Budget should bring in further LBTT reforms, Society paper argues

A call for further reforms to land and buildings transaction tax has been made by the Law Society of Scotland ahead of the Scottish budget to be unveiled by Finance Secretary Derek Mackay tomorrow, 14 December.

In a comment paper the Society acknowledges that some of its concerns about the LBTT additional dwelling supplement (ADS) have been addressed, but believes further reform is needed to reduce any detrimental impact on Scotland’s property market.

It also states that HMRC and the UK Government should take steps to tackle the additional complexity and costs of having a Scottish income tax, along with ensuring accuracy in people’s residency status to ensure taxpayers pay the right amount of tax.

Isobel d’Inverno, convener of the Society's Tax Law Committee, said the Society was pleased that the Scottish Government had addressed one of the most common unintended consequences of the ADS legislation, by giving relief from the additional 3% charge where couples buy a new main residence in joint names to replace a former main residence owned by only one of them.

She continued: "However we don’t believe that all of the concerns identified have been resolved and we need further legislation to deal with the way LBTT relates to group and share pledges. For example, Revenue Scotland recently issued a formal opinion to a taxpayer indicating that LBTT group relief is not available on the transfer of property from a parent company to its subsidiary or between fellow subsidiary companies where there is a share pledge in place over the shares in the transferee company. This means that LBTT is payable on the market value of the property transferred, which is proving to be a big concern not just for the property sector, but for many companies which own and run their businesses from properties in Scotland.

"We fear that LBTT is acting as a disincentive to investment in Scotland, as it impacts on share pledges which are a very common form of security and are routinely required by lenders. The types of transactions involved are also routine, and include, for example a company being asked by its bank to transfer some businesses/properties to subsidiary companies in order to reduce or compartmentalise risk."

The Society also shares some of the concerns raised by Sir Amyas Morse, head of the National Audit Office, over the challenge faced by HMRC in maintaining accurate address records of Scottish taxpayers. Inaccurate records would put taxpayers at risk of paying the wrong amount of tax, and the Scottish Government at risk of receiving too little, or too much, revenue. This will increase if thresholds and rates begin to diverge more substantially between Scotland and the rest of the UK, or if new bands are created.

"While there is currently no risk perceived by HMRC, if tax rates and thresholds diverge further in the future, there is a potential risk taxpayers may respond to higher or lower rates by not updating addresses, or deliberately misrepresenting their address to make it appear they are resident in the other jurisdiction", Ms d'Inverno observed.

"HMRC will need to have robust compliance procedures and sufficient resources to monitor and review this. There is also the risk that higher rates could lead taxpayers to undertake other tax planning measures, for example incorporation of a business. There are plentiful commercial and personal reasons to do this, and so this would be difficult for HMRC to challenge. The possibility of taking dividends may become even more attractive given the lower rates and exemption for dividend income – and it’s important to be aware that dividend tax goes to the UK, rather than to Scotland."

The additional costs of administering the Scottish rate amounted to £6.3m in 2016-17. The Society highlights the complexities introduced by having a different system, particularly for those who complete a self-assessment tax return. The different higher rate threshold in 2017-18 means some Scottish taxpayers have to calculate income tax liability partly using Scottish rules, and partly UK rules, particularly where they have income from savings and dividends.

It has called for the Scottish Government to make a timely announcement on the final Scottish income tax rates and thresholds, to avoid a repeat of last year which, according to the National Audit Office, saw HMRC having to send a corrected tax code to over 21,300 Scottish taxpayers for the 2017-18 tax year.

Click here to read the full paper.