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Guest commentary from BDO
SDLT saving schemes – the current environment
BDO, Tax Director, Real Estate & Construction group
Many property purchasers have viewed Stamp Duty Land Tax (SDLT) as an optional tax since its introduction in 2003. Poorly drafted legislation left the door wide open for purchasers and their advisors to devise cunning ways around these laws. In this article I will explore whether the attempts by HMRC in recent years to prevent SDLT avoidance have been successful and the attitudes of many property purchasers to this changing landscape. Unsurprisingly, it seems that the taste for zero SDLT has become addictive and there are still many buyers who will attempt increasingly high risk planning with dwindling chances of success.
I do not plan to analyse the merits of the various schemes which are being marketed but instead what I will focus on is why, despite the warnings and the bad press, many buyers just can’t kick the habit!
Let’s recap on what HMRC have done over the years to block the use of such schemes. Firstly, there have been numerous changes to the legislation. The introduction of SDLT itself on 1 December 2003 was in response to the widespread stamp duty avoidance on property acquisitions, particularly the resting on contract arrangements. Certain early reliefs were withdrawn as they were abused, a good example being the relief for seeding unit trusts. The Disclosure of Tax Avoidance Schemes (DOTAS) regime was extended to certain SDLT arrangements from 1 August 2005, although there was no requirement for users of schemes to report until 1 April 2010 (and this is subject to the grandfathering rules).
The introduction of the general anti avoidance rules in S75A-C FA2003 in December 2006 briefly stopped schemes in their tracks, but these provisions have not provided HMRC with the deterrent they had hoped. Indeed, the fact that the provisions are so wide as to potentially catch almost any situation has been their downfall. Despite pressure from advisors, HMRC took until November 2010 to publish guidance on these provisions. This was swiftly followed by an update in early 2011 which stated that the provisions will only apply where there is avoidance of tax. Unfortunately this statement, and HMRC’s lack of willingness to introduce a motive test, has resulted in even more uncertainty for tax payers and their advisors.
Losing the battle to curb the use of schemes from a technical perspective, HMRC targeted ‘Joe Public’, by using Spotlights in June 2010. HMRC use their ‘Spotlight’ page to help consumers’ from ‘unwittingly’ entering into arrangements which HMRC are likely to see as tax avoidance. Sub-sale schemes were specifically highlighted as being the types of arrangements which HMRC view as not achieving their intended aim to save SDLT and they issued a warning that users of these schemes would be challenged, through the courts if necessary.
HMRC issued a further statement in January 2011 specifically naming four schemes involving sub-sales which they had identified as being in use and which they were challenging. They also warned that, where appropriate, they would seek penalties.
The Spotlights announcement from HMRC coincided with a general shift in the attitude of lenders towards tax planning schemes, particularly those which had signed up to the Banking Code of Conduct. High Street banks, whose previous main concern was their credit risk, now had their reputation to consider and since several banks were reliant on Government support there was a new and influential stakeholder in play. The dynamics had now shifted with the banks’ decision making process being influenced by the Government. The banking world was receiving enough bad press generally and perceived support of tax schemes for those wealthy enough to afford it would not go down well with the general public or be tolerated by the Government. As a result, over the last 15 months or so, we have seen a refusal by many banks to lend where an acquisition involves a tax saving scheme.
With all this to discourage advisors and purchasers, is there really still an appetite for SDLT schemes? We have certainly seen a gradual increase in the number of property transactions, particularly in 2011. However, that is combined with a fragile economy where every penny counts, subdued funding and tight margins meaning that a 4% or 5% saving could make a real difference between doing the deal or not. The increase in SDLT to 5% from April 2011 for residential property over £1m has inevitably raised interest in tax planning from potential purchasers. A combination of these factors, coupled with media attention on foreign buyers avoiding SDLT on the purchase of trophy houses in Britain has kept interest buoyant.
But I think the real reason why there is still an appetite for schemes is that HMRC have not really shown the market what they can do. They have given warnings that they have the weapons but have not shown these to any real effect and we have not seen any ‘punishments’ handed out to scheme users. The legislation, particularly the anti-avoidance provisions in S75A FA2003, is in many cases unclear, providing the means to obtain a technical view that SDLT can be avoided. With proper professional advice and disclosure of the planning, penalties may be mitigated and, therefore, purchasers do not see any real downside to ‘having a go’.
HMRC have also been extremely slow in bringing cases to court. The first case of any interest being the DV3 Tribunal case which was heard in November 2010 and which HMRC lost. Of course, this was a pre-S75A case and the legislation has changed considerably since that particular transaction but the mere fact that HMRC have lost a test case which took them over four years to bring to court perhaps gives the market a false sense of security.
Whilst HMRC have continued to introduce legislative changes to block widely used schemes, promoters seem to be one step ahead – one door closes and another one opens and there is a steady supply of new schemes in the market.
So what might stop the avoidance? Inevitably there will be further legislative changes and these may, over time, reduce the options available, but these are unlikely to do the job alone. A parallel can be drawn with remuneration planning where extensive legislation was enacted in 2003 to negate the affects of such planning. However, it was not until the introduction of the disguised remuneration (DR) rules in December 2010 that there was any real concern that the game was up.
Increased litigation and success in the courts would inevitably frighten people, as no doubt would big penalties to those that do need to pay up. As mentioned above, SDLT cases have been few and far between, with HMRC achieving no credible success.
Certainly, if tax is needed to be paid up front rather than at the conclusion of a successful enquiry, as proposed in HMRC’s consultation on high risk tax avoidance schemes, this would negate any cash flow benefit of using a scheme. However, this comes with its own problems as to whether a particular scheme is in the regime or not – no doubt a whole new industry would emerge to keep planning outside such rules!
In my view there needs to be a sea change in attitude and this most likely would be achieved through a combination of the above. I do believe that over time HMRC will win their battle and SDLT avoidance schemes will be left for those few who can get their heads around the combination of the risk to reputation, fees, litigation and penalties. However, for the time being, as we all know, there are numerous schemes available. Whether advisors endorse these or not is another matter but certainly most will agree that they are not for the faint hearted and should only be undertaken by those willing to take on a big challenge.
BDO is the award-winning UK member firm of the BDO international network, the world’s fifth largest accountancy organisation, with more than 1,000 offices in over 100 countries.