SDLT – Penalties for claiming incorrect relief

When a corporate entity purchases a residential property costing more than £500,000 there is an additional SDLT corporate surcharge of 15% applied to the transaction.    One exemption from the 15% surcharge is based on the property not being occupied by a shareholder, Director, or other such persons.  That non-occupation rule applies for three years and allows HMRC to look back on historical transactions.


SDLT Higher Rate Surcharge

The property rental exemption briefly means the property is to be rented out to generate revenue or used by the business but in either scenario the property can only be occupied by a “non-qualifying” person if exemption from the 15% surcharge is to be valid.

In this article, we consider the case of Mas Fabrics Hong Kong.  The 15% rate was deemed not appropriate because the taxpayer failed the non-qualifying use and the taxpayer settled the additional SDLT once this was identified.  However, HMRC pursued a penalty of £55k and this tribunal case considered whether that penalty was appropriate.


Carelessness Penalty

HMRC’s enquiry asked numerous questions about ownership of the company.  Initial response was that the property was not currently occupied, but when it is used it will be used by non-qualifying personnel.  Further queries identified that the Deputy Chairman had occupied the premises for 4 days in September 2018 and later acknowledged the property would in fact be used by Directors and the leadership group.  The Local Authority had been advised by the building management that the apartment had been occupied by the Deputy chairman permanently since completion and was liable for Council tax.

There was no argument the surcharge should have been applicable.  In terms of mitigation, one aspect was a language barrier, with the idea that qualifying and non-qualifying was a confusing concept, in a way it is, qualifying in the ordinary sense means you meet the conditions for something, whereas non-qualifying means you don’t meet the condition, but with this SDLT surcharge, non-qualifying occupants qualify for the relief, whereas qualifying occupants don’t.

A second argument was that the taxpayer had sought advice from an agent, but the Tribunal concluded that the agent is reliant upon the taxpayer to give them all the information in order to arrive at the right outcome.  The agent had no evidence it had given specific advice, the majority of the transaction taking place by telephone and the Tribunal could not conclude whether the agent had advised incorrectly or because of lack of information from the taxpayer.

On that basis the conclusion was that the carelessness penalty would remain.


Other Points

It was never clear whether the taxpayer had sought advice or whether it had received any.  Engaging with an agent does not exonerate the taxpayer from penalties, there is a requirement for the taxpayer to fully disclose their intention and there is an expectation for the agent to ask the right questions, perhaps more so where the taxpayer is not UK resident or has English as a second language.

Tax is complicated at the best of times and an overseas business may not understand the role of a shareholder or Director in the same terms of UK law and understanding.  A Director may just be a title role which confers no ownership or right to profit or it could mean you own the business outright with all profit coming to you.


Final Thought

As an aside, a non-UK entity purchasing a residential property over £500,000 today would not only incur the 15% surcharge (unless it can claim exemption), but also an additional 2% for being based overseas and this 2% is in addition to the existing 3% surcharge for acquiring a property into a corporate entity.


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