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]:

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:

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:

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

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]:

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]:

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]:

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.