On 1 April 2015, the first payments of Land and Buildings Transaction Tax (LBTT) and Scottish Landfill Tax (SLfT) will start to be made to Scotland’s new tax authority, Revenue Scotland.
LBTT, which replaces Stamp Duty Land Tax on transactions involving land in Scotland, is governed by the Land and Buildings Transactions (Scotland) Act 2013 which received royal assent on 31 July 2013. There are still some changes to be made – the Scottish Government is currently consulting on LBTT regulations relating to licences, multiple dwellings relief and deferred payments amongst other things, and also a proposed relief from LBTT for one of the land transactions in a ‘sub-sale’ where there is significant development or redevelopment of the land or buildings in question.
LBTT will apply to land in Scotland regardless of where the purchaser is located, and where purchases involve land in Scotland and land in the rest of the UK it will be necessary to make an LBTT return for the Scottish land and an SDLT return for the remainder. LBTT is in many ways similar to SDLT, but there are some significant differences.
LBTT is a progressive tax, like income tax, which means that different rates are charged on different parts of the consideration, rather than being a slab tax like SDLT where the whole of the consideration is charged at the same rate, and the rate depends on the amount of consideration. The slab system of SDLT distorts the market and also leads to avoidance activity, for example, in house purchases, excessive amounts can be allocated to furnishings so as to keep the price subject to SDLT in a lower rate band. The progressive rate structure is expected to mean that these issues will not arise in LBTT. The progressive rates in LBTT also mean that there is a ‘prescribed minimum percentage’ for multiple dwellings relief (MDR) and acquisition relief. For MDR, the current consultation proposes a minimum of 40% of the LBTT payable without the relief. Most commentators have suggested that is too high, and a lower percentage should be prescribed (the minimum rate when SDLT MDR is claimed is 1%, ie 25% of the full rate of 4%.
LBTT ON LICENCES
Licences are exempt from SDLT but it is proposed that LBTT will be chargeable on some retail licences. The Scottish Government is currently consulting on the definition of retail premises where licences will be subject to LBTT (see the consultation paper Moving Forward with Land and Buildings Transaction Tax: A Consultation on Proposed Subordinate Legislation, issued in May 2014). The current proposal is that licenses relating to premises to be used as a retail shop for selling goods and services to the public will be subject to LBTT. This is likely to affect retail concessions at airports as well as concessions within supermarkets and department stores. The ‘retail shop’ definition raises a number of questions – such as can there be a ‘retail shop’ if there are no buildings, and whether ‘the public’ includes those who have paid an entrance fee or where only certain individuals are admitted, for example passengers at an airport. Detailed guidance will be necessary since an LBTT charge on licences will be unfamiliar,
The LBTT regime for leases is considerably different from SDLT. LBTT and SDLT are both payable on the net present value (NPV) of lease rentals, discounted at 3%, but for SDLT, in arriving at the NPV, only the rent for the first five years is taken into account, as the highest rent in the first five years is used for year six onwards. For LBTT by contrast, the NPV will be based on the actual rent for each year of the lease, so the LBTT charge will more accurately reflect the rent paid. For leases with market rent increases, or where the rent in the first five years is low, for example wind farm leases, this could mean that the LBTT cost would be higher than under SDLT.
In the initial LBTT return, the rents would need to be estimated, but the LBTT system requires a review of the LBTT payable every three years. Returns have to be submitted every three years, at which stage estimates are replaced by actual rents if known, and any additional LBTT paid or a repayment made by Revenue Scotland.
Extensions and variations of leases, and leases with turnover rents will be taken into account in the three year returns rather than requiring the submission of additional returns, thus removing a great deal of the complexity which has bedevilled SDLT and leases, particularly Scottish leases.
SDLT includes a relief for sub-sales, ie where A sells to B and before B has taken title, B sells to C, with the title being transferred by A to C. In these circumstances B does not have to pay SDLT provided a claim for SDLT sub-sale relief is made. There is no general sub-sale relief in the LBTT legislation, however. A great deal of concern was expressed about the implications of this, particularly for forward funding transactions, and the risk of transactions in Scotland being at a competitive disadvantage compared to transactions in the rest of the UK. A proposal for a limited form of sub-sale relief has now been set out in a recent consultation paper. This envisages that sub-sale relief will be available, if there is development or redevelopment on the land requiring planning permission which is completed within five years of the sub-sale. The drawback is that LBTT has to be paid upfront, and a refund claimed when the development is complete. The uncertainty about whether or not the relief will be available, and the delay in the benefit of the relief being received, is likely to mean that developers will not be able to count on the availability of the relief in arriving at project cash flows. This means that the proposed relief will not help the adverse cash flow issues which it was designed to address.
The lack of a general sub-sale relief is likely to mean that transactions in Scotland will have to be structured in a different way to avoid a double tax charge, for example by arranging for land to be sold direct to the ultimate purchaser, where possible. It may also lead to an increase in the sale of shares in SPVs holding land. The LBTT Act does cater for the possibility of an LBTT charge on the sale of shares in companies land, but only residential land.
PAYMENT OF LBTT
SDLT does not have to be paid until 30 days of the effective date, which means that a return can be submitted and SDLT certificate obtained to allow registration of title before the SDLT has been paid. LBTT, by contrast has to be paid at the same time as the return is submitted. It is understood that this is to avoid time and resources being wasted in tying up payments and returns. Payment does not have to be made in cleared funds; instead ‘arrangements satisfactory to the Tax Authority’ (Revenue Scotland) have to be entered into. Discussions are ongoing about the precise details of ‘arrangements satisfactory’, and it is expected that a number of options will be available, including making payment by direct debit, in the same way that registration dues are currently paid to Registers of Scotland, where setting up the direct debit will amount to ‘arrangements satisfactory’, with payment being collected at a later date.
LBTT OR SDLT?
LBTT applies to transactions with an effective date after 1 April 2015 unless a contract was entered into before 1 May 2012, the date on which the Scotland Act 2012 received royal assent. This means that many transactions being negotiated now will be subject to LBTT rather than SDLT. Some further amendments to the LBTT Act are to be made to deal with the extension or variation of Scottish leases after 1 April 2015. These will not be subject to SDLT, but changes are required to ensure they are subject to LBTT.
The rates of LBTT are not yet known and are expected to be announced when the Scottish budget is introduced to the Scottish parliament on 9 October 2014.
SCOTTISH LANDFILL TAX
SLfT which replaces UK Landfill Tax is governed by The Landfill Tax (Scotland) Act 2014, which received royal assent on 21 January 2014. SLfT has been designed to support Scotland’s zero-waste agenda while ensuring that the different Scottish system will not create difficulties for landfill operators involved with both the Scottish and the UK taxes.
Subject to parliamentary approval of the Revenue Scotland and Tax Powers (RSTP) Bill, currently before the Scottish parliament and expected to receive royal assent this autumn, Revenue Scotland will become the tax authority responsible for the collection and management of LBTT and SLfT. Revenue Scotland is currently developing the online computer systems for submission of LBTT and SLfT returns working closely with Registers of Scotland, the body responsible for registration of land in Scotland and the Scottish Environment Protection Agency (SEPA) in relation to SLfT. In relation to LBTT, the aim is to make the registration process and the submission of LBTT returns a one-stop shop, as well as trying to ensure that the LBTT return only asks for information which is required for LBTT purposes, thus making life much simpler for those involved in submitting LBTT returns.
THE REVENUE SCOTLAND AND TAX POWERS BILL
The RSTP Bill sets out the administrative framework for the devolved taxes, including the penalty and interest regimes and the appeals mechanisms. With an initial focus on LBTT and SLfT, it has been designed to cater for additional taxes which could be devolved in the future. One significant difference compared to the UK tax system is that there will be a Scottish general anti-avoidance rule (GAAR) which is far wider in application than the UK GAAR, illustrating the very firm line which the Scottish Government is taking to combat tax avoidance. The Scottish GAAR will give Revenue Scotland the power to counteract tax advantages arising from tax avoidance arrangements that are artificial, rather than abusive, as is the case for the UK GAAR, and there is no equivalent of the GAAR advisory panel. Taxpayers involved in complex transactions will have to consider the application of the Scottish GAAR in relation to LBTT and the UK GAAR in relation to other taxes.
THE SCOTTISH RATE OF INCOME TAX
As well as introducing the devolved taxes, the Scotland Act 2012 gives the Scottish parliament the power to set a Scottish rate of income tax (SRIT). The SRIT is expected to apply from April 2016 and will replace the Scottish variable rate, which has never been used. The SRIT will be operated by HMRC rather than Revenue Scotland, and it is important to appreciate that the Scottish parliament does not have any control over the other aspects of income tax such as the bands or reliefs.
The basic, higher and additional rate of income tax for Scottish taxpayers will be reduced by ten pence in the pound and the Scottish parliament will be obliged to set a new Scottish rate. An SRIT of 10% would mean no change from the UK rates. However, a SRIT of 9% would mean the rates paid by Scottish taxpayers were lower (19/39/44%- basic/higher/additional rates) and a Scottish rate of 11% would mean they were higher (21/41/46%). The same SRIT has to apply to all the rates, so it would not be possible to have a SRIT of 9% for basic rate taxpayers and a SRIT of 11% for additional rate taxpayers. It is unfortunate that the SRIT does not give that obvious flexibility.
The SRIT does not apply to savings or investment income, and so is mainly relevant to employment and pensions income. For employees and pensioners, the income tax change will be applied through PAYE (Pay As You Earn). HMRC will issue tax codes to employers in the months before April 2016 which will identify those employees who are Scottish taxpayers, and employers will deduct tax at the appropriate rates. In broad terms, Scottish taxpayers are those whose main place of residence is in Scotland. In many cases it will be easy to identify Scottish taxpayers, but there are some complications, for example where individuals work in London but live in Scotland. The SRIT will apply regardless of where the employer is located, so to take an extreme example, an employer based in England but with a single Scottish employee will have to apply the SRIT.
To simplify the operation of the SRIT, HMRC set out in a technical note (Clarifying the Scope of the Scottish Rate of Income Tax) in 2012 a number of areas where the UK rates, rather than the SRIT will apply, including gift aid for charities, the Non-Resident Landlord Scheme and the Construction Industry Scheme. Scottish taxpayers are to receive tax relief on pension contributions at the Scottish rates, and HMRC have recently confirmed that pensions administrators will have to put systems in place by 2018 to ensure that where tax relief at source applies, relief can be given at the Scottish rates. In the meantime HMRC will make adjustments to ensure that Scottish taxpayers get relief at the Scottish rates.
The introduction of LBTT and SLfT was not dependent on the outcome of the referendum on Scottish independence – the legislation for both of these taxes is already in place and the administrative arrangements are well advanced. However, in light of the ‘No’ vote, this is not the end of the story of Scottish tax.