For Compliance Officers who are not also conveyancers, it may come as a surprise to discover that systematic errors may be being made in the completion of Stamp Duty Land Tax (SDLT) returns by their conveyancing department. If this is the case then not only may there be the risk that the firm is falling short of the requirements of the Law Society’s Conveyancing Quality Scheme (CQS) but also that the firm is likely to be at risk of disciplinary action being taken by the SRA for failing to act in the best interests of clients. Come what may, any form of tax irregularity should be taken seriously, and so the growing problem of inaccurate SDLT returns is certainly an issue of which to be aware.
Recently, a growing number of claims against solicitors have been reported from clients who have been surprised to discover that the SDLT return made on their behalf was incorrect. As a result SDLT may have been underpaid or overpaid – either way reflecting badly on the firm if nothing else. Anecdotally, four out of ten SDLT returns are proving to be incorrectly calculated.
From Stamp Duty to SDLT
The origins of the problem now coming to light can be traced back to 2003 when the old Stamp Duty regime was replaced with the new self-assessed tax. Although dramatically different in the way in which it was assessed and enforced, the fact that it carried a similar name – “Stamp Duty Land Tax”- meant that many conveyancers were lulled into a false sense of security. This situation was reinforced by the fact that at the time, enforcement by HMRC was quite lax. Being a self-assessed tax, unlike the previous system, there was no checking of each return by HMRC nor was there any obligation on HMRC to flag up overpayments or failure to claim reliefs. Underpayments, however, carried interest at 3% backdated and could attract penalties of up to 100%. This made it all the more worrying, therefore, that the task of preparing SDLT returns was increasingly being delegated to administrative staff with minimal supervision of the process.
Some five years ago, however, the plot started to thicken. HMRC introduced a confusing set of new tax rates, with different rates for wholly residential properties as opposed to commercial or mixed-use properties. Just to confuse things further, Wales adopted a different tax to England – Land Transaction Tax – with slightly different rules and rates. There are now also supplemental rates for additional dwellings and company purchases, and many issues that are client and property specific such as connected parties transactions or “granny annex” reliefs.
The unfortunate consequence of these recent developments is that SDLT has now become one of the most complex taxes on the UK statute book with a bewildering range of possibilities in otherwise similar circumstances. The problem in practice is that the way in which the tax liability is assessed has often changed little within most firms, even though the calculation has become so much more complex of late.
The scale of the errors that have been reported can often be significant, with a margin of error of £15,000 – £50,000 not being uncommon. This can just as easily be by way of an underpayment as it can an overpayment. Often the errors will arise from an incorrect assumption that standard residential rates should apply and thus no reliefs may be claimed.
The majority of clients will, of course, be unaware of the miscalculation at the time and will make the payment in good faith. This may be starting to change. The rise of SDLT “claims-farmers” who trawl through the SDLT records looking for incorrect payments has raised public awareness of this issue and we may therefore be about to witness the rise of a situation akin to the market for PPP claims. When confronted with the evidence it is clear that many firms choose to pay up rather than make a claim for fear of a PII premium increase. Larger claims, however, are bound to result in notifications with unavoidable consequences for premium rates at future renewals.
The CQS requirements
For most firms undertaking conveyancing, membership of the CQS has become something of a “must have” if the firm is to remain on lenders’ approved lists. Moreover, changes made to the CQS in 2019 have reinforced the SDLT obligations on firms by adding the need for an SDLT policy. Thus, the CQS Core Management Standards now provide at standard 1.2 that:
“Practices must have a policy in relation to SDLT which must include:
- how to audit trail the SDLT calculation and advice
- how and when to make checks between the consideration stated in the sale contract and transfer deed and SDLT Return and the payments on the solicitors’ client account ledger for the transaction
- a procedure for verifying the amount of SDLT payable, where applicable.”
The accompanying guidance adds that “where possible this should include another experienced individual, other than the fee-earner, and the verification recorded on file”. The requirement for verification might not be applicable, however, if the calculation is outsourced, such as to external tax consultants, or where a firm uses an expert SDLT system, such as SDLT Compass.
Firms should also be able to demonstrate in relation to the audit trail that the relevant information provided by the client has fed through to the calculation process. The CQS specifically provides in its notes that “practices must ensure they have a policy on how to audit trail the SDLT information given by the client, the calculation of the SDLT due and the advice to the client”. In other words, the processes they employ must be capable of showing that relevant criteria used in the SDLT calculation are based on the information given.
It is important to emphasise that “an audit trail” and “outsourcing” do not mean merely using the HMRC online SDLT calculator. This is simply a spreadsheet exercise that will not assess the personal characteristics of the buyer or the physical characteristics of the property and so cannot be relied upon to check whether the right rate has been chosen, or if additional factors such as reliefs apply. On the other hand outsourcing to an expert, or the use of an expert system such as SDLT Compass, should provide the degree of reassurance that all such errors are being avoided.
The provision of tax advice
There are, of course, various complications with the whole issue of tax advice by law firms. The risk of incorrect tax advice being provided is widely recognised and as a result features quite commonly by way of an exclusion in many firms’ Terms of Business. Some firms go further and state that they do not provide advice, as such, on the completion of SDLT returns but then continue to do so in any event. Even if they omit references to undertaking responsibility for the SDLT return in their breakdown of the steps they take (as is required by the SRA Transparency Rules) what actually happens in practice may be more significant. An exclusion of liability for a service which is actually being provided in practice is unlikely to be effective.
What should Compliance Officers do?
The first step for the compliance officer wishing to check on the extent of their firm’s potential level of exposure to this particular risk factor is to review how SDLT issues are dealt with in the firm, who within the conveyancing department undertakes the calculations, how they do so and whether they possess the required level of expertise. Merely entrusting the process to someone obtaining online quotations using the HMRC online SDLT calculator who has little or no knowledge of the detailed provisions of SDLT may well result in errors.
If this is how the task is currently undertaken then the compliance officer should consider reviewing not only the system used but the calculations previously carried out as well. This is a matter which must be treated seriously since correcting under and over payments may prove to be a costly exercise for the firm. Not only could this result in reputational damage for service errors but it may even result in disciplinary proceedings. Failure adequately to supervise the calculation of SDLT liabilities is as much of a problem from a regulatory perspective as is any other form of lack of supervision.
Where appropriate, the firm should also consider the provision of adequate training for those staff involved with the SDLT calculations and the implementation of systems to ensure that calculations are conducted with appropriate levels of expertise. As referred to above, the requirement of the CQS that there be a check by another experienced person, and that check be recorded on file, is something which all firms should incorporate into their procedures whether they are CQS approved or not.
All firms should also give serious consideration to the use of either expert SDLT and tax advisors or use an expert system such as SDLT Compass. Such schemes will undertake an analysis of many relevant factors, questioning and assessing the results to identify the appropriate rates to pay and applicability of the various reliefs that may be available.
Arguably, there needs to be a culture change in the way in which SDLT is dealt with in many firms. Just as much care is required in the calculation of SDLT as would be needed for the calculation of Capital Gains Tax or VAT. An SDLT return is a submission to HMRC, the consequences of which will be equally significant to any other tax-related submission. This is something which must, therefore, be factored into the advice, and the overall service, provided to the client. Thus, if the firm is unable to calculate the SDLT itself, or if there are going to be issues that arise in terms of the amount of tax payable in certain circumstances, then these need to be options which the client is made aware of and the implications of the choices will need to be explained to them.
Finally, firms are advised always to refer to SDLT by its initials or its full name (and not just Stamp Duty) so as to stress that this is a taxation requirement. Above all the firm is providing tax advice in handling the SDLT return (like it or not) and is not merely completing a conveyancing form.