Property purchasers and tenants (and their professional advisers) will have to adapt their working practices to avoid incurring penalties and interest under proposed changes to the collection of Stamp Duty Land Tax (SDLT). Jon Pearson-Basudev and Holly Richardson consider HMRC’s latest proposals.
The last few years have proven a challenging time for SDLT practitioners, due to the considerable number of changes to the SDLT rules. To quote former Chancellor Lord Lawson, ‘[SDLT] as it is now is crazy.’
In March there was the implementation of the ‘slice’ system for non-residential properties, whereby SDLT is only charged on the portion within each tax band. This marked a positive change generally, lowering the amount of SDLT paid on lower level transactions. Then in April we saw the addition of the 3% surcharge for those buying a second residential property. The application of this change has been very wide indeed and has been described by Lord Lawson as an ‘attack on mobility’.
Whilst these changes so far have focused on the calculation of SDLT, HMRC are now proposing further changes aimed at streamlining the process of filing SDLT returns and collection of payment. The key change will be to the SDLT filing deadline. HMRC hopes that these changes shall bring greater efficiency to the system and enable HMRC to obtain funds and process applications more quickly.
The key aspect of the new proposals, set to be implemented between 2017 and 2018, will reduce the window for filing a return and paying the tax from the effective date (which may not be the actual date of completion) to 14 days compared to the current 30 day timescale.
For many, especially practitioners dealing predominantly with residential transactions, the new proposals are unlikely to herald a major change. Mortgagees are dominant in this area and impose strict obligations on lawyers to file the SDLT return within a tight timescale. As the SDLT payable is based on the purchase price and the parties are unlikely to seek early occupation, it is easier to ascertain what the actual SDLT is likely to be. Lawyers can adequately prepare and ensure they have funds and a signed declaration before completion.
HMRC claim that many customers already file and make payments well in advance of the 14th day and that on this basis these changes will be unlikely to have a significant impact. Whilst we accept that this is likely to be the case with many residential transactions and simple commercial transactions where the completion date and SDLT liability are already known, this may not be the case when transactions are not as straightforward. On such complicated transactions, lawyers may not be able to calculate the actual SDLT liability until the effective date and then face a race against time to complete the SDLT return, have the declaration signed by the client and obtain funds for the appropriate tax liability.
Based upon the information provided so far, HMRC do not propose to distinguish between complex or more basic SDLT returns and in both cases returns shall need to be completed within 14 days.
A common example of foreseeable problems caused by this approach occur when one considers a client who may wish to take early occupation for fitting-out purposes following the conclusion of an agreement for lease. If a tenant takes early occupation of property under an agreement for lease, this triggers the requirement to file a return and pay SDLT on the lease. The actual occupation date is unlikely to be known in advance by the lawyer responsible for making the SDLT return, but the tax due cannot be finalised until the date is known. This leaves practitioners with insufficient information to be able to complete a return and a constant uphill battle to ensure their client knows the cost of early occupation.
Similarly, when dealing with the grant of a lease set to commence from the completion date but with a specified end date, the precise length of the lease will be unknown and in turn the SDLT liability will also be unknown until completion.
It is worth noting that there will be some exceptions to the changes. When a further return is required, for example following a rent review within the first five years of a lease, the payment window is set to remain at 30 days.
Considering HMRC are intending on keeping the payment window at 30 days for rent review applications, it is surprising to find that the same logic has not been applied to transactions where an application is required to defer SDLT on uncertain or contingent consideration, nor for transactions involving overlap relief. Overlap relief (which applies where one lease replaces another, for example on lease renewal or surrender and regrant) is another situation where the SDLT liability is likely to be unknown before the effective date and if the timescale is changed to 14 days it will increase the chance of incurring a penalty.
As a firm, Hill Dickinson LLP has contacted HMRC to respond to their consultation and raise our observations on these proposed changes. Whilst we accept that in most cases the proposed changes to the SDLT filing deadline will be appropriate to increase efficiency, we have suggested that any reduced timescale should be expressed in working days rather than calendar days; 14 days can elapse very quickly over holiday periods such as Christmas and Easter. We have also urged HMRC to consider whether more complex transactions should remain within the 30 day timescale, particularly where SDLT is triggered by ‘substantial performance’ such as early occupation rather than by legal completion. Failing this, it is likely that clients will simply have to budget for payment of penalties and interest in certain cases.
These changes are not set to come into effect until the tax year 2017-2018, therefore giving practitioners and their clients some time to evaluate their procedures in order to minimise the impact of these changes.
Despite the preparation time, these changes to SDLT still present taxing times ahead and it does not look to stop there. In light of an uncertain future and an ongoing debate about what implications Brexit will mean to our economy, it is unclear what role SDLT will play. Lord Lawson hopes that the current Chancellor will consider lowering the SDLT rates, but accepts that it may be next Spring before this goes ahead. However, in these changing and uncertain times it is fair to say that whether the Chancellor is able to make these changes in the Spring (and, indeed, whether he wants to reduce receipts from a tax currently worth over £10 billion a year) will have to be seen.
This article first appeared on Place North West Resources.