Oisin Fanning v The Commissioners for HMRC

This appeal turns principally on the interpretation of s.45, which operates in part as a deeming provision. I should therefore start with a reminder of the relevant general principles.

The modern approach to statutory interpretation was conveniently summarised by Lewison LJ in Pollen Estate Trustee Co Ltd v HMRC [2013] EWCA Civ 753; [2013] STC 1479 at [24]:

“24.

The modern approach to statutory construction is to have regard to the purpose of a particular provision and interpret its language, so far as possible, in a way which best gives effect to that purpose. This approach applies as much to a taxing statute as any other: see Inland Revenue Comrs v McGuckian [1997] 1 WLR 991, 999; Barclays Mercantile Business Finance Ltd v Mawson [2005] 1 AC 684, para 28. In seeking the purpose of a statutory provision, the interpreter is not confined to a literal interpretation of the words, but must have regard to the context and scheme of the relevant Act as a whole: see WT Ramsay Ltd v Inland Revenue Comrs [1982] AC 300, 323; Barclays Mercantile Business Finance Ltd v Mawson, para 29. The essence of this approach is to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description. Of course this does not mean that the courts have to put their reasoning into the straitjacket of first construing the statute in the abstract and then looking at the facts. It might be more convenient to analyse the facts and then ask whether they satisfy the requirements of the statute. But however one approaches the matter, the question is always whether the relevant provision of statute, on its true construction, applies to the facts as found: see Barclays Mercantile Business Finance Ltd v Mawson, para 32.”

It is worth adding to this the following observation by Simler LJ in Eynsham Cricket Club v HMRC [2021] EWCA Civ 225; [2021] STC 496:

“45.

It is also common ground that the court should seek to avoid a construction that produces an absurd result, since this is unlikely to have been intended by Parliament. Thus the court will presume that Parliament did not intend a construction that would operate in a way that is unworkable, impracticable, anomalous or illogical (see the observations of Lord Kerr of Tonaghmore JSC in R v McCool [2018] 1 WLR 2431, paras 24 and 25, endorsing passages from Bennion on Statutory Interpretation, 6th ed (2013), section 312).”

Since these cases were decided the Supreme Court has returned again to the topic of the modern purposive approach to statutory interpretation in Rossendale Borough Council v Hurstwood Properties (A) Ltd [2022] AC 690. In their judgment Lords Briggs and Leggatt emphasised the central importance of identifying the purpose of legislation, as follows:

“10.

There are numerous authoritative statements in modern case law which emphasise the central importance in interpreting any legislation of identifying its purpose. Two examples will suffice. In R (Quintavalle) v Secretary of State for Health [2003] 2 AC 687, para 8, Lord Bingham of Cornhill said:

‘Every statute other than a pure consolidating statute is, after all, enacted to make some change, or address some problem, or remove some blemish, or effect some improvement in the national life. The court’s task, within the permissible bounds of interpretation, is to give effect to Parliament’s purpose. So the controversial provisions should be read in the context of the statute as a whole, and the statute as a whole should be read in the historical context of the situation which led to its enactment.’

In Bloomsbury International Ltd v Department for Environment, Food and Rural Affairs [2011] 1 WLR 1546, para 10, Lord Mance JSC stated:

‘In matters of statutory construction, the statutory purpose and the general scheme by which it is to be put into effect are of central importance … In this area, as in the area of contractual construction, ‘the notion of words having a natural meaning’ is not always very helpful (Charter Reinsurance Co Ltd v Fagan [1997] AC 313, 391C, per Lord Hoffmann), and certainly not as a starting point, before identifying the legislative purpose and scheme.’

See further Lowe and Potter, Understanding Legislation (2018), paras 3.45–3.48 (and cases there cited).”

The correct approach to deeming provisions was summarised by Lord Briggs in Fowler v HMRC [2020] UKSC 22; [2020] STC 1476 at [27]:

“There are useful but not conclusive dicta in reported authorities about the way in which, in general, statutory deeming provisions ought to be interpreted and applied. They are not conclusive because they may fairly be said to point in different directions, even if not actually contradictory. The relevant dicta are mainly collected in a summary by Lord Walker of Gestingthorpe JSC in DCC Holdings (UK) Ltd v Revenue and Customs Comrs [2011] 1 WLR 44, paras 37-39, collected from Inland Revenue Comrs v Metrolands (Property Finance) Ltd [1981] 1 WLR 637, Marshall v Kerr [1995] 1 AC 148 and Jenks v Dickinson [1997] STC 853. They include the following guidance, which has remained consistent over many years:

(1)

The extent of the fiction created by a deeming provision is primarily a matter of construction of the statute in which it appears.

(2)

For that purpose the court should ascertain, if it can, the purposes for which and the persons between whom the statutory fiction is to be resorted to, and then apply the deeming provision that far, but not where it would produce effects clearly outside those purposes.

(3)

But those purposes may be difficult to ascertain, and Parliament may not find it easy to prescribe with precision the intended limits of the artificial assumption which the deeming provision requires to be made.

(4)

A deeming provision should not be applied so far as to produce unjust, absurd or anomalous results, unless the court is compelled to do so by clear language.

(5)

But the court should not shrink from applying the fiction created by the deeming provision to the consequences which would inevitably flow from the fiction being real. As Lord Asquith memorably put it in East End Dwellings Co Ltd v Finsbury Borough Council [1952] AC 109, 133:

‘The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs.’”

Rather than analysing ss.45(1) and (3) separately as the grounds of appeal might suggest, it is important to consider s.45 as a whole and in its statutory context in order to determine the nature of the transaction to which s.45(1)(b) is intended to apply and whether the actual transaction in this case answers to that description. In doing so, I will use the labels “V” and “P” to describe the vendor and purchaser under the “original contract” referred to in s.45(1)(a), “T” to describe the further person referred to in s.45(1)(b) and the “land” to describe the subject matter of the relevant transactions referred to in each of ss.45(1)(a) and (b) (ignoring the fact that strictly the subject-matter would be an interest in land). For simplicity I will also assume that, as in this case, the land and the interest in it to which each transaction relates is precisely co-extensive.

Section 45(1) describes the situations in which s.45 can apply. Section 45(1)(a) envisages an “original contract” (between V and P) which “is to be” completed by a conveyance. Its wording replicates that of s.44(1), the provision that determines what transactions fall within the scope of s.44. Thus, any contract within s.45(1)(a) will also be within the scope of s.44.

Section 45(1)(b) requires there to be an “assignment, subsale or other transaction” related to the same land as the contract referred to in s.45(1)(a), as a result of which T “becomes entitled to call for a conveyance” of the land. That further transaction is defined as a “transfer of rights”. It is apparent from s.45(1)(a) and the tailpiece to s.45(3) that, for s.45 to have any application, such a transaction would need to be entered into prior to, or at least no later than, substantial performance or completion of the contract between V and P.

It is clear from s.45(1)(b) that Parliament intended s.45 to apply to transactions under which P either assigned their rights under the original contract or entered into a further contract to sell the land (a subsale). The words “or other transaction” which follow must be construed in their context. The specific references to assignment and subsale, combined with the definitional words “transfer of rights” and the related use of “transferor” and “transferee” in the closing words of s.45(1), provide a strong flavour of the kinds of transaction to which s.45 was intended to apply. Further and importantly, the transaction must be of a kind under which T “becomes entitled” to call for a conveyance. It does not say “may” or “might” become entitled. Rather, and as discussed further below, it envisages that, at least at the time as at which s.45 falls to be applied, T has in fact become entitled to call for a conveyance.

All these elements of the language of s.45(1)(b) provide strong indications that what s.45 is intended to apply to is transactions the substance of which is an agreement that T will acquire the land instead of P.

Section 45(2) provides that s.44 “has effect” in accordance with the following provisions of s.45. That is an important point to bear in mind in construing s.45. Its operative provisions do not apply in isolation, but instead modify the effect of s.44. Thus s.44 must be read with the modifications made to it by s.45. As Lewison LJ said in DV3 RS LP v HMRC [2013] EWCA Civ 907; [2013] STC 2150 (“DV3”) at [20]:

“[Section 45(2)] showed that the deeming provisions in s 45 had a limited purpose. Its sole purpose was to modify the operation of s 44. … But s 44 is one of a group of sections (ss 43–47) which define what is (and what is not) a land transaction. A land transaction is the acquisition of a chargeable interest. Thus s 44 is a key provision of the SDLT code which is applied generally in order to identify a land transaction; in other words what counts as the acquisition of a chargeable interest... The real question, in my judgment, is how s 44 operates, when you have made the modifications required by s 45.”

The key operative provision is s.45(3). The first, and important, point to note is that it provides for a deemed contract (the “secondary contract”). The suggestion that the secondary contract is the actual contract entered between P and T (in this case the Option) is contrary to the express words of s.45(3) and is clearly wrong.

Section 45(3) tells us only a limited amount about the terms of the deemed contract. We are told that it is a contract for a land transaction under which T is the purchaser, and we are told what the consideration is. Nothing is expressly said about the other terms.

However, the tailpiece to s.45(3) refers to the “substantial performance or completion of the secondary contract”. This can only refer to an actual event or transaction, rather than to a deemed event. So we need to determine what would amount to (actual) substantial performance or completion of the deemed contract.

Further, it is clear that whatever deeming is required to be done must be done for the purposes of the application of s.44: see s.44(2) and the reference to “[s.44] applies” in the first line of s.44(3). This, combined with the fact that the secondary contract is deemed to be a contract for a land transaction, provides a clue. The secondary contract must be of a kind to which s.44, and its concepts of substantial performance and completion “by a conveyance” (see s.44(1)), can apply. We also need to continue to bear in mind that s.45 is only engaged where T “becomes entitled” to call for a conveyance: s.45(1).

In DV3 at [21], Lewison LJ accepted an argument of the taxpayer in that case that for the purposes of s.45(3) it was illegitimate to disregard the reality of the contract between V (Legal & General Assurance plc in that case) and P and the contract between P and T (the taxpayer in that case), or the transfers that amounted to the completion of each of those contracts. He referred to the definition of completion in s.44(10) and commented that it would be impossible to decide whether there had been completion between the same parties and “in substantial conformity with the contract” as that provision requires without identifying the parties to each contract and the parties to each transfer. He rejected the argument that a fictional contract between V and T could be constructed, on the basis that the real-world transactions could not be ignored. Lewison LJ’s comments at [24] applied the same approach to substantial performance, explaining that it was by reference to the terms of the relevant contract that it could be ascertained whether there had been either completion or substantial performance.

I agree. Section 45(3) requires a determination of what amounts to substantial performance or completion of each of the (actual) contract between V and P, and the (deemed) contract between P and T. There is no difficulty with the former, and the latter must also relate to a real-world event. That event can only be the substantial performance or completion of the actual transaction with T.

A transaction can only fall within s.45(1)(b) if it is one under which T “becomes entitled to call for a conveyance”. Completion of such a contract logically requires a conveyance, as contemplated by the contract. This is reinforced by the fact that s.45 modifies the operation of s.44, which postulates a contract that is to be completed by a conveyance. Conceptually, two transactions are envisaged to which T is a party, namely: (i) the assignment, subsale or other transaction to which s.45(1)(b) applies (the transfer of rights); and (ii) the conveyance which T become entitled to call for as a result of that transfer of rights. This is also consistent with the fact that the transfer of rights is deemed by s.45(3) to give rise to a “contract for” a land transaction.

Section 44 also tells us what “completion” means and what amounts to substantial performance. Section 44(1) envisages completion by a conveyance and s.44(10) requires completion to be in substantial conformity with the contract. Subsections (5)-(7) define substantial performance by reference, broadly, to entry into possession or the payment of a substantial amount of the consideration.

There is no difficulty applying these provisions to a subsale by P to T or an assignment by P to T of its rights under its contract with V. The contract between P and T would be completed by a conveyance and, if that occurred at the same time as and in connection with the completion of the contract between V and P, then s.45(3) would ensure that there was a single charge to SDLT on (broadly) the total amount paid by T. The same would apply if the contracts were substantially performed.

An option is different. Unless and until it is exercised it cannot be described as a contract which “is to be” completed by a conveyance, within s.44(1). That in turn supports an interpretation of “becomes entitled” in s.45(1)(b) that requires T to have a present entitlement to call for a conveyance, at least at the time as at which s.45, and therefore s.44, falls to be applied. In other words, by the point that the completion or substantial performance in favour of P occurs, which is the time at which P would need to satisfy the requirements of s.45 in order to qualify for relief from SDLT, T would need to have become entitled to call for a conveyance. The grantee of an option has no such entitlement unless and until the option is exercised. On the facts of this case, as the UT held at [34], the application of s.45 must be tested as at 16 September 2011, the date on which Forms TR1 were executed transferring the Property to Mr Fanning. It was at that time that any charge to SDLT arose.

If T did have an entitlement to call for a conveyance, and completion or substantial performance in T’s favour occurred at the same time as completion or substantial performance in favour of P in accordance with s.45(3), then relief could be available. But it is clear from the reference to entitlement to call for a conveyance in s.45(1)(b) and the way in which s.45 modifies the operation of s.44 – which applies to a transaction which “is to be completed by a conveyance” – that “completion” of the deemed secondary contract would need to be by means of a conveyance rather than by anything falling short of that. Similarly, substantial performance of the deemed secondary contract would require either an entry into possession of the land within s.44(5)(a) or the payment of a substantial amount of the consideration which would become due if completion occurred.

This would not necessarily exclude all transactions that involved options from amounting to a “transfer of rights”. A simple example would be a grant of an option over the land by P to T which is exercised before the contract between V and P completes, with completion of both the V-P and P-T transactions occurring simultaneously. In that scenario it may be the case that T could be treated as having “become entitled” to take a conveyance prior to the time at which s.45 would fall to be applied, namely the date of completion of the V-P transaction. Section 45 might then apply by reference to the transaction resulting from the exercise of the option.

In summary, a natural interpretation of the statutory language leads to the conclusion that the grant of an option does not, without more, answer the statutory description in s.45(1)(b). It is not an “other transaction” as referred to in that provision.

This conclusion is also consistent with the obvious policy objectives. SDLT is a tax on transactions. Section 44 is a key provision that imposes SDLT on transactions of the kind entered into between Glendale and Mr Fanning. Section 45 is a relieving provision that, broadly, prevents a double charge arising under s.44 where its conditions are met. As Vos LJ explained in R (oao St Matthews (West) and others) v HM Treasury [2015] EWCA Civ 648; [2015] STC 2272 at [7]:

“The Finance Act 2003 aimed to place the burden of SDLT on the person who was to acquire the use and enjoyment of the property in question, and to reduce that burden on those with only a transient interest in the property.”

There is a longer description of the policy in Andrews J’s decision in that case at first instance, [2014] EWHC 1848 (Admin); [2014] STC 2350 at [7]-[14]. That discussion also refers to the Explanatory Notes that were provided at the Report Stage of the Finance Bill 2003, when the then clause 45 was amended to introduce the relief. (As originally drafted clause 45 was a taxing provision, designed to ensure that P and T both paid SDLT.) The notes refer to giving relief in certain circumstances to “intermediate contracting purchasers” where they transfer their rights without completing. As Andrews J said at [12]:

“Thus the aim of what became s 45 of the FA 2003 was to place the taxation burden on the person who is going to have the use and enjoyment of the property.”

Parliament cannot readily be taken to have intended that s.45 should provide a means of avoiding SDLT altogether by the simple mechanic of the grant of an option, in circumstances where it is P and not T who ends up with the enjoyment of the land. It is no response to this that SDLT would be charged in the event that the option was exercised at a later date and the land was conveyed to T. The option may never be exercised. Further, if the option was exercised then that would be a different transaction that would be subject to SDLT in the normal way in accordance with s.44.

In my view s.46 does not have a material impact on the analysis. It has the effect that the grant of an option is itself a chargeable transaction for SDLT purposes. This would be somewhat at odds with s.45(2) if an option could also fall within s.45, because that provision specifically provides that a transfer of rights is not to be treated as giving rise to a land transaction. That is a slight indicator that s.45 and s.46 were intended to deal with distinct rather than overlapping concepts, but the point is very far from being determinative.

I am also not assisted by the cases Mr Hickey relies on that establish that an option creates an equitable interest in land that fetters Mr Fanning’s ability to deal with the Property. None of that is in dispute, but it does not establish that an option falls within s.45(1)(b). As Hoffmann J indicated in Spiro v Glencrown Properties at 544G-H, the question is not how an option should be analysed in isolation, but specifically in the context of the statutory provision in question (in that case s.2 of the Law of Property (Miscellaneous Provisions) Act 1989).

My conclusion on the scope of s.45 means that I do not consider it necessary to consider the second and third grounds of appeal. However, since they were dealt with in some detail in the FTT and UT and were subject to argument before us I will address them briefly.

In short, I would agree with the UT that s.45(3)(b)(i) is not engaged. Mr Fanning and San Leon are not connected and HMRC do not contend that San Leon gave any part of the consideration payable by Mr Fanning to Glendale for the purposes of that paragraph.

Section 45(3)(b)(ii) is more difficult. Mr Fanning’s position is that the consideration given for the transfer of rights, namely the option, was the £100 paid for it. That analysis therefore requires the consideration to be limited to the amount paid at the point that the option is granted, rather than taking account of the consideration payable on any later exercise of the option. However, on the hypothesis that the analysis already discussed about the scope of “transfer of rights” is wrong and that it can include an option, I see that point. The real reason Mr Fanning’s case cannot succeed is that, without more, an option is not the kind of “transfer of rights” to which s.45 applies. Although the UT reached a different conclusion on this point, on analysis the reasoning was similar. The UT focused on the need for the Option to be exercised to give rise to an entitlement to a conveyance, and commented that the conceptual difficulty to which its approach gave rise reinforced the conclusion that s.45(1)(b) did not apply (see [47]-[48]).

Similarly, Mr Fanning’s case rests on the Option being substantially performed by reason of the payment of the option premium, and/or alternatively being completed at the date of grant, such that the tailpiece to s.45(3) is engaged. Again, the reason why that is incorrect is because an option is not the sort of transaction to which s.45 applies for reasons that include the fact that the statute contemplates completion by a conveyance, and that the concept of substantial performance must be interpreted by reference to completion by that means.

In view of the conclusion reached, it is unnecessary either to determine HMRC’s alternative argument that s.75A applied to the scheme, or to remit the case to the Upper Tribunal so that that question may be decided.

In conclusion, I would dismiss the appeal.