Brown v Commissioners for His Majesty's Revenue & Customs: Establishing the Principle of Indirect Consideration in SDLT Avoidance Schemes

Introduction

The case of Brown v Commissioners for His Majesty's Revenue & Customs ([2024] EWCA Civ 92) addresses the legality of a scheme employed by Mr. and Mrs. Brown to acquire a freehold property in Surrey without incurring Stamp Duty Land Tax (SDLT). The Browns utilized a structured plan involving an unlimited company to circumvent SDLT obligations. Both the First-tier Tribunal (FTT) and the Upper Tribunal (UT) initially dismissed the scheme's validity, leading to the current appeal in the Court of Appeal. The core issues revolve around whether the scheme effectively avoided SDLT and the interpretation of consideration under section 45 of the Finance Act 2003.

Summary of the Judgment

The Court of Appeal upheld the decisions of the FTT and UT, determining that the scheme employed by the Browns did not successfully avoid SDLT. The key finding was that the consideration for the property transfer was given indirectly by Mr. and Mrs. Brown through their involvement with the unlimited company, Earlswood. Consequently, SDLT was deemed payable on the acquisition of the property. The court emphasized the purposive interpretation of the Finance Act 2003, rejecting the Browns' arguments that relied solely on the mechanical aspects of the transaction.

Analysis

Precedents Cited

The judgment extensively references several key cases that influenced the court’s reasoning:

Rossendale BC v Hurstwood Properties (A) Ltd [2021] UKSC 16 - This Supreme Court decision established the principle of purposive interpretation, especially concerning schemes aimed at tax avoidance. The court held that such schemes should be disregarded if they lack a substantive business purpose besides tax avoidance.
Vardy Properties v HMRC [2012] UKFTT 564 (TC) - This case supported the notion that funds provided for property acquisition through a company controlled by the purchasers constitute indirect consideration.
Mayes v HMRC [2011] EWCA Civ 407 - Highlighted the importance of evaluating the overall scheme rather than dissecting its individual steps, especially when steps are pre-ordained for tax avoidance.
Project Blue Ltd v HMRC [2018] UKSC 30 - Clarified the scope of HMRC’s authority in amending SDLT returns based on notional transactions.

Legal Reasoning

The court applied a purposive interpretation to the Finance Act 2003 provisions, focusing on the legislative intent to prevent tax avoidance. Section 45 of the Act was central, which deals with sub-sale relief and the definition of consideration. The Browns argued that the consideration was not directly provided by them but was facilitated through the unlimited company. However, the court found that the consideration was indeed given indirectly by the Browns as per the statutory definitions and the overall scheme’s design aimed at SDLT avoidance.

Moreover, the court rejected the Browns' attempt to isolate the transactional mechanics, emphasizing that the substance of the transactions and their alignment with legislative intent outweighed their formalistic arguments.

Impact

This judgment reinforces the judiciary's stance against tax avoidance schemes that, while structurally legal, lack substantive economic purpose beyond tax benefits. It underscores the importance of comprehensively evaluating the entire scheme rather than mere formalistic compliance. Future cases involving SDLT and similar taxes will likely reference this decision when assessing the legitimacy of complex transactional structures designed to minimize tax liabilities.

Additionally, the ruling clarifies the interpretation of "indirect consideration" under section 45, setting a clear precedent that using vehicles like unlimited companies to effectuate property transfers without direct financial transactions does not exempt purchasers from SDLT obligations.

Complex Concepts Simplified

Stamp Duty Land Tax (SDLT)

SDLT is a tax levied on the purchase of land or property in the UK. It replaced the old stamp duty system to create a more comprehensive and less avoidable tax structure.

Section 45 of the Finance Act 2003

This section deals with sub-sale relief, aiming to prevent double taxation in subsequent transactions involving property. It defines what constitutes consideration in property transactions, including indirect payments.

Purposive Interpretation

A method of statutory interpretation that focuses on the purpose and intent behind the law, rather than just the literal meaning of its words. This approach is crucial in addressing schemes aimed solely at circumventing tax laws.

Chargeable Interest

Under the Finance Act 2003, a chargeable interest refers to any interest in land that is subject to SDLT. This includes freehold interests and certain leasehold interests.

Notional Transaction

A legal fiction used to assess tax liabilities where the actual transaction structure is designed to minimize tax. It allows tax authorities to treat the transaction as if it occurred in a different form more aligned with legislative intent.

Conclusion

The Court of Appeal's decision in Brown v Commissioners for His Majesty's Revenue & Customs serves as a significant precedent in anti-avoidance jurisprudence related to SDLT. By affirming that indirect consideration through a controlled company structure does not exempt purchasers from SDLT, the judgment deters the use of complex transactional schemes solely aimed at tax avoidance. The ruling emphasizes the judiciary's commitment to upholding the legislative intent of tax laws, ensuring that taxpayers fulfill their obligations despite creative structuring efforts. This case will guide future litigations and tax planning strategies, highlighting the necessity for genuine economic substance in property transactions.