Stamp duty modernisation

The Inland Revenue has published draft legislation covering elements of the proposed new stamp duty regime. However, the draft legislation does not deal with any of the more contentious proposals. In particular, it does not deal with:

• the basis upon which duty will be charged on leases;
• the new charge on the transfer of a substantial interest in a company or other vehicle whose assets consist primarily of interests in UK land and buildings and whose major activity involves the ownership or exploitation of UK land and buildings; and
• reliefs from the charge to stamp duty eg intra-group relief and sub-sale relief.

One thing that does now seem clear is that the Government is to press ahead with its proposed timetable and that it has ignored requests for a longer consultation by those who wish to avoid legislation of this importance being implemented in a hurry. It is intended that the new regime will be included in the Finance Act 2003 (likely to be enacted towards the end of July 2003). However, the legislation will not come into effect immediately but it will be in force by the end of 2003. In the light of this, the deadline for responses to the consultation on the draft legislation is 24 February 2003 although the Government hopes that responses will be made earlier. This is a very tight deadline particularly as it is perhaps unlikely that the draft legislation dealing with the more contentious issues will be published before the new year. It is also clear that some of the detail will be contained in regulations but a draft of the regulations is not expected to be published before the middle of 2003.

There will be a new self-contained statutory framework for the tax (interestingly, the draft legislation does not give the tax a name). Conceptually the new tax is very different from stamp duty. Stamp duty is a tax on documents (if there is no document there can be no stamp duty) and it is voluntary in the sense that the Revenue does not have any direct powers of assessment or enforcement.

The new tax is a tax on transactions (and not on documents) and there will be a comprehensive administrative framework which will require taxpayers to submit returns, self-assess the amount of tax due, keep records and be prepared to submit to a Revenue enquiry into returns submitted. All of this will be based on the self-assessment regime for income tax and corporation tax. Taxpayers and their professional advisers, particularly those that buy and sell real estate on a regular basis, will need to become acquainted with the new compliance regime which will represent yet another burden for business.

Although the most contentious parts of the draft legislation are not yet available, the following points arising from the draft legislation are of immediate interest. They illustrate the fact that the scope of the charge will be significantly different to that of stamp duty:

• The tax will be charged on transactions relating to UK land.
• On a land exchange, tax will be payable on both transfers (unlike at present where duty will only be payable on the higher value land provided contracts are appropriately drafted).
• The variation of a lease or other interest in land will be subject to the tax and so to will be the release of an easement (these need not currently be subject to stamp duty).
• The Government is giving further consideration to the request to exclude VAT from the ambit of the tax. Currently, stamp duty is frequently charged on the VAT inclusive consideration.
• The consideration for a transaction (upon which the tax will be calculated) will include all consideration in "money or money's worth". Consideration for stamp duty purposes is considerably narrower in scope. For example, for stamp duty purposes the provision of services would not be regarded as consideration which could attract duty whereas services other than some construction services would be regarded as "money or money's worth" so that the land transaction for which services are given in consideration would be taxable.
• It is not unusual for land transactions to be carried out for a consideration that is at least in part unascertainable and/or payable only on the happening of a future event eg the grant of planning permission. Under the current stamp duty regime the application of the "contingency principle" operates so that if the contract stipulates a minimum or maximum sum that might become payable in the future, then stamp duty will be payable by reference to that sum (and if there is no minimum or maximum market value is applied). It is often possible to ensure that a minimum sum is included in the contract resulting in the payment of less duty than if market value or the actual sum that subsequently becomes payable were to be used. Where the consideration is unascertainable the new tax will require a "best estimate" to be made of the sum that may become payable in the future and for the tax, at least initially, to be paid on that basis. Once the actual sums are paid the original tax can be adjusted and either additional tax paid or a repayment of tax made at that time. There will also be provision to pay tax by instalments in circumstances where final payment may not be received for more than 18 months.

Under the new regime taxpayers will be required to make a return in respect of any land transaction that is "notifiable". This will include not only those transactions that are subject to tax but also certain transactions that whilst exempt from tax fall into a category of transaction which the Revenue wish to have the opportunity of looking at more closely. As at present, there will be some transactions that may be self-certified as exempt and for which a return will not need to be submitted to the Revenue. In addition, there will be a new penalty and interest regime.

We will be issuing more detailed notes covering specific areas of the tax over the coming months. This will include, amongst others, notes on transactions within the scope of the tax, calculation of the tax, the compliance regime, the tax on special purpose vehicles and the lease duty charge. We will also be running an education programme for our property colleagues and clients.

If you would like any further information, please contact:

Mark Nichols
Tax partner
[email protected]
+44 (0)20 7367 2051

Richard Croker
Tax partner
[email protected]
+44 (0)20 7367 2149

Mike Boutell
Senior professional support lawyer
[email protected]
+44 (0)20 7367 2218