The legislation surrounding stamp duty land tax (SDLT) is complicated. This article outlines some of the common problems and pitfalls associated with the submission of SDLT tax returns concerning the purchase of commercial property.
Date of payment of SDLT
SDLT is ordinarily payable within 14 days of the effective date of the purchase. In most cases, the effective date will constitute the completion date of the transaction. However, earlier payment of SDLT may be triggered if the transaction is ‘substantially performed’ prior to completion.
Three common examples of substantial performance are:
- the buyer taking exclusive or, in certain circumstances, non-exclusive physical possession of the property prior to completion;
- the buyer receives, or becomes entitled to receive, rents or profits from the property prior to completion; or
- the buyer pays a substantial amount of the consideration for the property to the seller prior to completion.
It is very important to identify any acts of substantial performance as penalties and interest will be payable by the buyer if an SDLT tax return is filed late. Indeed, in certain circumstances, substantial performance may even trigger the payment of SDLT despite the transaction later proving abortive.
Amount of SDLT payable
SDLT is calculated upon the consideration payable in respect of the land element of a transaction. Where the purchase price is apportioned between the land and any other items such as chattels, stock or goodwill etc., then the purchase price will need to be apportioned between each item and SDLT will only be payable on the sum relative to the land.
HMRC have the power to challenge price apportionments and as such, it is usually best practice to instruct a surveyor to professionally determine any relevant values.
Uncertain consideration: overage and other claw-back provisions
Any contingent or unknown consideration which may be payable to a seller by a buyer in the future (for instance, through a development uplift provision or other such overage mechanism) must be disclosed in an SDLT return by providing a suitable estimate of what a buyer reasonably believes the uncertain or unknown consideration may be. Again it is common for a buyer to take professional advice from a surveyor as to any such amounts.
Tax must be paid on the total of the known and the estimated consideration. It is possible to apply for a deferment of the tax attributable to the estimated consideration until such time as the contingency arises or the amount of the unknown consideration is ascertained. Such applications must be made within 30 days of the effective date of the transaction, being the date of completion of the transaction unless the transaction is substantially performed earlier.
Payment of Seller’s fees and expenses
The payment of the seller’s professional fees or other side payment can, in certain circumstances, also form part of the consideration on which SDLT must be paid. Any agreement with the seller to pay such sums should be considered carefully.
Where successive transactions are linked, extra SDLT can be due for the first transaction, this being payable at the same time as the tax payable on the second transaction. HMRC regards transactions as linked if they “form part of a single scheme, arrangement or series of transactions between the same vendor, purchaser or, in either case, persons connected with them.”
A connected person is defined by HMRC in wide terms and will include anyone connected by family, marriage, civil partnership or through a corporate entity, partnership or other business structure. Whether a transaction is linked is a question of fact and requires a full examination of the circumstances in each case at an early stage of the transaction. Transactions could be linked irrespective of whether there is a contractual connection between them and even if they are entered into on different dates or between different individuals using different representation.
Where transactions are linked due to the parties being connected companies then the chargeable consideration upon which SDLT is paid will be deemed to be the open market value of the property in question, even if the actual consideration paid is lower.
HMRC’s power to investigate
HMRC can have as long as 21 years within which to query the information provided within an SDLT tax return. An HMRC investigation into a buyer’s SDLT affairs would likely trigger further investigations as to payment of other taxes. Criminal sanctions are available to HMRC in addition to the power to levy extra tax, interest and civil penalties. It is thus essential that buyers ensure that any SDLT return submitted to HMRC on their behalf is as accurate as possible. Obtaining timely and reliable advice from one’s solicitor, accountant and surveyor is essential to this process.
If you have any queries about SDLT, please contact our Commercial Property team.