Andrew Waddell is Managing Director of Winslows, a boutique tax law firm specialising in supporting other law firms, that do not have tax departments.
Winslows’ team of City-trained tax lawyers provides support across a range of tax practice areas with particular expertise in the fields of property and corporate taxation. In this interview, Andrew discusses the rise in stamp duty land tax (SDLT) negligence claims and highlights why property lawyers are exposed to greater risk than ever before.
There’s recently been a reported increase in stamp duty land tax negligence claims made against property firms. Can you tell us more about this?
Yes, that is certainly the case. SDLT negligence claims are more common than ever, primarily as a result of the SDLT 3 % surcharge rules, which came into force in 2016. These rules apply an additional 3% to the existing residential rates of SDLT where the purchase is the purchase of an additional property or the purchaser is a company. These rules are very complex and can throw up unexpected results in certain scenarios.
As a result, SDLT is no longer something that property lawyers can be expected to have a working knowledge of. These 2016 rules underline the fact that it is an area of tax law practice that requires specialist input.
Property lawyers are under fee pressure, both from their clients and from their competitors. As such, many have found it difficult to build in specialist tax time within their fee quotes. In turn, they are opting to make their own assessment on the application of the tax rules, and this is unfortunately where mistakes can happen.
What’s more, SDLT refund companies are identifying errors for clients and assisting them with reclaims. This is also helping to highlight mistakes that may otherwise have not been identified. Though this is of course good for clients who deserve to have their position corrected, it can lead to them considering claims against their original advisors, thus also contributing to a rise in negligence claims.
What types of claims are being brought against firms?
Essentially if a client has to pay other professionals to correct SDLT analysis carried out by a property lawyer, the cost of those extra fees, plus any interest, penalties or unnecessary expense could form the basis of a claim.
What types of transaction are the most likely to give rise to SDLT errors?
There are numerous types of transaction which could be subject to mistakes. The following are just some of the examples we’ve seen where an error has been made in regard to SDLT:
- Incorrect application of the 3% surcharge to a purchaser who does not fall within all of the required conditions
- Failure to apply for a refund of the 3% surcharge, when a Main Residence is subsequently sold after a relevant purchase
- Charging a transaction to the residential property rates of SDLT rather than the commercial rates, in situations where a transaction includes both types of property
- Incorrect taxing of certain property annexes as Additional Dwellings subject to additional rate of SDLT
- Failure to apply the ‘six-or-more’ rule. This enables residential properties of that number to be charged to commercial rates of SDLT rather than residential rates
- Failure to apply Multiple Dwellings Relief correctly to reduce the SDLT payable. This includes situations where properties include a “granny annex”
- Failure to correctly apply lease overlap relief when acting for a client that has surrendered a lease at the same time as taking a new lease of the same property
- Failure to correctly apply either Sub-sale relief or SDLT group relief
What are the sanctions for getting SDLT wrong?
What I’ve mentioned above are situations where the client actually overpays SDLT because a professional has failed to calculate it correctly. In this instance, the client incurs costs to correct the position and can end up out of pocket, hence the potential for claims to be brought against the lawyers who originally acted on the transaction.
On the other hand, if a client doesn’t pay enough SDLT, i.e. they underpay, then there is the potential that the position is corrected by HMRC, with interest and penalties applying. Exactly how penalties will apply will depend on the circumstances which lead to the underpayment; was the purchaser’s mistake careless, deliberate or deliberate and concealed? The penalties are based on the amount of underpaid tax and can range from 30-100% of the tax depending on the category of mistake, with certain reductions for taxpayers who voluntarily disclose inaccuracies.
Interest also accrues on the underpaid tax from the 31st day after the effective date of the transaction, and is essentially Bank of England base rate plus 2.5%
Have property lawyers missed their opportunity to take action?
In normal circumstances, purchasers have 12 months and 30 days from the effective date of a transaction to correct their return. Therefore, if there is a risk that a client has overpaid, the sooner this can be identified the better; as well as increasing the opportunity for professionals to correct any mistakes, it also enables them to mitigate any potential claims.
In the event that a client or lawyer identifies an underpayment, professional advice should be sought immediately to correct the position.
In order to ensure the SDLT computations are accurate, the best course of action is to engage specialist advice at the time of the transaction.
If a firm is interested in using your service, what is the process?
Contact info@winslows.co.uk to arrange a consultation or contact head office on 0203 196 5582
What other services do Winslows Tax offer?
Winslows supports law firms that do not have their own tax department across a range of practice areas. This includes property, corporate, finance and private client. Full details can be viewed on our website www.winslows.co.uk
