Businesses should reassess LBTT lease payments following tax tribunal decision

Andrew Crichton, commercial real estate expert at Pinsent Masons, said: “The ruling could have significant financial implications for businesses and individuals who have extended leases since 1 April 2015, when LBTT replaced stamp duty land tax in Scotland. It will also be important to consider this decision in relation to any future lease extensions in the wider context of general anti-avoidance provisions”

The dispute arose as a result of the transition from stamp duty land tax (SDLT) to LBTT and the interpretation of previous guidance from HM Revenue and Customs (HMRC) in respect of SDLT on Scottish leases, the transitional guidance provided in respect of the transition from SDLT to LBTT, and the interaction of that guidance with underlying Scots law on leases. 

The question for the First-tier Tribunal (FTT) was whether LBTT was payable when a lease originally entered into before 1 April 2015 was extended after that date. Archer (UK) Limited (Archer) had paid LBTT on such an extension, but challenged the charge, arguing that the tax was not due under the transitional provisions governing the shift from SDLT to LBTT.

The FTT agreed with Archer, concluding that Revenue Scotland had misapplied the law when charging the tax. The tribunal found that the relevant legislation did not support the imposition LBTT on the lease extension in question. It reaffirms that guidance issued by Revenue Scotland is not legally binding – it is only Revenue Scotland’s interpretation of the legislation and that interpretation may be incorrect – and cannot override the statutory framework. 

“Any relevant lease extensions and subsequent returns, completed since 1 April 2015, should be reviewed to establish whether or not they warrant a refund from Revenue Scotland. This ruling could result in substantial tax savings,” said Crichton. 

“This ruling is consistent with previous rulings in relation to the status of HMRC’s guidance in relation to SDLT and so, whilst welcome, taxpayers should remember that despite the lengthy guidance provided by both tax authorities in relation to SDLT and LBTT it is always important to seek legal advice. This is particularly true where the transitional rules are in play or where the transaction is cross-border, given the differences between the two regimes,” said Andrew McCarthy, real estate tax expert at Pinsent Masons.

It is not yet clear if Revenue Scotland will appeal this decision.