Earlier this year we let you know that the first three-year review point for leases subject to land and buildings transaction tax (LBTT) was fast approaching and that, as of 1 April 2018, the requirement for commercial tenants to submit mandatory three-year returns in respect of their Scottish leases would kick in.
What happened on 1 April 2018?
This date marked the third anniversary of LBTT coming into force for Scottish property transactions. The previous tax regime, SDLT, placed few ongoing reporting obligations on a tenant in respect of a non-residential lease. However, under LBTT a tenant is obliged to make mandatory returns to Revenue Scotland at various points throughout the lifetime of such a lease: on grant; every three years thereafter; on assignation; and on termination.
What have we learned so far?
Revenue Scotland have so far delivered on their promise to send out return reminders to tenants prior to the third anniversary of non-residential tenancies.
- These reminders remain a 'goodwill gesture'. There is no guarantee that Revenue Scotland will continue to issue such letters. Responsibility for compliance with ongoing reporting requirements rests solely with the tenant.
- Failure to receive a reminder will not constitute a reasonable excuse for a tenant not having submitted a return, or for the late submission of a return.
- Tenants should be aware that returns are required within the prescribed 30-day timescale even where there are no changes to report. Tenants must take pro-active steps to monitor their leases and diarise their reporting obligations to ensure compliance and avoid penalties.
Solicitors and agents can continue to use the Scottish Electronic Tax System (SETS) for the electronic submission of LBTT lease returns. Revenue Scotland have developed a new online platform for tenants who wish to prepare and submit their own three-year lease returns.
- The online platform has been designed to be as user-friendly and intuitive as possible. It is an open platform with no registration requirement. The taxpayer has 90 minutes to complete the return. There is no option to save a draft and return to it later.
- Unlike the SETS system (used by agents) the online platform does not pull through any information from previous returns submitted in respect of the lease. Individuals must ensure that they have all relevant information to hand before they begin the process.
- Some lease returns cannot be submitted via the online platform. This is the case, for example, where there are two or more tenants.
- Tenants must be alive to the fact that three-year returns are not an administrative exercise. Completion of a three-year return requires a full assessment of the 'life' of the lease from an 'LBTT perspective' up to the date of the review. A return may have to accommodate an extension or variation of lease terms, or renewed calculations to take into account actual rent paid in the preceding years or updated future rental reasonable estimates.
- Where there is any element of complexity to the return or a commercial tenant is unsure about any matter relating to a return, they should seek professional advice.
Where the submission of a lease review return results in a claim for overpayment of of LBTT, Revenue Scotland have been taking follow up steps to check the basis of the claim for overpayment. Submitting the supporting calculations of any claim for overpayment along with the three-year return may minimise delay to the repayment of LBTT. However, a tenant doing so could still receive follow up letters from Revenue Scotland requesting additional information. Tenants should ensure that such supporting information is retained and easily available to allow them to comply with such requests.
This is a timely reminder that tenants should prepare and maintain comprehensive records regarding any rental variations or estimates. They should also retain copies of all Net Present Value calculations performed in respect of the lease.
Revenue Scotland have updated their website content, expanding their guidance and worked examples to provide a more comprehensive resource in relation to the mandatory three-year returns.
Commercial tenants must bear in mind that their reporting obligations in respect of an LBTT lease are not restricted to three-year lease returns. Further return obligations can also be triggered by a lease termination, assignation or expiry. It is of the utmost importance that a tenant monitors and diarises effectively to ensure that all return submission deadlines are met.
If you would like to discuss any of the issues raised above, please do not hesitate to get in touch with your usual DWF Real Estate or Tax contact.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.