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September 2, 2010
Considering an SDLT Avoidance Scheme?
The Estates Gazette recently published an article by solicitor Tom Hubbard of Hill Dickinson on some issues associated with Stamp Duty Land Tax (SDLT) avoidance schemes. We have outlined some of the main points from the article below.
What is SDLT?
SDLT was introduced from December 1st 2003, designed to replace stamp duty for most property transactions. Under SDLT the purchaser is liable for the tax, which is triggered by their transaction. Within 30 days of the transaction the purchaser must complete and submit a return to HM Revenue and Customs, in which he self-assesses his SDLT liability and pays the SDLT due.
How have The Government tried to Restrict Tax Avoidance?
In 2004 the Government introduced the Disclosure of Tax Avoidance Schemes (DOTAS). These state that schemes designed or intended to create an advantage in respect of tax must be disclosed to HMRC’s anti-avoidance group. From August 2005 this included SDLT.
When does SDLT Apply?
- Initially the law did not apply to property with a value of less than £5 million or to residential property of any value.
- Only details of the SDLT scheme were required. There was no obligation to inform HMRC of the identity of those using the scheme or specific transactions in which it had been used.
- From 1st April 2010 the laws governing SDLT schemes were tightened. SDLT now applies to residential purchases of £1 million or more. The £5 million threshold still applies for purchases of wholly non-residential property.
- There are exemptions to schemes if they come within specific exclusions under the DOTAS rules or they are the same or substantially the same as those that were first made available for implementation before 1st April.
- Relief is not available if the transaction is not for bona fide commercial reasons or for the purpose of tax avoidance.
In December 2006 the Government introduced an anti-avoidance rule for SDLT in section 75A of the Finance Act 2003. This applies where one party disposes of a land interest that is acquired by another party and a number of transactions are involved in connection with the disposal and acquisition and the SDLT chargeable in respect of the transactions is less than it would have been had the interest been acquired directly from the original owner. In this case the SDLT is charged by reference to the highest amount paid by the purchaser or received by the owner.
However, this law is wide and uncertain and could apply to innocent transactions where no avoidance is intended. Also, at the moment HMRC’s policy is not to give a ruling on whether section 75A applies to a proposed scheme.
What are the fees for SDLT Avoidance Schemes?
Around 2% of the purchase price. This can be subject to vat.
When compared with the top rate of SDLT of 4% (this will rise to 5% for residential purchases from April 5th 2011) this is a significant saving.
Can HMRC challenge SDLT Avoidance Schemes?
Yes, HMRC is entitled to open an enquiry into the SDLT return nine months after the filing date (usually 10 months after completion, assuming that the return is filed on time).
On completion of the enquiry, HMRC must issue a closure notice confirming that no further tax is due or they must amend the return, effectively claiming the additional tax, together with statutory interest. Even if HMRC does not open an enquiry within the time limit, they can issue an assessment if they discover that chargeable tax has not been paid.
The time limit for raising an assessment is six years after the effective date of the transaction or 21 years in the case of fraud or neglect.
Changes from April 1st 2011
From April 1st 2011 the time limit for a discovery assessment will be four years after the effective date of the transaction, increasing to six years in the event of carelessness and 20 years if the non-payment is intentional or the taxpayer has failed to deliver a land transaction return or comply with the DOTAS rules.
Taxpayers can prevent HMRC from raising an assessment by making a full and detailed disclosure of all relevant facts and circumstances when filing a return. This should be made in writing to the Birmingham Stamp Office with a copy of the return.
Consequences of not complying with DOTAS.
Failure to comply with DOTAS can result in an initial fine of up to £5,000. If this continues HMRC can issue further penalties up to £600 per day. However, a fine will not be imposed if the taxpayer has a reasonable excuse and the failure is dealt with in a reasonable time.
Are SDLT Avoidance Schemes Effective?
Whilst SDLT avoidance schemes offer the potential for significant tax savings they are relatively new and their effectiveness is still in question. If a scheme is set up and fails to comply with DOTAS then the cost to the person or people using the scheme could be substantial. If the scheme fails they may not only be liable for the cost of the scheme, but also the tax which they have tried to avoid paying and any interest from the outstanding tax owed to HMRC.
The most effective way to approach SDLT avoidance schemes is to ensure that all disclosure required under DOTAS is given and where relevant, full disclosure is given to The Birmingham Stamp Office. Given the cost of implementing the schemes, the penalties for not complying with DOTAS rules and the uncertainty associated with the avoidance schemes, anyone considering using one should take professional advice from a solicitor that is well experienced in advising on them.