Schemes designed to dodge stamp duty land tax (SDLT), which cost the public purse £170m a year, will face tough scrutiny from HM Revenue & Customs after a landmark tribunal judgment this week. Regulations have also been laid that will force users of avoidance schemes to disclose them to the authorities, HM Revenue & Customs said.
A First Tier Tribunal ruled against Durham-based Vardy Property Group after it sought to exploit a rule to avoid paying £290,000 of stamp duty on the £7.25m purchase of commercial property in 2006.
The group had sought to use sub-sale relief, an exemption designed to protect house-builders from having to pay stamp duty twice, when they buy land and then sell the houses they have built on it. It structured the purchase through a newly formed unlimited-liability company, which immediately distributed the property as a dividend to the shareholder company. The group claimed that as the final purchaser had paid nothing for the property it was not liable for stamp duty.
But the tribunal found that the unlimited company had not properly carried out company law requirements for declaring a dividend, and that in reality the ultimate owner of the property had indirectly provided the purchase price. Therefore, the avoidance scheme failed and SDLT was due.
Meanwhile, the new regulations on the disclosure of tax avoidance schemes will give HMRC better access to information about them and those who promote and use them, enabling them to be challenged and closed down more quickly, HMRC said.
HMRC’s director general of business tax, Jim Harra, said: ‘This victory at the First Tier Tribunal sends a clear message to tax avoiders that we will challenge avoidance relentlessly.’
Earlier this year, the Solicitors Regulation Authority urged solicitors to think twice before becoming involved in SDLT schemes, and warned the profession to ensure any involvement it has with such schemes complies with the code of conduct.
Richard Collins, executive director, said: ‘In view of the level of concern on the part of HMRC and the fundamental importance of integrity in the provision of legal advice, we will look very closely at the conduct of any firm actively involved in these schemes. Buyers of property are free to use honest and proper tax planning to mitigate their tax liability, but there are a number of risks and misconceptions surrounding SDLT schemes,’ he said.
Head of corporate tax at national firm Pannone, Simon Moulden, also cautioned solicitors who have no expertise in tax law against advising clients on using such schemes. He expressed concern that some schemes that were designed for commercial property are being marketing in residential conveyancing, especially at the low value end.
Moulden warned: ‘The danger for some solicitors is that they have got sucked into marketing schemes offered by third parties as a way of making more cash at a time when margins are tight.’
The Vardy Group said it will not be appealing the decision. A spokeswoman said: 'We went into this arrangement in good faith having been professionally advised, along with many other property investors, that it was a perfectly legitimate and legal course of action. With the benefit of hindsight, it was the wrong decision. Important lessons have been learned as a result, not least taking action that is based entirely upon professional advice,' she said.