The first tier tribunal dismissed an appeal against HMRC’s decision to impose the SDLT anti-enveloping rate on the purchase of a dwelling by business, explains Sean Randall.
Consultus Care & Nursing Ltd primarily provides self-employed carers to those in need of care. It also involves the provision of training courses and temporary accommodation to carers.
In 2015, Consultus purchased a dwelling for close to £1m. It intended to use the property for temporary accommodation to carers: specifically, carers attending its training courses at premises nearby would stay at the property at ‘keen prices’.
The business claimed relief from the stamp duty land tax (SDLT) anti-enveloping rate (a flat 15% rate) on the basis that it had acquired the property exclusively for the purpose of a property-rental business.
HMRC opened an enquiry into the SDLT return made by Consultus and made amendments to the return, giving effect to their conclusion that the relief was not available and therefore there had been a loss of tax.
Consultus then brought an appeal against HMRC’s decision to make the amendments (Consultus Care & Nursing Ltd v Revenue and Customs Comrs  UKFTT 437 (TC)).
The anti-enveloping rate
The rate was introduced in 2012 in response to a concern that SDLT was being avoided by the practice of ‘enveloping’ – ie acquiring a dwelling in a company, enabling the company to be sold as a wrapper or envelope without SDLT being payable.
The rate attacked the start of the process – the acquisition of the dwelling by the company – and worked like a toll charge: three times the then amount of SDLT would be paid by the company in lieu of the SDLT lost on future disposals of the company.
There is precedent for this concept in SDLT’s sibling, stamp duty reserve tax. The rate was initially introduced with no consultation to prevent forestalling and numerous amendments were made over four years to reduce ‘collateral damage’ – the unintended impact of the rate on innocent transactions. Sadly, one amendment came too late for Consultus, as we shall see.
The tribunal held that the relief did not apply because a purpose of the purchase was to support the provision of training by the business by having cheap accommodation available for carers. If (which was not accepted) the property was purchased exclusively for a property-rental business, the company’s use of the property as temporary accommodation for carers was not such a business but was instead part of the appellant’s trade of providing carers.
The decision, though correct, is harsh. The appellant is not an envelope and the use of a company to make the acquisition was driven by the appellant’s business. It was, therefore, demonstrably outside the target of the rate but within its bomb-blast in 2015. Relief from the rate was extended in 2016 to cover this type of situation, ie where the dwelling is purchased exclusively for use in a trade. If the purchase had happened four months later, HMRC would not have made amendments to the SDLT return. So the same problem would not arise now. But here are some comments on the case and on the rate:
- The tribunal dismissed HMRC’s argument based on Griffiths v Jackson  STC 184 that the provision of additional services (eg breakfast, laundry and cleaning services) to occupants meant that Consultus’s activity constituted a trade rather than a property-rental business. But this did not matter, as the tribunal had concluded that the property was acquired partly to benefit the provision of the appellant’s training courses.
- What is the point of the anti-enveloping rate these days when the fall-back effective rate for purchases of high-value dwellings by companies is close to 15%? Either it should be increased to restore its deterrent effect and purpose as a toll charge or it should be repealed. As it is, the rate is somewhat of an anachronism.
- HMRC and a court or tribunal will apply tax law, however harsh, to the facts. They have no discretion. That is trite. The case follows two appeals that preceded it (Good Cuisine Co Ltd v Revenue and Customs Comrs  UKFTT 163 (TC) and Sequence Care Group Holdings v Revenue and Customs Comrs  UKFTT 0243 (TC)) in which HMRC also argued successfully that the rate applied to purchases of dwellings by businesses. So HMRC was only doing its job.
- However, the government should amend legislation retrospectively more routinely when, to do so, removes taxpayers from being hit unintentionally by targeted anti-avoidance rules. The amendments made between in 2016 ought to have been made with retrospective effect. The three appeals probably represent a small proportion of the number of businesses that purchased dwellings for use in their trade between 2012 and 2016 that were unfairly caught by the anti-enveloping rate.
About Sean Randall
Sean joined Blick Rothenberg in May 2019. He has almost 20 years worth of Big Four experience advising developers, investors, occupiers, funds and individuals on stamp duty in connection with real estate transactions, group reorganisations, corporate reconstructions and capital markets matters.
He is the editor and author of Sergeant & Sims on Stamp Taxes (the leading textbook on stamp duty), a Fellow of the Chartered Institute of Taxation and council member of the Stamp Taxes Practitioners Group. He has contributed to the development of government policy, tax authority practice and statute on stamp duty over many years.