The trials and tribulations of tenants’ ongoing LBTT lease obligations

With an increasing number of penalty notices being issued recently by Revenue Scotland for the late submission of three-yearly LBTT returns following a post-Covid backlog, it is important for tenant taxpayers to be mindful of their continuing obligations under the Land and Buildings Transaction Tax (“LBTT”) regime.   Nearly 10 years after the tax was introduced, there still seems to be some confusion over the fact that additional LBTT returns need to be submitted throughout the life of an LBTT lease, and not just when the lease is entered into.

When do additional returns need to be filed?

Further LBTT returns must be submitted (and additional tax paid to Revenue Scotland, if applicable) in the following circumstances:

1. Every three years throughout the lease including any extension of that lease (i.e. the third anniversary of the effective date and every three years after that); and
2. If the lease is assigned, terminated, renounced or irritated (forfeited). This includes where a lease comes to an end by a notice to quit being served by either party, or a break option being exercised.

In each case, the returns must be submitted within 30 days of the effective date, and any additional tax paid, otherwise penalties and interest will apply. The responsibility for doing this rests solely on the taxpayer.

Unlike personal tax returns, which have a fixed submission deadline for everyone, the effective date varies from lease to lease. This can cause taxpayers a management headache where they have multiple leasehold properties, as the effective dates will likely all be different. It is therefore key that as well as having a system in place for diarising break dates and expiry dates, that the LBTT three-yearly dates for each lease are also diarised.

Corporate acquisitions

For anyone acquiring a company that is a tenant of property through a corporate share deal, the LBTT documentation should be reviewed as part of the due diligence process to ensure all returns have been filed, to check the correct return references have been used, and that all LBTT and penalties/interest have been paid. This is important as the obligations of the tenant / taxpayer will transfer to the purchasing entity, including the responsibility for filing future three-yearly returns timeously.

Penalties 

We have recently seen a rise in the number of clients contacting us to submit three-yearly returns following receipt of a penalty notice from Revenue Scotland, some receiving the penalty notice nearly two years after the submission deadline. Even where no tax is due to be paid, the penalty for being two years late with a three-yearly return is £1,600 for each return.  It is therefore important not to miss the filing deadline and if it is missed, that the taxpayer takes action promptly to file the late return.

Reminder letters

Unfortunately, the taxpayer cannot rely on Revenue Scotland to issue a reminder letter.   Whilst some taxpayers do receive a reminder letter, this does not appear to have been consistent across the board. It is key to note that there is no obligation on Revenue Scotland to issue reminder letters, and Revenue Scotland has made it clear that it is no defence to a penalty being imposed that a reminder letter has not been issued or received.

Even where reminder letters are issued by Revenue Scotland, they may be sent to a previous correspondence address noted on an older LBTT return, rather than to the company’s current registered office. In contrast, penalty notices are being issued to the taxpayer’s registered office which is often the first point at which the taxpayer realises there is a missed return. It is therefore crucial that if the taxpayer  changes its address during the three-year period, that it notifies Revenue Scotland to ensure that any correspondence is sent to the correct address.

Indigo Sun Retail Ltd v Revenue Scotland July 2024

Some of these points were raised recently in the recent Tribunal case of Indigo Sun Retail Ltd v Revenue Scotland, who appealed the penalties issued by Revenue Scotland for late submission.

One of Indigo Sun’s arguments was that if the £100 initial penalty notice for failure to submit the returns on time had been issued, they would have realised the returns were late and would have contacted their solicitor, and that notice of that initial late submission should have been issued, before the daily penalties could accrue. However, the Tribunal ruled that there was no requirement for a first notice to be issued, before the additional daily penalties could start to accrue.

The only avenues left to Indigo Sun as grounds for having the amount of penalties reviewed were (i) reasonable excuse and (ii) exceptional circumstances. However, the Tribunal ruled that they did not establish reasonable excuse as: “LBTT is a self-assessed tax. [Revenue Scotland] is not required to notify a taxpayer of their responsibility to submit a tax return…The Appellant does not have a reasonable excuse for failing to submit the returns on time”.  

The Tribunal also ruled that Indigo Sun had not produced any reliable material to demonstrate that there were special circumstances to show that it was significantly unfair for Indigo Sun to pay the penalties imposed or that it would put an excessive burden on them, so their appeal was dismissed.

The onus on taxpayers under the LBTT regime can seem more daunting, but the key things to remember as a taxpayer, are:

• To diarise the three-yearly deadlines (and give your solicitors sufficient time to prepare and submit the returns);
• To submit further returns if the lease is assigned or terminated; and
• To notify Revenue Scotland of any changes to your registered office or correspondence contact details to make sure you receive any correspondence issued.

If you need any assistance to check when your next three-yearly returns need to be made, or if you require a return to be submitted, please contact our Commercial Property team.