HMRC Failed Tax Bid

A recent tax case in which the UK Tax authorities (HMRC) failed in a legal bid to recover up to £50m in stamp duty demonstrates the complex nature of Islamic financial transactions.

Three Court of Appeal judges decided that HMRC had pursued the wrong party for the tax. The purchaser, a firm owned by the Qatar Investment Authority, had used an Ijara structure to fund the purchase of Chelsea Barracks.

The tax office had won a decision in a tribunal in December 2014 for £38m stamp duty land tax to be paid, based on a £959m purchase price for the site. However, this decision was then taken to the Court of Appeal.

Project Blue

HMRC then sought stamp duty land tax worth £50m against the £1.25bn paid by the bank to Project Blue – a figure that as well as the £959m purchase price included tax and further development costs.

According to the court, section 75A of the 2003 Finance Act did not apply because the acquisition of the land by a bank as part of a Shari’a compliant financing arrangement should have been subject to SDLT, even though HM Revenue and Customs (HMRC) could no longer collect the SDLT from the bank.

Lord Justice Patten said that section 71A, the relief for Islamic finance structures, did not apply to MAR’s acquisition of the property, as the relief was combined with sub-sale relief.

“The scheme of s.71A seems to have been to limit SDLT in all cases to a single charge on the acquisition of the property from the third party vendor whether by the financial institution or its customer,” he said. “It therefore seems strange that parliament should, in the case of a sub-sale or similar arrangement to which s.45(3) applies, have decided that both the acquisition of the property by the customer and its later acquisition by the financial institution should be SDLT free.”