The good, the bad and the ugly of SDLT
Stamp Duty Land Tax (SDLT), which replaced Stamp Duty for land transactions, was introduced by the Finance Act 2003 and became operational on 1 December 2003. It has therefore passed its first anniversary. Over a year on, what have we learned?
Well, the first lesson is that whilst working out the correct SDLT treatment of some transactions is simple, for many commercial transactions it can be quite complex. The second lesson is that it is not only the legislation about which we need be concerned – the SDLT forms (which together constitute a tax return) are a distinct challenge.
The Revenue initially operated a "light touch" approach to allow taxpayers and their professional advisers time to become used to completing the new forms. However this honeymoon period has ended, and since then the Revenue’s strict application of the rules has caused some difficulties.
Unsurprisingly, as SDLT was a wholly new tax, the legislation, forms and guidance for completion of the forms did not (and still do not) cover every situation. The Revenue have tried to brief tax advisers by issuing sporadic updates on their website, and have now consolidated their guidance to make it easier to complete the forms properly. Even minor failures to follow published guidance, such as striking through boxes which are not relevant, can result in the rejection of the entire form. If a form is rejected then it has to be corrected and re-submitted to the Revenue before the original 30-day deadline expires or penalties and interest may be incurred.
Furthermore, unlike with most other tax returns, the late filing penalty of £100 is charged in full even if there is no tax to pay.
Those submitting SDLT forms must clearly take great care to try to avoid errors. A new option for the completion of the main SDLT return form is the use of a Revenue CD-ROM. As it runs the Revenue’s validation checks on completion of a form, it should pick up many of the simple errors which have caused the bulk of the rejections up to now. In future it will be possible to file returns online. This option was intended to have been available from April 2005, but it has been delayed and there is now no published date for the introduction of this service.
One of the forms has recently been changed. The new version requires even more information to be supplied, much of which is irrelevant to the SDLT payable on the transaction. You cannot help but wonder if the Revenue wants these details so it can police other taxes, such as Capital Gains Tax. Whatever the reason, it is getting more time-consuming and more expensive for the purchaser to comply with this new tax.
So much for the forms. What of the tax itself? SDLT is still evolving. The 2003 legislation has already been considerably amended since being passed.
Disadvantaged Area Relief, which exempted transactions from SDLT in particular areas of the country, has been abolished for non-residential property. This appears to have been done to pay for the increase in the threshold at which SDLT becomes payable on residential property transactions, from £60,000 to £120,000.
SDLT did not originally tax partnership transactions. However since July 2004 land transactions are subject to SDLT if they involve transfers by partners into a partnership, transfers amongst the partners themselves, or transfers out of a partnership to partners or former partners. The rules on partnership transactions are incredibly complicated and can result in tax becoming payable in circumstances where, in many cases, the partners will not realise that a charge has arisen, for example on the assumption of a new partner. Partners may also incur interest and penalties for failing to notice that they had triggered a charge in the first place. It is likely that much trouble lies ahead on this front.
Changes have also been made to the rules governing when a variation to a lease is chargeable. For a while variations were only chargeable if they resulted in an increase or decrease in the rent or the duration of the lease, but that proved to be susceptible to tax avoidance. The rules have been tightened up so that now any variation which the tenant pays for is chargeable.
Many of the rules on SDLT on leases require the tenant to make an additional SDLT return on the occurrence of an event several years into the lease. Usually there will be more tax to pay, but sometimes it will be possible to claim a repayment. This presents major problems for tenants and their lawyers, who now have to keep track of such things as anniversaries of the original transaction date, contingent events taking place (or not), and payments which could not initially be ascertained becoming known. Inevitably some of these future trigger events will be overlooked. This could be costly both in relation to the unexpected tax charge but also the interest and penalties which will be charged on late payment. Problems are most likely when a lease has been assigned to a new tenant, who will have taken on the responsibility to make returns and pay the SDLT.
SDLT was introduced largely because the very sharp increases in the rates of Stamp Duty between 1997 and 2000 did not increase the tax revenue as the Government had expected. The new high rates made it worthwhile to find ways to avoid Stamp Duty, and the commercial property industry and their advisers did so very successfully. Now most of the mitigation strategies used under Stamp Duty are not available under SDLT. A number of planning ideas have been developed but some are only viable for high value transactions. Many have already been blocked by new legislation as their use was so widespread that they quickly came to the Revenue’s attention. For this reason advisers have become more discreet about workable routes.
The shelf life of new mitigation strategies may in the future be even shorter, due to the new requirement to disclose tax avoidance schemes to the Revenue – this will bring schemes to their attention at first use, and if the Revenue consider them to be flexible enough to be available for widespread use on high value transactions then presumably they shall take action to close the route. As at late June 2005 the Revenue’s published intent is for the disclosure requirement to be effective from 1 July 2005, although it is thought that this may be pushed back to 1 August 2005.
FOR FURTHER INFORMATION PLEASE CONTACT: ALASTAIR JOHNSTON