the stock of residential property valued at over £2 million owned by such corporate bodies.
What is not yet clear is whether the charge applies per property over £2 million, whether you just look at the total stock of properties which individually have a value of over £2 million and ignore lower value properties or whether it will apply in respect of the total value of all residential property held. If the latter applies then this will be truly concerning as it could have a real negative impact for residential investors with an increasing portfolio.
The New 15% SDLT charge for companies investing in UK residential property.
Some questions have been coming to me, largely because of unclear guidance being given in budget news reports, relating to the availability of multiple dwelling relief on acquisitions of properties by companies where the property concerned contains more than one self contained dwelling.
For the new 15% rate to apply the consideration attributable to at least one of the dwellings must be more than £2 million.
It does not therefore apply, for instance, where a company buys a property for £3 million which contains 3 flats unless one or more of those flats are worth more than £2 million.
Looking at a couple of examples.
Example 1
Property is to be bought for £3 million.
The property comprises 3 flats.
The ground floor flat is worth £500,000
The first floor flat is worth £450,000 but the top floor flat is a duplex with wonderful views and is worth £2,050,000.
To calculate the SDLT. You ignore the single purchase of the Property.
The top floor flat is treated as one acquisition of a property worth over £2 million. A return must be filed in respect of that acquisition and SDLT will be chargeable at the rate of 15% (£307,500).
The other flats are treated as a separate purchase with the requirement to file a second SDLT return.
This will be treated as the purchase of 2 dwellings for £950,000.
Presuming the usual conditions for Multiple Dwelling Relief (MDR) apply it should apply to the acquisition of these 2 flats so the SDLT chargeable will be £950,000/2 = £475,000 so £950,000 x 3% = £28,500.
Example 2
A property is bought for £3 million containing 3 flats of equal size.
Ground Floor Flat £1,750,000 ( having the benefit of a garden)
First Floor Flat £600,000
Second Floor Flat £650,000.
The 15% rate will not apply at all as none of the properties are worth over £2 million individually so only one SDLT return.
Assuming MDR applies, SDLT calculation would be £3,000,000/3 =£1,000,000 (exactly) average so SDLT will be £3,000,000 x 4% = £120,000.
Before the budget there was no need to obtain formal valuations in respect of the values attributable to each dwelling where multiple dwellings were being acquired in order to be able to claim MDR. Now companies will have to get valuations where it is possible that one or more of the dwellings could be pushing the £2 million limit.
For the new 15% rate to apply the consideration attributable to at least one of the dwellings must be more than £2 million.
It does not therefore apply, for instance, where a company buys a property for £3 million which contains 3 flats unless one or more of those flats are worth more than £2 million.
Looking at a couple of examples.
Example 1
Property is to be bought for £3 million.
The property comprises 3 flats.
The ground floor flat is worth £500,000
The first floor flat is worth £450,000 but the top floor flat is a duplex with wonderful views and is worth £2,050,000.
To calculate the SDLT. You ignore the single purchase of the Property.
The top floor flat is treated as one acquisition of a property worth over £2 million. A return must be filed in respect of that acquisition and SDLT will be chargeable at the rate of 15% (£307,500).
The other flats are treated as a separate purchase with the requirement to file a second SDLT return.
This will be treated as the purchase of 2 dwellings for £950,000.
Presuming the usual conditions for Multiple Dwelling Relief (MDR) apply it should apply to the acquisition of these 2 flats so the SDLT chargeable will be £950,000/2 = £475,000 so £950,000 x 3% = £28,500.
Example 2
A property is bought for £3 million containing 3 flats of equal size.
Ground Floor Flat £1,750,000 ( having the benefit of a garden)
First Floor Flat £600,000
Second Floor Flat £650,000.
The 15% rate will not apply at all as none of the properties are worth over £2 million individually so only one SDLT return.
Assuming MDR applies, SDLT calculation would be £3,000,000/3 =£1,000,000 (exactly) average so SDLT will be £3,000,000 x 4% = £120,000.
Before the budget there was no need to obtain formal valuations in respect of the values attributable to each dwelling where multiple dwellings were being acquired in order to be able to claim MDR. Now companies will have to get valuations where it is possible that one or more of the dwellings could be pushing the £2 million limit.
Wednesday, 14 December 2011
UPDATE - Land Remediation Relief
As an update to my August Blog on the potential loss of Land Remediation Relief - I am pleased to report that the Government has listened to the industry and the relief survives ...
Extract from HMRCs consultation response
"Land remediation relief
2.12 The original purpose of this relief was to provide a financial incentive to developers to bring land back into use that had been contaminated by previous industrial use or land containing derelict structures that would be prohibitively expensive to remove. Approximately 1,300 companies a year claim this relief costing the Exchequer around £40m. Based on the information available at Budget, the Government agreed with the OTS’s view that it failed to deliver its policy objective.
2.13 As part of the consultation, responses were received from a range of interested parties including companies and representative bodies. Respondents argued that removing this relief would affect the regeneration of uneconomic brown-field sites. Several companies claimed that they take land remediation relief into account when considering sites and that removal of this relief would make a significant number of their planned projects financially unviable.
Information was also presented that suggested abolishing this relief would exacerbate financial pressures on this sector resulting from the removal of the exemption from landfill tax for soils and waste from contaminated sites, which was agreed in 2009 and is coming into effect shortly.
2.14 The Government has considered the responses. Based on the evidence received in the consultation the Government has decided that removal of this relief, in conjunction with the already agreed removal of the exemption from landfill tax, would risk undermining the Government’s plans to support the housing and construction sectors through planning reforms and the release of large areas of publicly owned land for development. The Government has therefore decided not to abolish this relief"
The full response paper can be viewed here.
Extract from HMRCs consultation response
"Land remediation relief
2.12 The original purpose of this relief was to provide a financial incentive to developers to bring land back into use that had been contaminated by previous industrial use or land containing derelict structures that would be prohibitively expensive to remove. Approximately 1,300 companies a year claim this relief costing the Exchequer around £40m. Based on the information available at Budget, the Government agreed with the OTS’s view that it failed to deliver its policy objective.
2.13 As part of the consultation, responses were received from a range of interested parties including companies and representative bodies. Respondents argued that removing this relief would affect the regeneration of uneconomic brown-field sites. Several companies claimed that they take land remediation relief into account when considering sites and that removal of this relief would make a significant number of their planned projects financially unviable.
Information was also presented that suggested abolishing this relief would exacerbate financial pressures on this sector resulting from the removal of the exemption from landfill tax for soils and waste from contaminated sites, which was agreed in 2009 and is coming into effect shortly.
2.14 The Government has considered the responses. Based on the evidence received in the consultation the Government has decided that removal of this relief, in conjunction with the already agreed removal of the exemption from landfill tax, would risk undermining the Government’s plans to support the housing and construction sectors through planning reforms and the release of large areas of publicly owned land for development. The Government has therefore decided not to abolish this relief"
The full response paper can be viewed here.
Tuesday, 8 November 2011
Self-Build Projects – What are my VAT costs and what has Planning Permission got to do with it?
Please note This is a very simple summary touching on some of the VAT implications for self builds, conversions and alterations to residential property. It is not by any means a bible on the subject, but I can help with more detail if required.
Zero Rating
Where you have bought a piece of land with the intention of having a new house built on it VAT will not usually be chargeable on construction costs and materials. This is because the builder can charge VAT at the zero rate on these services.
This would include typical situations like buying a bungalow, demolishing it and rebuilding a house on the site or converting a commercial building or a barn into a new home. Zero rating can also apply to approved alterations to listed buildings where listed building consent has been obtained.
Zero rating will not apply if you intend to build a new house which isn’t capable of being sold in its own right. So, if you are converting an outbuilding into a dwelling for a member of your family but the planning permission does not allow the “new dwelling” to be sold separately from the main property then zero rating will not apply and your builder will have to charge VAT at the full rate.
It is important to note that even where zero rating does apply it is pretty much limited to the labour supplied and materials used in the construction of or included in the fabric of the building and each case and the apportionment of the zero rating allowance to materials used and works done needs to be carefully considered.
Professional Services supplied in respect of architects, design consultants and project management fees are not capable of attracting the zero rate on their own but the VAT you incur on these could be mitigated in a couple of ways if you approach things in the right way from the outset.
One way to eliminate the VAT on these professional services is to get your builder to engage these professionals for you and provide the services directly. The builder can recharge you for these costs under a single lump sum contract known as a “design and build contract”. If that is not possible and you want a more hands on approach then you can set up your own company to do that for you. Your company will contract to provide design and build services to you at cost engaging the builder and the professional advisers and so long as that company is VAT registered, it can charge you VAT at the zero rate and recover the Vat on the professional aspects neutralising the VAT costs.
Reclaiming VAT
If you are doing the build yourself, so long as you are creating new dwellings capable of being sold in your own right and you are not building or converting with the intention of selling or letting the property (at least in the foreseeable term, you are not barred from future sales) then you can reclaim the VAT on the cost of materials you have bought yourself from suppliers.
Again there are materials which qualify and some that don’t but any good VAT adviser can manage this for you and agree the amount you can reclaim with HMRC.
Reduced 5% Rate
There are also some things which can qualify for a reduced rate of VAT (5%) such as converting a house into self-contained flats or bedsits or going the other way and converting flats back into a single dwelling. The 5% rate can also apply to the refurbishment of properties which have not been lived in for at least 2 years.
Extensions and Granny Annexes
But what about things like Granny annexes or extensions?
This is where planning permission is so important. Generally speaking an extension is highly likely to give rise to an irrecoverable VAT cost as in order to reclaim your VAT or qualify for zero rating the key is whether the works create a brand new dwelling which is capable of being sold independently from the main dwelling or building.
If VAT costs are high (20% often is no small sum) and you are planning a Granny Annex then not only does it need its own self-contained status BUT you also need your planning permission to be granted on the basis that you could sell the Annex separately without you having to sell your house or the main building and therefore attention to this element needs to be given at the outset.
Advice
It really doesn’t hurt to have someone look over the tax aspects of a build project for you. It could lead to savings and will certainly help you properly plan project costs.
Anecdotally, a friend of mine was getting ceramic tiles fitted in the kitchen and bathrooms and wood floors throughout the rest of the house fitted by her new build developer all to be fitted for her before she moved in and supplied with the house. The Developer called these “extras” and the sales rep produced an invoice which attempted to charge her VAT on these items a not inconsiderable VAT cost of £1900. A letter later and she was refunded that £1900 which goes to show sometimes it is useful to have someone in the know at hand!
Wednesday, 5 October 2011
Dotting the "I"s and crossing the "t"s - Intra group loans
As a Solicitor, it is not uncommon for me to hear from the FD or Financial Controller of a group of companies that it is not usual practise for them to formalise their intra group lending arrangements.
Though standard terms would usually apply, ensuring that intra group lending was based on a bona fide commercial basis, very often, and even with large PLCs there is not the sort of documentation or evidence of a loan available in the same way you would expect with say an external loan relationship. In fact it is common to find little more than a board minute ( if you are lucky) and some entries on the intra group balance statements.
The recent case of MJP Media Services Limited v HMRC (Upper Tribunal - 2nd September 2011) has highlighted that unless proper evidentiary documentation is kept, a court is unlikely to agree that a "lending relationship" has taken place for the purposes of the loan relationshp rules and this could have a very negative effect on the ability to claim deductions for corporate tax purposes.
http://www.tribunals.gov.uk/financeandtax/Documents/decisions/MJPMediaServicesLtd_v_HMRC.pdf
Furthermore, I can see that this evidentiary burden could have a negative impact wherever a company is expecting the existence of a loan to reduce a tax liability of whatever nature for the company.
Specifically, in the MJP case, the company had not retained copies of bank statements showing that payments had been made and the tribunal was "instead faced with a patchwork of accounting entries and partial documentation".
This case therefore serves as a warning for companies who manage their intra group "loans" in a very informal way. What HMRC and the courts will be expecting to see is a more formal agreement and actual evidence of loan payments being physically made into and from the banks accounts belonging to the relevant companies.
Though standard terms would usually apply, ensuring that intra group lending was based on a bona fide commercial basis, very often, and even with large PLCs there is not the sort of documentation or evidence of a loan available in the same way you would expect with say an external loan relationship. In fact it is common to find little more than a board minute ( if you are lucky) and some entries on the intra group balance statements.
The recent case of MJP Media Services Limited v HMRC (Upper Tribunal - 2nd September 2011) has highlighted that unless proper evidentiary documentation is kept, a court is unlikely to agree that a "lending relationship" has taken place for the purposes of the loan relationshp rules and this could have a very negative effect on the ability to claim deductions for corporate tax purposes.
http://www.tribunals.gov.uk/financeandtax/Documents/decisions/MJPMediaServicesLtd_v_HMRC.pdf
Furthermore, I can see that this evidentiary burden could have a negative impact wherever a company is expecting the existence of a loan to reduce a tax liability of whatever nature for the company.
Specifically, in the MJP case, the company had not retained copies of bank statements showing that payments had been made and the tribunal was "instead faced with a patchwork of accounting entries and partial documentation".
This case therefore serves as a warning for companies who manage their intra group "loans" in a very informal way. What HMRC and the courts will be expecting to see is a more formal agreement and actual evidence of loan payments being physically made into and from the banks accounts belonging to the relevant companies.
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