This week I'm looking at one of the major changes brought in by the LBTT regime, and that is regular returns for leases - every 3 years, if the lease is assigned and when the lease ends. This was not required under SDLT and will force tenants to set up systems to ensure that they don't forget to submit these returns.
Essentials of the regular returns regime
The key change for commercial leases is that once an LBTT return has been submitted for a lease, the tenant is then under a duty to submit further returns to Revenue Scotland. This will allow Revenue Scotland to monitor the position throughout the life of a lease - and ensure that any taxable changes are brought to their attention.
The further returns must be submitted:
- every 3 years;
- if the lease is assigned; and
- when the lease ends.
As with the initial lease return, the timing for submission of the other returns is within 30 days after the relevant date.
These further returns must be submitted even if there has been no change to the circumstances, e.g. the rent and duration of the lease remain as they were (or were anticipated) when the last return was submitted.
If there has been a relevant change, e.g. a rent review that increases the rent or an extension of the duration of the lease, then further LBTT might require to be paid.
The regular returns should use the rates and bands that were applicable at the original effective date of the lease, not any different rates or bands that might be in force at the date of submission of any later return.
Only notified LBTT leases are subject to the regime
The most commonly asked question we've heard so far is whether the obligations apply to leases whose effective date was before 1 April 2015. The answer is no, provided such leases have not been varied to a degree that there is a deemed new LBTT lease (on which more shortly).
Also, the obligations don't apply to an LBTT lease, i.e. one whose effective date was on or after 1 April 2015, if that lease has not been notified yet because the combination of its rent and duration mean that there is not yet any obligation to notify it. That said, there are other provisions (similar to those that apply under SDLT) that will oblige a tenant to notify an LBTT lease if there is a change of circumstances that results in it becoming notifiable, e.g. an increase in rent that takes the lease above the notification threshold. Once there has been such a notification, then that lease will be within the regular review regime.
If an LBTT lease has not yet been notified (because it is not notifiable), but an assignation of the lease was notified because a premium was paid for it, the notification of the assignation does not count as the notification of the lease for the purposes of triggering the regular returns obligation. The exception to this would be if the assignation incorporated a variation of the lease that resulted in the lease becoming notifiable.
SDLT lease can morph into an LBTT lease
In some cases a variation to an SDLT lease, that takes place on or after 1 April 2015, will result in the deemed grant of a new LBTT lease.
If a variation of an SDLT lease would have been treated (under the SDLT regime) as a deemed new lease for SDLT purposes - i.e. extending the duration of the SDLT lease or varying the rent (otherwise than at rent review) - then such a variation made on or after 1 April 2015 will be treated as a deemed new lease for LBTT purposes. Once that deemed new lease has been notified, then the regular review obligations will apply to the deemed new lease.
Tenants need to put administrative systems in place
All tenants of leases which have been notified to Revenue Scotland will require to keep these regular review obligations in mind and to ensure that they keep records and set up reminders or other internal monitoring systems about the requirement to submit these regular returns. Tenants are likely to have the safety net of a solicitor reminder for the return triggered by an assignation (if the tenant appoints a solicitor to act for it on the assignation) but not for the 3 yearly or end of lease triggers.
Revenue Scotland will not issue reminders - and penalties are charged for late returns or for late payment of tax. See our briefing for more on such penalties and interest.
Who does what when an LBTT lease is assigned?
If an LBTT lease is assigned, the outgoing tenant (or assignor) must submit the LBTT return.
Going forward, the incoming tenant (or assignee) takes on the obligation to submit any remaining 3 yearly returns and a return if it assigns on or when the lease ends. So the outgoing tenant's obligations end once it has submitted the return following completion of the assignation and (if applicable) has paid any (more) LBTT that might be due.
Assignees might become liable to pay more LBTT if circumstances change (in a way not anticipated by an earlier return) after they have become the tenant. They won't be liable for LBTT due because of something that occurred before their date of entry - as this is to be picked up by the assignor in its return submitted following completion of the assignation.
As the incoming tenant will have to submit the future returns, when taking an assignation it should ensure that it gets information on the LBTT history - so that it can be sure that it provides accurate information to Revenue Scotland in the subsequent returns.
All in all it's a bit of an administrative headache for tenants. With time and familiarity, the completion of such regular returns will become a routine task in most cases - but tenants will still require to be very organised with their records and reminder systems to ensure that they don't forget to comply.