The developer of Chelsea Barracks has been told by the court to pay £50 million in unpaid stamp duty.
Project Blue, which has links to the Qatari government, paid nearly £1 billion to buy Chelsea Barracks from the Ministry of Defence in 2007.
Its aim was to turn the 13-acre historic site into luxury apartments with price tags of up to £50 million.
The company, owned by developers Qatari Diar, funded most of the purchase using Sharia-compliant finance from a Qatari bank. It claimed no tax was due because of a loophole designed to allow people to refinance in a way permitted by Muslim law.
Sharia-compliant mortgages involve the buyer selling the property to a bank which then leases it back, usually with a future-sale clause. On some occasions this means no tax is due, for example when someone refinances a home they own by selling it to the lender.
In 2016 the Court of Appeal found in favour of the Qatari developers, declaring that HM Revenue & Customs (HMRC) should have pursued Masraf Al Rayan, the bank, for the unpaid tax because it was the actual purchaser.
But the Supreme Court judges overruled the decision, stating that Project Blue was the true buyer and should therefore pay the full tax bill.
A spokesman for HMRC said: “We are delighted with the Supreme Court’s decision – a result that will bring in millions of pounds for public services. This latest victory adds to a series of wins against those who have tried to avoid stamp duty land tax and it goes to prove that these schemes don’t work.”
The spokesman added that HMRC wins nine out of every 10 avoidance cases taken to court, with many more settling what they owe before it reaching that stage.
Project Blue said the company acknowledges and respects the court’s decision, adding: “Project Blue Ltd has always fully complied with all UK taxation matters and will continue to do so.”
Chelsea Barracks was built in 1860 to accommodate two battalions of infantry and was the victim of a nail-bomb attack by the Provisional IRA in 1981, which killed two.
The proposed development, near Sloane Square, has invited controversy in the 11 years since its sale to Qatar.
In 2009, Prince Charles wrote to the prime minister of Qatar to protest the modern design drawn up by architect Lord Rodgers.
The developer paused construction on the latest phase of the scheme earlier this year, citing an increasingly difficult construction market. Qatari Diar said it was still “committed to delivering Chelsea Barracks” and expected the first residents to move in during the first half of next year.
Since preparation work on the Chelsea Barracks site began in 2014, UK construction costs have risen by 14.6%, according to data from consultant Arcadis.
Qatar is increasingly buying up London property, with companies from the oil-rich Gulf state having stakes in the Shard and Heathrow Airport.