As with other devolved taxes in Scotland, it is administered by Revenue Scotland, who were recently successful in the case of Indigo Sun Retail Ltd and Revenue Scotland ("Indigo Sun"). The case is a reminder of the fact that penalties in the LBTT regime are comparatively more punitive than those in the SDLT regime, and critically, that businesses cannot rely on Revenue Scotland to remind them of the requirements to file a return for this self-assessed tax.
The LBTT Lease Regime
There are a number of differences between LBTT and SDLT. Arguably, the biggest difference incorporated into the LBTT regime was the introduction of the three yearly return for lease transactions. There are a limited number of circumstances in which a further SDLT return might be required for a lease transaction in England and Northern Ireland. Not so in Scotland, where, if a lease transaction is notifiable to Revenue Scotland, further returns must be submitted by the tenant every three years (regardless of whether there has been any change to the lease or not), on assignation of the lease, and on its termination.
Compliance with this requirement is an area in which we are increasingly finding businesses running into difficulties and incurring financial penalties. The penalty regime for late returns and late payments under LBTT is more punitive than for SDLT: not only is a £100 penalty triggered as soon as a return becomes one day late, if a return is more than three months late, it can attract daily penalties of £10 a day for a further three months. This means that if a return is just over three months late, you could be subject to a penalty of £1,000 – even if there is no tax to pay. Once returns are over six months late, a further penalty of £300 or 5% of the unpaid tax (whichever is the greater) may be incurred, showing just how quickly these penalties can reach sizeable sums.
Indigo Sun
Indigo Sun found this out to their detriment before the First Tier Tribunal for Scotland in July 2024, in their appeal against the imposition of penalties of £1,000 in respect of a property they leased in Edinburgh. They were also subject to penalties of £1,000 for a property in East Kilbride.
Indigo Sun argued that for each of their properties, the initial £100 penalties should have been issued before the further £900 worth of daily penalties, because it would have alerted them to the requirement to make a return, and avoided the necessity to impose the daily penalties. Effectively, they argued that whilst they accepted that the returns were submitted late, it was unfair that they had not received notification of the lesser penalty first. However, the relevant legislation provides that where there is a failure to file an LBTT return on time on or after 11 March 2020, Revenue Scotland is not required to notify taxpayers of a penalty before they make an assessment for that penalty.
Key takeaways
- If you enter into a lease transaction in Scotland and it is notifiable for LBTT purposes, you will need to submit further lease review returns every three years until the lease is assigned or terminated, even if it continues past its original term.
- Although Revenue Scotland do often send reminders to taxpayers about their obligation to submit three yearly returns, you should not rely on them to do so.
- DWF has a deep expertise in the management of three yearly review lease compliance for a range of clients, from national retail businesses with extensive Scottish property portfolios to clients with single Scottish leases, who use this to reduce the risk of incurring costly penalties.
If you need assistance with any aspect of LBTT compliance, please do not hesitate to contact Caroline Colliston or Zita Dempsey in the Scottish tax team, or your usual DWF contact.
Authors: Amy Beard, Caroline Colliston, Zita Dempsey
