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Hard-edge deadline bites taxpayer in SDLT appeal

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Lucy Webb looks at a stamp duty land tax (SDLT) appeal after a photographic studio firm secured a lease at a site not to be used for residential purposes.

12th Apr 2024
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The upper tribunal (UT) has dismissed any notion of a late claim by a taxpayer for multiple dwellings relief, upholding the “hard-edged deadlines” within the stamp duty land tax (SDLT) regime.

Ridgway purchased a property in August 2017 for £6.5m. It comprised two separate registered titles: the first was a semi-detached house and gardens, while the second was adjoining land and a building with separate access known as the Old Summer House.

The Old Summer House had originally been used as a garage and later as an artist’s studio.

Ridgway was advised that if it was in commercial use at the date of completion that the mixed-use rate would be available to lower the rate of SDLT. Ridgway was also advised that if there was no commercial use, then multiple dwellings relief could be claimed.

Two weeks prior to completion, at the instigation of Ridgway, the vendors granted a commercial lease of the Old Summer House for a term of six months to a photographic studio business. The lease contained a covenant that the Old Summer House should not be used for residential purposes.

However, no planning permission was obtained to use the Old Summer House as a photographic studio.

Claim denied by HMRC

Ridgway submitted a land transaction return in September 2017 which stated that the property was mixed-use, part-residential and part-commercial. SDLT of £314,500 was paid at the lower non-residential rate.

The UT noted that if SDLT had been paid at the residential rate, it would have amounted to £888,750. With multiple dwellings relief, the SDLT would have amounted to £577,500.

HMRC opened an enquiry into the land transaction return in May 2018 and issued a closure notice in February 2021, in which it concluded that the Old Summer House was residential property as defined in section 116 Finance Act 2003 because it was “suitable for use as a dwelling”.

HMRC amended the land transaction return to charge SDLT at the residential rate and without the benefit of multiple dwellings relief. The taxpayer appealed to the first tier tribunal (FTT) [[2022] UKFTT 0412 (TC)].

First tier tribunal decision

The FTT held that the lower rate for mixed-use property was not available. Instead, it determined that SDLT should have been calculated at the residential rate with the benefit of multiple dwellings relief, and that there was no requirement for Ridgway to have claimed that relief.

It’s worth noting that, while the FTT’s decision included consideration of an anti-avoidance provision within section 75A FA 2003, both parties to the appeal before the UT agreed (as did the upper tribunal) that section 75A was not in point in this case.

Both HMRC and Ridgway appealed the FTT’s decision to the upper tribunal [[2024] UKUT 00036 (TCC)].

Upper tribunal decision

The UT commented that that the existence of restrictions on use, whether by way of freehold or leasehold covenants, planning law or other legal restrictions, must form part of the multi-factorial analysis as to whether a building is suitable for use as a dwelling for the purposes of section 116 FA 2003 (comments that align with HMRC’s own internal, non-binding guidance at SDLTM00380).

When considering the Old Summer House, the UT determined that the FTT had failed to account for the planning obligations that restricted the use of the Old Summer House to residential use, and that this was a material error of law in the decision.

In the UT’s judgement, the planning position was a relevant factor, for the same reasons that the covenant in the commercial lease was a relevant factor. Accordingly, the UT set aside the FTT’s decision and remade it.

Overall, the UT considered that the inconsistent legal restrictions on the Old Summer House’s use carried less weight in assessing suitability for use than the physical attributes of the building. Having looked at the plans and photographs of the building, the UT was satisfied that the Old Summer House was suitable for use as a dwelling at the effective date of the land transaction.

Out of time for multiple dwellings relief

It was common ground that if the property was residential, then the conditions set out in Schedule 6B FA 2003 were satisfied for it to qualify for multiple dwellings relief. Ridgway argued that when HMRC closed its enquiry into his land transaction return, if the property was residential property he ought to have been given credit for multiple dwellings relief.

Alternatively, that the FTT had jurisdiction to permit a late claim.

HMRC countered that, per subsection 58D(2) FA 2003, multiple dwellings relief is only available where it has been claimed in a return or an amendment to a return. As Ridgway made no such claim (and was out of time to amend the return well before HMRC issued its closure notice), no relief was available.

While the UT accepted that HMRC’s position might be said to give rise to unfairness to taxpayers in the position of Ridgway, the UT highlighted the Court of Appeal’s comments in Candy v HM Revenue and Customs [2022] EWCA Civ 1447. Namely, that SDLT is a self-assessed tax which imposes “hard-edged deadlines”.

Where a relief requires a claim, and a claim is not made in accordance with any procedural requirements, the taxpayer will not be entitled to relief.

Relevant facts

The UT stated that section 58D(2) was clear that relief “must” be claimed in a return or an amended return. The relevant facts were known to Ridgway at the time he made his return, and he made an error in concluding that the property was non-residential.

The absence of any provision for Ridgway to make a claim out of time or during the course of an enquiry was consistent with the benefit of certainty and finality referred to by the Court of Appeal in Candy.

The UT allowed HMRC’s appeal. The FTT’s decision was set aside and remade so as to dismiss Ridgway’s appeal against HMRC’s amendment to his land transaction return.

Comment

Ridgway’s representative submitted that the UT’s decision in blocking a late MDR claim could have “far-reaching consequences in relation to enquiries and claims concerning direct taxes which were governed by similar provisions in the Taxes Management Act 1970”.

However, the UT commented that it was not guided to any specific provisions, and in any event the tribunal “was concerned solely with the statutory regime for SDLT.”

Replies (7)

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By Justin Bryant
12th Apr 2024 12:21

"Ridgway’s representative submitted that the UT’s decision in blocking a late MDR claim could have “far-reaching consequences in relation to enquiries and claims concerning direct taxes which were governed by similar provisions in the Taxes Management Act 1970”."

That's pure bunkum of course, as consequential relief claims can be made re direct taxes (unlike ATED and SDLT) following a discovery assessment/enquiry.

https://www.gov.uk/hmrc-internal-manuals/compliance-handbook/ch55100

It's very unclear to me why the FTT judge was wrong re s75A and why HMRC agreed it was not potentially relevant (had the scheme otherwise worked).

Thanks (0)
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By FactChecker
12th Apr 2024 18:19

In non-legalese speak, whilst I recognise how material was the question of the taxpayer being out of time to amend the return, the key aspect here has less to do with a "Hard-edge deadline" ... and more the inadvisability (in this case impossibility) of making a complete about-face in your returns.

The taxpayer obviously 'failed' to claim multiple dwellings relief (based on both properties being residential), *not* because of lack of forethought *but* because that would have prevented him making his 'alternative' claim (at the lower rate for mixed-use property).
Unlike a courtroom, a tax return is not amenable to reporting the facts as X - but if you, HMRC, don't like X then let's say instead they are Z.

Thanks (2)
Replying to FactChecker:
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By Justin Bryant
13th Apr 2024 14:21

But that's not quite right is it, coz the facts were (arguably at least) both X and Y here, so there was a choice and arguably it's possible to get the best of both worlds as nothing stops you entering both cliams (mixed-use is not a claim as such) in the same SDLT1 (with SDLT based on the lowest amount).

Thanks (1)
Replying to Justin Bryant:
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By FactChecker
13th Apr 2024 15:51

And that's why people pay you for advice, Justin, whilst I just pontificate from the side-lines .. casting FOC morsels upon the water to see which float and which sink!

It never occurred to me that you could put two wholly contradictory 'claims' (or statements - call them what you will) within the same single SDLT1 form.
I'm used to the 'if not that, then try this' approach in court cases ... but had assumed a tax return, supposedly being a statement of facts, could not contain two facts where if either is true then the other must be a lie. [The summer house could only be residential or be commercial, not both.]

My mind is now boggling with (theoretical) opportunities ...

Thanks (2)
Replying to FactChecker:
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By Justin Bryant
14th Apr 2024 09:41

I'm not the only one with the above view, I can assure you i.e. it's not that clever and this taxpayer was I suspect badly advised.

Thanks (1)
Replying to Justin Bryant:
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By kim.shaw-and-co.com
15th Apr 2024 19:35

Justin Bryant wrote:

I'm not the only one with the above view, I can assure you i.e. it's not that clever and this taxpayer was I suspect badly advised.

Agreed. Contradictory positions for protective purposes do, of course, make compliance checks highly likely. There is often a misguided hope that things will simply sail through unchallenged and all will be well if nothing 'stands out'.

Where that doesn't happen it can all end in tears. We've no timeline here but at the first hint of a check there was presumably the possibility of protecting the position(s) arising from alternative analysis - it's just that nobody thought it through or assumed a claim would be 'read in' if it were feasible.

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Replying to kim.shaw-and-co.com:
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By Justin Bryant
16th Apr 2024 11:52

When you consider the risk of being sued for not doing it the way I suggested, the answer is a lot easier.

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Replying to kim.shaw-and-co.com:
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By Justin Bryant
16th Apr 2024 11:52

When you consider the risk of being sued for not doing it the way I suggested, the answer is a lot easier.

Thanks (0)