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Analysis of HMRC v Vardy Properties (The Vardy Case) TC02242

Cornerstone Tax Advisors         VARDY Commentary

A review of the decision in Vardy (first tier) at first glance appears to produce a “no win” decision for the taxpayer.  However on analysis, several salient points come out:

  • The scheme failed because those implementing it failed to appreciate the requirements of the Companies Acts and, since that failure had not been allowed to succeed by the Judge but merely transferred the liability down from the intermediary company to the shareholder as is the pattern in these distribution in specie cases.
  • The decision that there was a technical defect in the implementation is one of fact and was one of four arguments run by HMRC as to why the subsale was ineffective, namely:
  • That the sub-intermediary purchaser company was acting as an agent and bare Trustee for the end purchaser.  This argument was dismissed having no force as a standalone one.
  • That the distribution in specie was not a transaction as there was no consensual or multipartite element in it.  This matter was dismissed by the judge following the ratio in Greenberg v IRC (1972) AC109 at P137A quoting “The word transaction is normally used to denote some bilateral activity but it can be used to denote an activity in which any single person is engaged.”  The judge found that a Declaration of Divided was an “other transaction” within the meaning of Section 45(1b) FA03.
  • The sub-purchaser had no right to call for a Conveyance at the requisite time.  I.e. that the original purchase had to be completed before such call might take effect and that therefore there was no simultaneity between the completion of the original purchase and the payment of the dividend in specie.  This argument was dismissed by the Court.
  • Breach of the Companies Act 1985.  HMRC argue that since the provisions of Section 270(4) CA85 had not been complied with, the dividend was not lawful and was therefore voidable.  As such therefore the beneficial interests in the property had not moved from the intermediary purchaser to the shareholders.  The distribution in specie was not lawfully made and the end purchaser shareholders were in fact at that point constructive trustees for the company.  The Court held this to be a matter of fact and therefore decided that Section 45 was not engaged.

The Appeal of the intermediary purchaser was therefore dismissed and the appeal of the end purchaser shareholder company allowed.  This at least avoided double taxation.

In the Obiter, the judge went on to consider the position, had the Companies Act provisions been complied with, as to what chargeable consideration could be attributed to the secondary contract.  The following salient points were made:

  • That sequential transactions are within the schema and intention of the Statute in relation to the phrase “at the same time as” in Section 45(3).  So had there not been a defective in the dividend, Section 45 would have been activated as regards the intermediary company.
  • The second argument surrounded what the chargeable consideration to be imputed to the transaction under Section 45 would have been.

HMRC contended that it should have been the full £7.25 million on the basis that it was paid not for the subscription for shares but as an advance payment, evidenced by the subscription of shares, of the consideration for the secondary contract, bringing it into the scope of 45(3)(b)(i).  The taxpayer argued that 45(3)(b)(i) only applied to assignments and novations  i.e., transfers of rights and that subsales are specifically covered by 45(3)(b)(ii) which did not allow the classification of monies paid in advance (whether directly or for indirectly) to be imputed to the secondary contract.

The judge disagreed, wrongly in our view, and managed to conflate subsales where there is no transfer of rights but merely successive transfer of titles, with transfers of rights, i.e., assignments and novations of contracts.  Thereby bringing the consideration paid by the sub-purchaser for its shares into 45(3)(b)(i) leading to his conclusion that there was tax due on the full £7.25 million.

It seems on any analysis. by those understanding the difference between transfers of rights and transfer of title. that a back to back transfer of property cannot in any way be a “transfer of rights” within the meaning of the legislation or indeed within the meaning of the Law of Property Act!

Consequently, and absent any implementation defect, this decision would have been highly appealable by the taxpayer and liable to overturn by the Courts solely on that point of construction.

Since this is a lower tier decision there is absolutely no binding precedent and HMRC’s press releases they had “closed a tax dodge” were both premature, inaccurate and misleading.

David Hannah
26 September 2012


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