The first of April is known as “April Fool’s Day”. However, the Scottish government was not joking when it introduced stringent additional requirements for commercial tenants as part of the new devolved tax, land and buildings transaction tax (“LBTT”), on 1 April 2015.
What has changed?
Before 1 April 2015 all land transactions in Scotland were subject to stamp duty land tax (“SDLT”). Both LBTT and SDLT charge new leases at a rate of 1% on the net present value (“NPV”) of the VAT-inclusive rent payable over the life of the lease (in excess of £150,000). If the tax charge is the same, what’s the issue?
The NPV used for SDLT is based on the rent payable in the first five years of the term of the lease. The rent for later years is assumed to be the highest amount paid in years one to five. At the end of the first five years (or sooner if the rent becomes certain before then), if the rent in years one to five was uncertain, tenants must “true up” the NPV calculation based on the actual rent paid, file an SDLT return and pay any additional tax due within 30 days. There is one review date. If no additional tax is due, there is no requirement to file a return. All relatively simple.
But for LBTT, tenants must true up the NPV every three years, and also if the lease is assigned and when it ends. An LBTT return must be filed, even if the NPV is unchanged. So there are more returns to file and potentially more tax to pay. Failure to file a return will result in penalties, even where no tax is due (or a tenant is due a refund).
How does this work in practice?
Even the most straightforward lease will result in multiple tax and filing points. Take the following example:
Isla opens a shop selling honey called “Beesnes”. She takes a lease over retail premises in Glasgow for five years at an annual rent of £50,000 pa. The lease is granted on 6 July 2014. Isla duly files an SDLT return and pays SDLT of £757. As the rent is fixed, Isla has no further filing obligations and gets on with running her business.
Beesnes goes from strength to strength and in 2019 Isla decides to extend the lease for a further 10 years. The variation brings what was an SDLT lease into the LBTT regime.
The minute of variation is agreed on 5 July 2019. The terms of the variation are that the rent will increase in line with RPI, subject to a minimum increase of 2% pa compound, and if the shop makes a profit of more than £100,000 in its financial year, an additional £5,000 of “turnover rent” will be due that year. Unknown to Isla, the variation means that LBTT returns are required as follows:
● initially, by 4 August 2019, along with the payment of LBTT of £3,027;
● on each three-year anniversary (review dates), by 4 August 2022, 4 August 2025 and 4 August 2028; and
● when the lease expires, by 4 August 2029.
The business really takes off and in Beesnes’ financial year ending 31 December 2021, Isla makes £115,000 of profit. So at the first review date, 5 July 2022, Isla should have recalculated the NPV based on the actual rent paid (including any RPI increases), filed an LBTT return and paid additional tax of £45 (£3,072 – £3,027).
Isla moves the business online and no longer needs the shop. The landlord will charge a penalty if she wants to exit the lease early, so instead she assigns the lease to a shopkeeper friend, Lewis. The assignation is executed on 5 July 2024. As the rent was a market rate, Isla does not charge Lewis for the assignation.
The profit of Beesnes for the financial year ending 31 December 2022 was £120,000 and for 31 December 2023 was £125,000.
On assignation, Isla should have recalculated the NPV based on the actual rent paid to the date of assignation, filed another return and paid an additional £86 of LBTT.
Lewis gave no consideration for the assignation, so has no requirement to file an LBTT return initially. However, he inherits Isla’s filings for the lease. He misses his first review date of 5 July 2025, being only one year after the assignation. He takes on the obligation to file returns for the remaining review dates and when the lease ends.
What do occupiers need to do?
As retailers and other occupiers under commercial leases take on new leases or vary existing leases, an increasing number of SDLT leases in Scotland will convert into LBTT ones. For those with multiple rental leases, LBTT compliance will need to be carefully managed to ensure that filing dates are not missed. As review dates are not linked to registration, there will be no trigger.
The late-filing penalties for an LBTT return start at £100 where the return is up to three months’ late and increase to £1,600 where it is more than 12 months’ late – even where no tax is due. The penalties are greater where tax is payable. Additional tax-geared penalties are due if the return is not filed within six and 12 months of the filing date of 5% of the tax chargeable, or £300 if greater. These penalties are cumulative but the total of the penalties may not exceed 100% of the tax. Interest is payable on late-paid tax, currently at the rate of 3% pa.
Keeping track of one lease and meeting all the filing obligations can be tricky. Keeping track of multiple leases with multiple review dates may be a job in itself. That is why KPMG has developed an app, Vesta, to make this manageable. The authors would be delighted to demonstrate it.
Jo Joyce is a senior manager and Preema Patel is an assistant at KPMG LLP. The views expressed are of the authors and are not necessarily shared by KPMG LLP.
