Law Society: Further reform needed to improve land and building transaction tax

In its comment paper the Law Society has said some of its concerns about the LBTT additional dwelling supplement have been addressed, but believes further reform is needed to reduce any detrimental impact on Scotland’s property market. It has also said 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 Law Society of Scotland Tax Law Committee, said: “We are pleased the Scottish government has listened to concerns about the LBTT and addressed one of the most common unintended consequences of the additional dwelling supplement (ADS) legislation, namely to give relief from the three per cent ADS charge where couples buy a new main residence in joint names to replace a former main residence owned by only one of them.

“We also welcome the proposal to retrospectively amend the ADS legislation so that the new relief applies to transactions previously carried out.”

She added: “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.”

Commenting on the Scottish income tax rate, Mrs d’Inverno said: “We echo some of the concerns raised by Sir Amyas Morse, head of the National Audit Office, that the biggest challenge faced by HMRC is the maintenance of accurate address records of Scottish taxpayers. If these are inaccurate, it means taxpayers are at risk of paying the wrong amount of tax and the Scottish Government is at risk of receiving too little, or too much, revenue.

“Good communication with taxpayers will become even more important if thresholds and rates 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.

“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 Law Society has raised concerns about the additional costs of administering the Scottish rate, which in 2016-17 amounted to £6.3 million, and over the accuracy of data. It has also highlighted 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, which is particularly complex where people 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.

To read the full paper see the Law Society of Scotland website: Scottish Budget 2017.