Project Blue Limited - The Judgment of the Court of Appeal

The Court of Appeal has held that Project Blue Limited (PBL) does not have a liability to pay Stamp Duty Land Tax (SDLT) for the acquisition of the Chelsea Barracks from the Ministry of Defence (MoD / MOD). Rather, the court found that it was Masraf al Rayan (MAR), the bank providing the Ijara financing to PBL which should have been assessed for the SDLT liability (although MAR is protected against assessment by time limits and procedure).

This decision is surprising and one which commentators had not expected. There have now been three decisions in this case, all of which have come to different conclusions. The general expectation is that acquisitions of property with the use of Ijara lease finance should not incur an SDLT liability for the bank as they are subject to specific alternative finance reliefs from SDLT.

In the context of a transaction that was disclosed under the disclosures of tax avoidance schemes (DOTAS) regime and on which there was no SDLT paid by any party, the Court of Appeal found that the contract between the MoD and PBL was to be disregarded for SDLT purposes. As PBL transferred the property to MAR prior to the completion of its contract with the MoD, MAR was found by the Court of Appeal to have acted as the purchaser of the property for SDLT purposes directly from MoD. Accordingly, PBL was not liable for SDLT.

Although the sale was treated as taking place between MoD and MAR, the Ijara lease, was, however, granted by MAR to PBL. As the Court of Appeal analysed the transaction as not involving a sale and leaseback between the same parties, the alternative finance exemption from SDLT could not apply to MAR.

In addition, the Court of Appeal held that if this was incorrect, it would still be MAR who was liable to pay SDLT under the anti-avoidance provisions in the SDLT legislation rather than PBL. Again, this was on the basis that the court considered that MAR was the purchaser.

We do not consider that this decision will impact on plain vanilla financing of a routine nature for Islamic finance providers. Given the unexpected nature of this decision, we fully expect HMRC to appeal this decision to the Supreme Court although this will take some time.

In the interim, where you are providing Islamic financing you should always ensure that the agreements relating to land that you enter into contain full indemnities protecting you against any SDLT liabilities that may arise.  It is important that such indemnities are drafted carefully.

If you have any queries regarding the above, please do contact us.