Many firms are getting caught out by a little-known legal requirement for Land and Buildings Transaction Tax, writes KATIE CORRIGAN
The tax-raising powers of the Scottish Government are a perennial subject of debate. To some they are an essential part of Scotland’s self-determination toolkit, but to others a source of complexity. One such example is an aspect of Land and Buildings Transaction Tax (LBTT) that many businesses know little about.
LBTT was brought in to treplace Stamp Duty Land Tax in Scotland and, while designed to be broadly “tax neutral”, it sought to tailor property taxes, particularly the tax thresholds, to suit the Scottish property market.
For businesses leasing commercial property, the most significant shift was the introduction of mandatory LBTT returns every three years, throughout the duration of the lease. Previously, tax was assessed upfront based on the first five years’ rent, with further returns only required in the event of an abnormal rent increase.
The point of the three-year return is to ensure that the tax paid by tenants accurately reflects the rent that is paid and keeps track of changes to the lease. If the rent hasn’t changed, no additional tax is due, but a return is still required.
However, awareness of the three-year return requirement has been low. And Revenue Scotland, although not required to send three-yearly reminders, sometimes does, leading to inconsistent communication and confusion, particularly among businesses without suitable systems in place to keep track.
As a result, many businesses have been caught out, often resulting in significant penalties.
The issues with the current three-year return regime may be summarised as:
- Misunderstanding the rules: Many businesses assume a return is only needed if more tax is due. In fact, a return is required regardless.
- Failure to file: Missing the three-year deadline, whether wilfully or not, can lead to significant penalties, even if no tax is owed.
- Complex penalty structure: Late filings can trigger both initial and daily penalties, making it difficult to calculate the total cost.
However, it seems that the Scottish Government is not blind to the situation. It is now reviewing the position on LBTT generally, with possible changes expected in the next Scottish budget.
The proposed amendments include:
- Introducing a threshold, so only higher-value leases require returns.
- Reducing how often returns must be filed.
- Removing the need for a return if no additional tax is due.
Such changes would undoubtedly be a welcome relief, particularly for SME businesses which are the cornerstone of the Scottish economy, and of the commercial real estate sector, helping to reduce their administrative burden and avoid disproportionate penalties.
Until any reforms are confirmed, it would be prudent for tenants to review all leases signed since April 2016, to ensure all three-year LBTT returns have been submitted and seek good professional advice where necessary.
Katie Corrigan is a senior legal director and head of real estate at Vialex
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