Elizabeth Court (Bournemouth) Ltd v HM Revenue and Customs

This is the appeal of Elizabeth Court (Bournemouth) Ltd, to which I shall refer as “the Company”, from the decision of the Special Commissioner, Dr Nuala Brice made on 27 November 2007, dismissing its appeal against the closure notice of Her Majesty's Revenue and Customs, refusing it a refund of stamp duty land tax paid in respect of two transactions effected on 21 January 2005.

The transactions in question were the acquisition of the freehold and leasehold reversions to a block of flats, known as Elizabeth Court, at East Cliff Bournemouth, as nominee purchaser for 117 out of 131 flat owners. The aggregate purchase price was £920,000, attracting a liability to stamp duty land tax of £33,125.

The claim for a refund of that tax is based on the application of section 74 of the Finance Act 2003. So far as relevant that section provides:

“(1)

This section applies where a chargeable transaction is entered into by an RTE company in pursuance of a right of collective enfranchisement.

(2)

In that case, the rate of tax is determined by reference to the fraction of the relevant consideration produced by dividing the total amount of that consideration by the number of flats in respect of which the right of collective enfranchisement is being exercised.

(3)

The tax chargeable is then determined by applying that rate to the chargeable consideration for the transaction.

(4)

In this section—

(a)

“RTE company” has the meaning given by section 4A of the Leasehold Reform, Housing and Urban Development Act 1993 (c. 28);

(b)

“right of collective enfranchisement” means the right exercisable by an RTE company under—

(i)

Part 1 of the Landlord and Tenant Act 1987 (c. 31), or

(ii)

Chapter 1 of Part 1 of the Leasehold Reform, Housing and Urban Development Act 1993 (c. 28); and

(c)

“flat” has the same meaning as in the Act conferring the right of collective enfranchisement.

(5)

References in this section to the relevant consideration have the same meaning as in section 55.”

The issue is whether that section applies to the acquisition of the reversions to Elizabeth Court. If it does, the liability to stamp duty land tax is nil. To determine the issue, it is necessary to consider, in some detail, the nature of the right of collective enfranchisement for which chapter 1 of part 1 of the Leasehold Housing and Urban Development Act 1993, to which I shall refer as the 1993 Act, in (1) its original form (2) as amended at the time the provisions of the Finance 2003 relating to stamp duty land tax come into force and (3) its form as proposed to be amended by the Commonhold and Leasehold Reform Act 2002, to which I shall refer as the 2002 Act.

The 1993 Act conferred rights of collective enfranchisement on qualifying tenants of residential blocks of flats called a right of collective enfranchisement. Section 1 was, so far as relevant, in the following form:

“This Chapter has effect for the purpose of conferring on qualifying tenants of flats contained in premises to which this Chapter applies on the relevant date the right, exercisable subject to and in accordance with this Chapter, to have the freehold of those premises acquired on their behalf--

(a)

by a person or persons appointed by them for the purpose, and

(b)

at a price determined in accordance with this Chapter;

and that right is referred to in this Chapter as “the right to collective enfranchisement.”

That right was exercisable in accordance with the provisions of section 13, namely,

I should also refer to section 15 of the 1993 Act. Subsection (2) defined a nominee purchaser as, and I quote:

Section 15(1) provided that, and I quote:

On 26 July 2002, Royal Assent was given to the 2002 Act. Only some sections then came into force; the operation of the rest depended on the making of commencement orders.

Section 120 was brought into force with effect from 26 July 2002 and it repealed the residence condition formerly contained in section 13(2)(b)(i) of the 1993 Act.

Sections 121 to 125 made substantial amendments to the provisions in the 1993 Act relating to the right of collective enfranchisement but they had not been brought into force at the time section 74 of the Finance Act 2003 was enacted and, indeed, still have not been. Those, if I may put it this way, embryonic amendments, are set out in those sections and in schedule 8 to the 2002 Act in paragraphs 3 and following, would have four particular effects. First, they would have amended section 1 of the 1993 Act so as to confer the right of collective enfranchisement on an RTE company, as defined, of which qualifying tenants of flats contained in the premises are members. Second, they would have inserted new sections: 4(a), 4(b) and 4(c) so as to define the term "RTE Company", section 4(A), introduce conditions as to the membership of the company, section 4(B), and authorise the Secretary of State to make regulations as to the required form and content of the Memorandum and Articles of an RTE company, section 4(C). Third, they would have amended section 13(2) of the 1993 Act so as to require that the initial notice for which subsection 1 provides, should be given by an RTE company which has, amongst its participating members, the requisite number of qualifying tenants. And fourth, it substituted the RTE company for the expression "Qualifying Tenants" in numerous different contexts in the 1993 Act.

In September 2002, the Office of the Deputy Prime Minister published a consultation paper which included specimen memorandum and articles for an RTE company. A year later, on 2 September 2003, the second of the three companies bearing the name of the Company was incorporated. That company did not comply with the requirements of section 4(A) to be an RTE company and was, in due course, succeeded by the third company which is the Company which is the appellant.

On 21 November 2003, there was a participation agreement between the second company and the various individual defendants. On 10 July 2003, the Finance Act 2003 was given the Royal Assent and it was to come into force as and when schedule 19 so required, and that date was 1 December 2003, when the stamp duty land tax was duly introduced and came into force.

I have already quoted section 74. Points to be noted are, first, the conditions for the application of the section, as laid down in subsection 1 and, second, the definitions of, first, an RTE company and, second, the right of collective enfranchisement contained in subsection (4)(ii).

On 9 January 2004, the initial notices required by section 13 of the 1993 Act to acquire the freehold and leasehold reversions were given by the second company as nominee purchaser to the respective owners. The landlords served counter notices on 9 March 2004 admitting that the participating tenants were, on the relevant date, entitled to exercise the right to collective enfranchisement conferred by section 1 of the 1993 Act.

On 22 December 2004, the Company, that is the appellant, was incorporated. It is accepted that it is a company limited by guarantee and its membership does satisfy the requirements of section 4(A) as referred to in section 74 of the Finance Act 2003. The following day, it changed its name to that of the second company, and that is the name it now bears.

Two days later, it gave notice to the landlords to substitute its name for the second company “as the new nominee purchaser". The Company, the appellant, on 21 January 2005, bought the freehold and leasehold reversions, for the sum I mentioned, and paid the stamp duty land tax it now seeks to have refunded.

On 8 and 9 June 2005 after certain intermediate correspondence, Her Majesty's Revenue and Customs claimed that relief under section 74 of the Finance Act 2003 was not available as, "The legislation to allow the creation of RTEs has still not been enacted". As a consequence, on that date, they issued notices of inquiry. The inquiry was terminated by closure notices give on 30 January 2006 refusing any further refunds.

On 23 February 2006, notice of appeal to the Special Commissioners was given by the appellant and the hearing took place before Dr Brice on 31 October 2007. On 26 November 2007, the Special Commissioner's decision was released.

Her relevant conclusions can be expressed in the form of six propositions: first, it must be recognised that, though the 2002 Act is not in force, it represents the intention of Parliament even though it cannot confer enforceable rights. Second, it is possible to conclude that, because the company complies with the provisions of section 4(A) to be inserted into the 1993 Act and, therefore, with section 74(4)(a) of the Finance Act 2003, the company is an RTE company within the latter statutory provision. Third, that that approach cannot be used in relation to the requirement of section 74(4)(b) that the transaction should be "In pursuance of the right of collective enfranchisement... under the 1993 Act" because it is not; the only right then conferred was on a nominee purchaser. Fourth, in any event, section 4(A) cannot be regarded in isolation; it is one of many interlocking provisions amending the right to collective enfranchisement which has not been brought into force. Fifth, in particular, section 4(A) cannot be read or applied in isolation from sections 4(B) and (C) which depend on events which have not occurred and, sixth, it follows that, before the amendments to the 1993 Act are fully effective, there can be no relief from stamp duty land tax, as envisaged by section 74 of the Finance Act 2003.

In due course, a notice of appeal was given to the court. Counsel for the Company submits that the Special Commissioner was wrong. In summary, he contends that there is no indication that Parliament intended the relief for which section 74 provides should depend on further steps being taken to bring the amendments of the 1993 Act into force. In particular, the company was and is an RTE company at the relevant time, it participated in the chargeable transactions whereby the reversions were required and it exhibited all the characteristics required by section 4(A) incorporated, by reference, into the Finance Act 2003.

The fact that sections 4(B) and 4(C) were not so incorporated and that none of section 4(A), 4(B) and 4(C) is in force in the context of the 1993 Act is, in his submission, immaterial. Section 4(A) may well mean one thing in the context of section 74 of the Finance Act 2003 and another thing as and when brought into force in the context of the 2002 Act.

He submits that, at the time of the acquisition of the reversions, the right of collective enfranchisement belonged to the qualifying tenants and was duly exercised by the company, as their nominee purchaser. Thus, as he submitted, the right conferred by section 1 of the 1993 Act was exercised by an RTE company thereby satisfying both requirements for the application of section 74.

These propositions are disputed by counsel for the Inland Revenue. She submits that the Special Commissioner was right for the reasons she gave and, in particular, as she points out, section 74 confers the exemption on an RTE company exercising its right to collective enfranchisement in that capacity. She submits that the intended amendments by including section 4(B) and 4(C) show that it was not intended that compliance with section 4(A) should, by itself, be enough.

I can express my conclusions quite shortly. I accept the submission for the Company that the provisions of section 4(A) are incorporated into and given legal effect by section 74 of the Finance Act 2003. It matters not that they had and have no legal force in the context which the 2002 Act envisaged. It follows that the absence of any similar incorporation of sections 4(B) and 4(C) means that those sections do not apply in the context of stamp duty land tax. Thus, it is immaterial, if that is the case, that the Company does not comply with section 4(B) and that there are no regulations, as envisaged by section 4(C). Accordingly, an RTE company, for the purposes of stamp duty land tax, may not be an RTE company for the purpose of the 1993 Act if and when the embryonic amendments envisaged by the 2002 Act are brought into force.

I also accept that the company is an RTE company for the purposes of section 74 of the Finance Act 2003. It complies with both the conditions laid down by subsection (1) and is not excluded by the provisions of subsections (2) and (3). It follows that I also accept that the chargeable transaction, for the purposes of section 74(1) of the Finance Act 2003, was entered into by an RTE company but was it entered into, "In pursuance of a right of collective enfranchisement" as that subsection also requires?

The answer to that question would also be in the affirmative if the provisions of subsection 1 stood alone because the company, being an RTE company, would have entered into the chargeable transaction pursuant to the qualifying tenants' right to collective enfranchisement. That would have satisfied the condition in subsection (1) that a right of collective enfranchisement had been exercised. But the phrase, "Right of collective enfranchisement" is defined in section 74(4)(b) as “the right exercisable by an RTE company under … chapter 1 of part 1 of the Leasehold Reform, Housing and Urban Development Act 1993”.

The simple point is that an RTE company has no such right unless and until the amendments to the 1993 Act, to be effected by the 2002 Act, are brought into force. The right to which the subsection refers cannot include the right of an RTE company as the nominee purchaser for the qualifying tenants, not only because the use of the definite article appears to exclude it but, also, because it would introduce an anomaly if it did. Why should relief, under section 74, be available in cases where the nominee purchaser is an RTE company but be denied when the nominee purchaser is a company limited by shares or one or more individuals?

I agree with the Special Commissioner's reason for concluding that the narrow approach she initially adopted was inappropriate. In paragraph 42 of her decision she said:

One consequence is, as counsel for the company submitted, that the relief afforded by section 74 is not available unless and until the executive implements the relevant provisions of the 2002 Act. I had expected that there would be a ministerial statement admissible, in accordance with the decision of the House of Lords, in Pepper v Hart [1993] AC 593, to resolve any ambiguities to which this fact might be thought to have given rise. There is none.

I have considered whether I should revisit my conclusions on the construction of section 74 on the grounds that where a new tax is introduced, subject to specific exemptions and reliefs, as SDLT was in Part 4 Finance Act 2003, the court is entitled to give a strained construction to some relieving provision so as to accord it effect at the same time as the associated charging provision. On reflection, I have decided that, even if I am entitled to do so, this case does not provide the appropriate occasion.

I reach that conclusion for the following reasons: the terms of section 74(1) confer relief conditionally on satisfaction of the conditions laid down in the later subsections. In that respect, they are unlike the unconditional formulae used in, for example, section 60 and 64. They are also unlike the other conditional formulae used in, for example, section 61 and 65. Parliament must, I think, be taken to have been aware that, for whatever reason, the amending provisions of the 2002 Act had not, for the most part, been implemented at the time section 74 of the Finance Act 2003 was enacted. In those circumstances, the natural reading of section 74(1) is that the relief for which the section provides was intended to be available as and when the amending provisions of the 2002 Act had been brought into force; whenever that might be.

It follows that this is not a case, as counsel for the company submitted that it was, of the executive frustrating the will of Parliament because it was not the intention of Parliament that the relief for which section 74 provided should be available before the amendments were made effective.

Some support for that conclusion can be derived from the comparison of section 74(4)(b) and (4)(c). In the case of the former, the reference to the 1993 Act carries with it, by force of section 20(2) Interpretation Act 1978, a reference to that Act as amended from time to time. But in the case of subsection 4(c), the word "flat" is given, "The same meaning". This was possible because there was no embryonic amendment to the meaning of that word as it appeared in the 1993 Act.

In the absence of any ministerial statement, the court is left to speculate what Parliament intended the position to be after stamp duty land tax was introduced but before the embryonic amendments were brought into force. In that period, the right of collective enfranchisement would remain vested in the body of qualifying tenants to be exercised through a nominee purchaser. Why should Parliament have intended that the relief for which section 74 provided should be available to the RTE company in the case of an enfranchisement after the 2002 Act amendments had been implemented but not to qualifying tenants in the case of an enfranchisement by them under the 1993 Act in its original form?

In that context, counsel for the company drew my attention to the provisions of the Finance Act 2003, Schedule 16(iii). It provides, and I quote:

It is, I think, arguable that the definition of "bare trustee" contained in paragraph 1 of that schedule may embrace a nominee purchaser exercising the right of collective enfranchisement vested in qualifying tenants before the embryonic amendments to the 1993 Act contained in the 2002 Act are made. If that is right, then the consequential liability to stamp duty land tax is likely to be the same as that for which section 74 provides as and when the embryonic amendments are made.

In the light of the discussion between bench and bar on this matter, counsel for the Company applied in the course of his reply to amend his notice of appeal so as to raise this point. He had no draft of his proposed amendment and counsel for Her Majesty's Revenue and Customs had not had notice of his intention to do so. His application was opposed by counsel for Her Majesty's Revenue and Customs on those grounds.

I refuse that application. The point was not raised before the Special Commissioners. Whether or not the company is a bare trustee for the purposes of the Act may depend on the precise relationship between it and the qualifying tenants. That would raise questions of fact which have not been investigated before the Special Commissioner.

There are no findings of fact or conclusions of law on this topic such as would enable me, on an appeal of this nature, to consider the point counsel wishes to argue. I understood that, subject to getting an extension of time, it would be open to the Company to raise this point in fresh proceedings. In those circumstances, the proper course appears to me to be to refuse the application and leave the Company to pursue such other proceedings as it may be advised. But it may be that this point supplies the answer to the question why Parliament enacted section 74 in the terms it did and how the exercise of a right of collective enfranchisement made between the introduction of stamp duty land tax and implementing the amendments to the 1993 Act for which the 2002 Act provides, is to be treated.

In all these circumstances, I refuse the application to amend the grounds of appeal and I dismiss the appeal.